Pensions may not be as common as they were years ago, but many people going through divorces in Connecticut have pensions, and these pensions can sometimes represent a significant portion of a couple’s assets. In Connecticut, retirement assets like pensions are generally subject to equitable distribution in divorce. How they are divided, however, can be more complicated, depending on certain factors such as whether the pension benefits are vested at the time of the divorce, whether the pension is qualified or non-qualified under ERISA, and whether the pension is in pay status at the time of the divorce.
Pension as Marital Property in a Divorce
All property owned by spouses together or separately at the time of divorce is considered marital property subject to equitable distribution in Connecticut. Therefore, pensions in the name of one spouse can be considered by a Connecticut court for purposes of equitable distribution, even if the interest in the pension was first acquired prior to the marriage. .
Vested vs Unvested Pension Benefits
One of the first inquiries in divorce cases involving pensions is whether the party’s pension assets are vested or not. It is possible that a party’s interest in pension assets is partially vested at the time of the divorce as well. Under Connecticut case law, it is possible for unvested pension benefits to be considered an asset and divided by the Court in a divorce. You and your divorce attorney will review the pension plan documents and the particular facts and circumstances of your case in determining how best to approach your position with respect to any unvested portion of a pension.
Qualified Pension Plans
A qualified pension plan is one that meets certain requirements under ERISA and is given special tax treatment. Such plans are treated differently than nonqualified plans in divorce.
When dividing a qualified pension, there are two options. The first is to use a Qualified Domestic Relations Order (QDRO). A QDRO is a judicial order that gives the non-titled spouse the right to receive all or a portion of the pension benefits payable to the titled spouse under the plan. It allows the pension to be divided without losing its favorable tax treatment and paying early withdrawal penalties.
Dividing a pension by QDRO is not the only option in the event of divorce, however. If a party wants to keep his or her pension assets without dividing them, and the other party agrees, the party who retains the pension can buyout the other party’s interest in the pension using other assets. In this scenario, the present value of the pension usually must first be established. Divorce attorneys sometimes hire actuaries or valuation experts to arrive at the present value, taking into account a variety of factors, including the anticipated pension benefit, the anticipated retirement date, and potential discounts. Once the present value is determined, the other spouse receives an equivalent value in other marital assets in exchange for giving up rights to the pension.
Nonqualified Pension Plans
Some employers offer nonqualified pension plans to their top executives to attract and retain them. These plans are not subject to ERISA. In dividing these non-qualified pension benefits in divorce, there are also two options. One option is for the titled spouse to buy out the other spouse by providing equivalent assets to the nontitled spouse. The present value of the non-qualified pension must be determined in a similar fashion to determining the present value of a qualified pension.
Alternatively, the spouses can agree upon an “if, as, and when” division of the non-qualified pension. In such an agreement, the titled spouse pays a percentage of the non-qualified pension benefits to the non-titled spouse once the non-qualified pension goes into pay status. Any taxes paid by the titled spouse with respect to the non-qualified pension are deducted prior to payment to the other spouse.
Divorce and Pension in Pay Status
Any time a pension is in pay status at the time of divorce, the key issue that must be determined is whether the pension can be divided. Sometimes pension assets that are in pay status can still be divided via QDRO. If the pension cannot be divided, then the titled spouse will either have to provide equivalent assets to buy out the other spouse or agree to an “if, as, and when” division of the pension.
Division of Pre-Marital Pensions
Often, a spouse may come into the marriage with existing pension rights. It is possible to argue that the court should give the titled spouse credit for the premarital portion of the pension, meaning that part of the pension would not be divided. The success of this argument depends on the facts and circumstances of the case.
An experienced attorney can help ensure your marital assets are fairly valued and divided in divorce. If you are considering divorce and pension is a concern, contact our firm to learn how we can help you.
