The Journal of The DuPage County Bar Association

Back Issues > Vol. 29 (2016-17)

Marital Portion Calculation in Retirement Plans
By Dorothy A. Voigt

Retirement benefits are important to the economic security of individuals in retirement. A lucky worker has a job in which she earns benefits in a retirement plan from early in her career until retirement. Some workers have retirement benefits which were earned prior to and during a marriage at the time of divorce. It is also possible that additional non-marital benefits may accrue in a worker’s retirement plan after a divorce. Retirement benefits earned during a marriage are marital property.1 Determining the amount of spousal retirement benefits that is marital property is a crucial issue to the division of the marital estate. This article will discuss how the marital portion of retirement benefits is calculated in different types of retirement plans.

Defined Contribution Plans. Defined Contribution Plans, such as a 401(k) Plan, Profit Sharing Plan or a 403(b) Plan, are plans that contain an account balance. Regular statements are provided by plan administrators and participants can control how the funds in the plan are invested. Because the dollar value as of a particular date can be determined, it may seem that determining the pre-marital portion of a defined contribution plan would be relatively straightforward.

If a defined contribution plan is to be divided as part of a divorce, the value of the plan can be determined as of the date of the divorce (or any other date agreed upon, such as a month end) and a post marital portion should not be relevant because any funds that are contributed after the divorce are not part of the calculation. The alternate payee can receive the funds at the time of the divorce and can roll them over into an IRA or another qualified plan and control how the funds are invested.

The value of a defined contribution plan fluctuates with the market value of the investments in the account. The value of  the pre-marital portion of such a plan will have fluctuated throughout the marriage, so simply referring to the balance as of the date of the marriage to determine the non-marital amount at the time of the divorce is not sufficient. The pre-marital portion will be subject to market gains and losses. Depending upon how long the parties are married and the quality of their record keeping it may be possible to determine exactly what the value of the pre-marital portion was at the time of the marriage, the value at the time of the divorce, as well as what was contributed to the plan during the marriage. In other cases, the documentation may be sketchy or non-existent, or the plan record keeper itself may have changed. Due to the length of time involved, it may not be possible to obtain records of plan contribution and value from the date of the marriage to the date of the divorce. In that situation, it may be extremely difficult to determine the actual value of the pre-marital portion.

Courts have employed two methods of determining the pre-marital portion: 1) the Longevity formula and 2) the Contribution formula.2

The Longevity formula focuses on the amount of time that the participant was a participant in the plan before the marriage and during the marriage. For example: if an individual was employed by her firm for five years prior to the marriage and was married for ten years; then five years out of 15 years would be non-marital, or one third. If the value at the time of the divorce was $300,000, then the non-marital portion would be $100,000 and the marital portion would be $200,000. This method is best to use when the documentation is not available to determine the amount of contributions made to the plan during the marriage or the value at the time of the marriage.

The Contribution formula looks at 1) the dollar amount of contributions made to the plan during the marriage, 2) the value of the plan at the time of the marriage and 3) the value of the plan at the time of the divorce. The value at time of divorce is multiplied by a fraction consisting of the amount of the contributions to Plan during marriage divided by the value of the account prior to the marriage plus the value of the marital contributions. This method is generally more accurate if relevant documentation is available.

For example: if the value at the time of the divorce was $300,000, the contributions to the plan during the marriage totaled $150,000, and the value at the time of the marriage was $50,000, the equation is $300,000 x ($150,000 / [$150,000 + $50,000] or $200,000) = $225,000 marital, leaving $75,000 as pre-marital. If we presume this is the same individual as in the above example, you can see that calculating benefits this way produces a very different number to divide in the divorce.

Defined Benefit Plans. Determining the marital portion of a defined benefit plan such as a pension plan is, based upon one’s perspective, easier and more complicated than a defined contributions plan. A defined benefit plan accrues benefits pursuant to a formula in the plan document. These formulas often will contain variables such as salary, length of service, and a multiplier. The exact dollar amount of the benefit that will be paid to the participant cannot be determined until they actually retire and all the variables in the equation can be filled in.

A defined benefit plan participant may also earn benefits both before the marriage and after the marriage if they stay at the same job. Therefore, non-marital benefit portions may be both pre-marital and post-marital.

Once a defined benefit plan participant has put in a certain number of years at her job, it may be possible for the pension plan to produce an estimate based upon the benefits that have already been earned. The closer the individual is to actually retiring, the more accurate the estimate is likely to be. Obviously if the parties are divorcing after or at the time the participant is retiring, the exact amount of the benefit can be determined. If the participant has already retired, he or she may have made benefit elections which will control the distribution of the benefits. There are two basic approaches to valuing a defined benefit plan which has not yet matured upon dissolution of a marriage: 1) the immediate offset approach and 2) the reserved jurisdiction approach.3 A defined benefit plan’s benefits are generally not “matured” because they cannot be paid to the alternate payee at the time the QDRO is entered and payment depends upon the participant reaching a specific age.

