Pension Division in Divorce: What You Need to Know

Updated by Tracy Achen, Divorce Coach 
FAQ Answer by Timothy McNamara, Financial Expert

It’s important for divorcing couples to consider pension division in divorce, especially if either spouse has retirement assets. Unfortunately, many women overlook the value of retirement assets when negotiating their divorce and walk away from what could be a significant part of their future financial security. This is why pension and divorce evaluations are critical to a fair divorce settlement.

There are multiple types of retirement accounts, but how they are divided and the funds distributed differs. The most common types are: Defined Contribution plans such as a 401k or 403(b), Individual Retirement Accounts (IRAs), Government/Military Retirement Benefits, and Defined Benefit plans (traditional pensions). For this article, we’re only going to discuss how pensions are divided in a divorce.

How Does a Defined Benefit Plan or Pension Work?

pension division in divorce

Pensions are considered defined benefit plans. A defined benefit plan pays benefits based on an employee’s income history and years of service to a company. These plans are funded by the employer and an employee will need to work for the company for a certain number of years to become vested to receive the benefits.

When the employee retires, the pension plan will start paying monthly benefits or a lump-sum amount. Generally, benefit payments continue until the employee dies, and some plans even offer survivor benefits. Plans with survivor benefits are called joint-life benefit plans. You can talk to your pension plan administrator to get the specifics of your plan and whether it offers survivor benefits.

Are Pensions Considered Marital Property?

Even if your name isn’t on the pension, you may still be entitled to a share of it when you get divorced. How a pension will be split depends on when the pension as established, the length of your marriage, and how other marital assets are divided. The contributions you made during the marriage may also factor into the division.

The key factor is when the pension was earned.

  • Pension benefits earned during the marriage are generally considered marital property and subject to division in a divorce. For example, if your spouse has a pension valued at $200,000 and it was earned entirely during the marriage, you might be entitled to $100,000 of it (depending on your state). 

  • Pension benefits earned before the marriage or after a separation are usually considered separate property and won’t be divided in a divorce. For an example using the coverture method, say your spouse has a pension valued at $200,000 earned over 20 years, of which 15 of those years were during your marriage. $150,000 would be subject to division in divorce (15 divided by 20 equals 75%). This means you might be entitled to half that amount or $75,000. 

Also, a valid prenuptial agreement can specify a that a pension remains the separate property of the pension owner and will not be divisible in a divorce.

The state where you live will determine how a pension is divided in a divorce. In community property states like California and Texas, assets acquired during the marriage are split 50/50 (unless the spouses agree otherwise). In equitable distribution states like Florida and New York, assets are divided fairly, but not necessarily equally.

How are Pensions Valued?

Unless you or your spouse are currently receiving a pension (and you know the frequency and payment amount), it can be hard to determine how much a pension is worth. Factors that go into valuing a pension include:

  • The life expectancy of the employed spouse. 
  • When he or she will be eligible to retire. 
  • The projected pension value on the earliest retirement date. 
  • The present value of the pension at the time of divorce or separation.

For defined benefit pension plans, you will probably need an actuarial valuation to determine its present value at the time of divorce. You can find out more about pension and divorce evaluations from Voit Econometrics

Options for Pension Division in Divorce

Because retirement accounts are one of the more valuable assets a couple has, it’s important to address them when negotiating your divorce. Here are a few options on how to approach handling these types of accounts. 

  • Each Spouse Keeps Their Own Plan: If both of you have relatively equal retirement assets, it may make the most sense to keep your own plan and avoid the hassle of trying to divide each plan. 

  • Division by Present Value Offset: In this scenario, you would receive other marital assets equal in value to your share of the present value of the pension (for example, more equity in the house). 

  • Deferred Distribution: You receive your share of the pension when your ex retires and starts collecting benefits. This could either be monthly payments or a lump-sum amount.

Documents Needed to Divide Pensions

For a pension plan that is divided by deferred distribution, you’ll need a Qualified Domestic Relations Order, also known as a QDRO. A QDRO specifies how an alternate payee will obtain part of the retirement plan benefits a participant has accrued.

Also, with a QDRO in place, you can avoid tax penalties for early fund withdrawal that would normally occur. This can be especially important if one spouse is not retirement age yet. A QDRO can also address whether the non-employee spouse will continue to receive benefits if the participant dies (if the pension includes survivor benefits).

Without a QDRO, you may not legally receive your share of the pension, even if it’s stated in your divorce agreement. That’s why it is important to seek the help of QDRO specialist or a divorce attorney familiar with dividing assets and drafting QDROs. They can advise you on the best way to divide assets and what language is needed in the QDRO by the plan administrator.

Final Thoughts

Pension division in divorce is too important to ignore. Retirement assets are often one of the largest sources of wealth in a marriage, and securing your share is essential to your future financial stability. It may not seem that important when you're young, but it can make a huge difference when you're struggling to survive on social security. 

If you’re thinking about divorce or have already started the process, take the time to explore your rights, ask questions, and work with professionals who understand how to protect what you’ve earned - or supported - during the marriage. 

Pension and Divorce Evaluations FAQ 

The following question answered by our financial expert can help you understand more on the subject of dividing retirement assets:

Kathy's Question: I have been married 30 years. My husband is receiving his 30 year Teamster's pension as well as Social Security Disability benefits. He receives 2 times as much as I receive at my job. Because he is collecting these pensions already, are they considered assets or income and am I still entitled to 1/2 of the Teamster pension even though he is collecting it? Is it an asset or income?

Timothy's Answer: The social security disability payments your husband is receiving would be considered income. The question you raised about a pension being considered income or an asset is a good one. You’ve stated that your husband is currently receiving a monthly benefit from his pension plan. This means he has a defined benefit plan, which entitles him to an annuity stream of income for the remainder of his life. This annuity stream of income should be valued as an asset when a couple is going through a divorce.

When a couple is getting divorced, they need to decide how they will divide the marital estate, and this would include the current value of any pensions. There are many ways to divide a pension. One method is to compare the current pension value to the value of other assets divisible in the divorce, trading off assets until a balance is reached. In this situation, the owner of the pension would retain the monthly benefit stream of income and his or her spouse would get other marital assets which would equal the current value of the pension.

Another method would be to divide the pension benefits using a Qualified Domestic Relations Order (QDRO). A QDRO is basically a legal document that spells out how pension benefits will be divided when spouses divorce, allowing the money to be distributed without the normal early withdrawal tax penalties. If you choose this method, it is important to have your QDRO finalized and approved prior to the divorce so your rights to collect this benefit will be protected.

One more thing, state laws differ with regard to the issue of disability pay. In some instances, disability is viewed as a replacement of income and cannot be considered an asset until it is converted to a retirement benefit. In others, a disability benefit is considered property. We do not engage in the practice of law and therefore recommend you consult an attorney on all legal matters.

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