Sept. 6, 2017 – All divorce lawyers must consider the proper division of pensions in their client’s divorce process. The options for division discussed in this article are available to all divorce process options. The collaborative divorce process, however, uniquely affords clients the opportunity to better understand the pension plan and what happens to each party's benefits following a Qualified Domestic Relations Order (QDRO). The collaborative process allows for educating clients and lawyers about complicated assets and creative divisions of assets with the help of a neutral financial professional. When clients have the opportunity to consider a broader range of solutions, they might possibly receive greater value from their pension plans post-divorce.
Often, the single most valuable asset in a divorce matter is the pension plan. Each party is typically awarded a specified percentage of the plan. Occasionally, and for good reasons, there is a disagreement about what percentage of the pension to award the nonparticipant spouse. In this article, however, the assumption is a 50-50 division.
Diane Diel (Wisconsin 1976) of Diane S. Diel S.C. practices family law in Milwaukee. She is a past president of the State Bar of Wisconsin, past chair of the Wisconsin Collaborative Family Law Council, and past president of the International Academy of Collaborative Professionals.
Diane thanks Grant Zielinski, of Divorce Financial Solutions, for his contributions to this article.
The most common solution is to award each spouse a separate half interest in the pension by means of a QDRO. The plan administrator establishes the alternate payee’s (the person who is not the participant in the pension) interest as a separate interest and adjusts and determines the alternate payee’s monthly pension amount based on his or her life expectancy. Standard life expectancy tables predict longer lives for women, and thus, age and gender differences mean that the younger, female recipient of a half interest in a defined benefit pension will receive a potentially much lower monthly benefit than her older male former spouse. Once those lower payments are being paid out, there is no opportunity for the alternate payee’s share to revert to the participant.
When there is a substantial age disparity or a spouse in ill health at the time of divorce, consideration should be given to a shared interest QDRO. Understanding the distinctions between shared interest and separate interest QDROs can result in maximizing the value of the pension. Considerations related to shared interest QDROs are particularly important when the participant is already receiving pension benefits, or when there are gender differences and/or substantial age disparity between the spouses.
What does the shared interest QDRO do? Simply put, it assigns a portion of the participant’s benefits to the alternate payee when the pension goes into pay status. If the participant is the older spouse, the shared interest QDRO might be negotiated to provide an award of a monthly payment to the alternate payee in an amount that exceeds the actuarially adjusted benefit the younger spouse would receive under a separate interest QDRO. Under the shared interest approach, the older participant spouse’s net benefit – even after the payment to the younger spouse – may be equal to or greater than the separate interest monthly benefit. The participant also may benefit because, if the younger spouse dies, the monthly payment to the younger spouse would revert to the participant spouse.
The use of a shared interest QDRO may be the best way to assure that pension benefits will not be left on the table or allowed to revert to the pension fund.
Negotiations of shared interest QDROs can also include considering whether the participant should be relieved of or be obligated to maintain a joint and survivor designation for the former spouse. When a separate interest benefit to the alternate payee would be less than the amount that alternate payee would receive as the 50-percent joint annuitant, a shared interest QDRO should be explored. The idea is to find a payment amount that can be paid from the participant’s pension on a shared interest basis that is at least equal to the payment that would come to the alternate payee from a separate share QDRO. Both the participant and the alternate payee may well receive higher monthly benefits than either would if the separate share 50-50 QDROs were implemented. Both the participant and the alternate payee can receive a benefit in the event of the death of the other. If the alternate payee dies, the participant will resume receiving the monthly payment paid to the alternate payee. If the participant dies, the alternate payee can be protected by requiring the participant to name the alternate payee as the joint and survivor annuitant.
It also pays to understand the difference between shared interest and separate share QDROs when one spouse is ill. What if the participant is not healthy and is not believed to have a standard life expectancy? It may be imprudent to create a separate share QDRO for an unhealthy participant or alternate payee. If the alternate payee is the healthier spouse, the careful lawyer will investigate whether the plan allows a separate share QDRO greater than a 50-percent interest, and will also consider whether a shared interest QDRO creates an advantage through a high percentage survivor annuity option. Some plans, including the Wisconsin Retirement System, do not allow an alternate payee to be assigned more than 50-percent of the plan, but do have options for 50-, 75-, and 100-percent survivorship annuities. Thus, allowing the participant to retain the plan but requiring that the participant maintain the former spouse as the joint annuitant at a more than 50-percent level may create the possibility of more value from the pension.
What if the alternate payee is the unhealthy spouse? It could be imprudent to reduce the participant’s pension benefit in favor of a former spouse who is not seen as likely to have a normal life expectancy. The shared interest QDRO will protect the income stream of the alternate payee during his or her remaining lifetime but will restore income to the participant when the alternate payee dies.
The use of a shared interest QDRO may be the best way to assure that pension benefits will not be left on the table or allowed to revert to the pension fund. With the right planning and education, the pension pie can be expanded.