Under the immediate offset approach, the court determines the present value of a pension benefit at the time of dissolution, awards that benefit to the employee spouse, and then offsets that award with an award of other marital property to the non employee spouse. The immediate offset approach is appropriate when there is adequate actuarial evidence to ascertain the present value of a pension, the employee spouse is close to retirement age, and there is sufficient marital property to allow for an offset. The non employee spouse is basically bought out of the pension at the time of the divorce.

Under the reserved jurisdiction approach, the court does not immediately compensate the non employee spouse at the time of dissolution; instead, it awards that spouse a percentage of the marital interest in the pension and then retains jurisdiction over the case so that the non employee spouse may receive his or her portion if, as, and when the pension becomes payable. The reserved jurisdiction approach is preferable where it is difficult to place a present value on a pension due to uncertainties regarding vesting or maturation, or when the present value can be determined, but a lack of marital property makes an offset impractical or impossible. of months that the participant accrued benefits in the plan during the marriage and the denominator is the total number of months that the participant accrued benefits in the plan during their career multiplied by the percentage awarded to the alternate payee and by the final benefit amount paid.

Most defined benefit plans will accept language defining the benefit in fraction form in a QDRO and will calculate the amount of the defined benefit amount to be paid to the alternate payee when benefits are commenced. In a defined contribution plan, the plan requires the sum to be paid to the alternate payee to be expressed as a dollar amount or percentage of the benefit. Therefore, the attorneys need to do the calculations and provide the plan with a percentage or dollar amount that the alternate payee is to be paid. Defined contribution plan administrators will reject a QDRO incorporating some kind of formula for determining the marital portion.

Since many parties getting divorced have pre-marital portions to their benefits, it is important for the attorneys to be conversant with what needs to be done to determine the marital portion. It is insufficient just to put language in the marital settlement agreement stating that the parties are awarded half of the marital portion of the benefits, without further thought as to what is involved in determining that amount.

1. As a general rule, property acquired by either spouse after the marriage, but prior to a judgment of dissolution, is presumed marital property regardless of how title is actually held. See 750 ILCS 5/503(b) (1). See also In re Marriage of Rogers, 85 Ill.2d 217, 52 Ill.Dec. 633, 422 N.E.2d 635 (1981); In re Marriage of Hobbs, 110 Ill.App.3d 451, 455, 66 Ill.Dec. 203, 205, 442 N.E.2d 629, 632 (1982).
2. In re Marriage of Walker, 304 Ill.App.3d 223, 710 N.E. 2d 466 (4th Dist., 1999); In re Marriage of Benz, 165 Ill.App.3d 273, 518 N.E.2d 1316 (4th Dist. 1988); In re Marriage of Richardson, 381 Ill. App. 3d 47, 884 N.E. 2d 1246 (1st Dist., 2007); In re the Marriage of Raad, 301 Ill.App.3d 683, 704 N.E.2d 964 (2d Dist. 1998); In re Marriage of Leisner, 219 Ill.App.3d 752, 579 N.E.2d 1091 (1st Dist. 1991); In re Marriage of DeAngelo, 159 Ill.App.3d 293, 512 N.E.2d 783 (2d Dist. 1987); In re Marriage of Blackston, 258 Ill.App.3d 401, 630 N.E. 2d 541 (5th Dist. 1994)
3. In re Marriage of Hunt, 78 Ill. App. 3d 653, 397 N.E.2d 511 (1st Dist., 1979); In re Marriage of Robinson, 146 Ill. App. 3d 474, 497 N.E.2d 140 (3rd Dist., 1986); In re Marriage of Wisniewski, 286 Ill. App. 3d 236, 675 N.E.2d 1362 (4th Dist., 1997); In re Marriage of Richardson, 381 Ill. App. 3d 47, 884 N.E. 2d 1246 (1st Dist., 2007); Vaul-Kennedy v. Kennedy, 2014 IL App (1st) 1-13-2947-U (Ill. App. 2014).

Dorothy A. Voigt concentrates her drafting orders to divide retirement benefits in connection with a divorce and assists attorneys and divorcing individuals to understand the retirement and executive compensation benefits they have and the divisibility of same. She received her Juris Doctor from IIT Chicago-Kent College of Law and earned, with honors, her L.L.M in Employee Benefits from the John Marshall Law School in 2012.

 
 
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