If you’re currently separated or considering divorce and started your cash balance retirement plan before marriage, this post is for you.
I’ve recently found that clients – and even other divorce lawyers – are not familiar with how cash balance plans work. These plans differ slightly from traditional defined benefit pension plans.
It’s therefore very important you know how your spouse’s share is typically determined and how to protect your premarital interest.
How does a cash balance retirement plan work?
A cash balance plan, also called a cash balance pension plan, is a form of defined benefit pension plan. They’re becoming more widespread among larger employers.
You typically start receiving your benefits at age 65, but it could be as early as age 55 depending on the employer.
You don’t contribute any of your own money to cash balance pension plans. Instead, your pension account receives an annual credit based on your salary each year.
And the amount you receive is generally based on total years of service to the company and your salary over the final years before retirement.
How can you retain your premarital interest when the plan is divided in divorce?
In divorce, your spouse is legally entitled to share only in the “marital value” of your cash balance pension plan.
Under New Jersey law, marital assets are subject to “equitable distribution” in divorce. More on that here
Many divorcing spouses, however, agree to simply divide a particular marital asset 50-50. With retirement plans, including cash balance plans, it’s the “marital value” that gets divided.
So, if you started in the cash balance pension plan before you were married, it’s essential to include language in your divorce agreement to ensure you retain the “premarital” value and that only the “marital value” gets divided.
The language in your divorce agreement directing how much your spouse will receive at your designated retirement age will generally be implemented by the administrator of your pension plan.
One method often used to calculate “marital value” for a cash balance pension plan started before marriage is called the “coverture” method. Simply divide the length of time you participated in the pension plan while married by the total length of employment during which the pension was earned.
This effectively omits your premarital interest from the calculation. The amount you get from dividing those two numbers will then be multiplied by the share your spouse is to receive.
5 (years participated in pension plan while married) ÷ 10 (total years contributed to pension). And you’ve agreed your spouse is to receive 50%
Here, the result of 5 ÷ 10 is .50. In other words, 50% percent of your pension plan is marital. So, your spouse would receive 50% of .50, or 25% of the future benefit accrued.
Therefore, in this example, your divorce agreement would provide for your spouse to receive 50% of the future benefit accrued as a result of your participation in the plan from the date of marriage through the date of filing of the divorce complaint (or an alternative agreed date) based on coverture fraction. Your spouse’s share is typically divided by way of a Qualified Domestic Relations Order (“QDRO”). More on QDROs here.
Be sure your divorce agreement also includes certain provisions to avoid big problems down the road. These might include, for instance, survivor benefits if you die before retirement and how and when your spouse will receive his or her benefits.
For pension plans with substantial value
If you have a cash balance pension plan of substantial value, you should consider having your premarital interest calculated so you benefit from the earnings accrued on that interest. This calculation is typically done by a forensic accountant and could be extremely costly with all the time involved. An experienced divorce and family lawyer can advise you on the method that works best for you.
For more information about how to divide your cash balance pension or other retirement plans in divorce, please click here.