Valuing pension plans in divorce cases involves complex areas of law and accounting where haste, ignorance or a failure to adequately prepare can have catastrophic results.
Attorneys often are pushed into negotiating divorce agreements under pressure and without adequate information about the parties’ pension plans. Having some basic information available about the types of plans and the types of problems unique to each might make it easier to spot issues on the fly.
Identify the Plan
Develop as much information about each spouse’s pension and retirement plans at the earliest time possible in the case.
Sometimes, finding important details can take considerable time and investigation, so it’s important to start early. There are documents common to most pension plans governed by the Employee Retirement Income Security Act of 1974 (ERISA), but certain military and state or local government plans might be exempt from ERISA and use different kinds of documentation.
In an ERISA plan, the plan administrator will be the source of documents and information needed to analyze each plan. The plan administrator should be asked to provide the plan document, the summary plan description, and a current benefits statement.
The attorney’s own client should be directed to immediately obtain those documents for his or her plans. The documents should be demanded from opposing counsel right away, using discovery procedures as necessary.
Also be alert for private plans, such as individual retirement accounts (IRAs) or pension and retirement plans for self-employed persons. Be particularly alert to the possibility of a self-directed IRA, which might be funded with hard-to-divide assets.
Identifying the sponsor organization will help identify the type of plan involved and what law will apply when it comes to dividing the plan. The plan sponsor might be the individual himself, in the case of an IRA, a private employer, the federal government, the U.S. military or a local government.
Determining the plan sponsor also will help determine what kind of court order is required. For example, plans governed by ERISA will require a qualified domestic relations order (QDRO).
A federal government plan will require a Court Order Acceptable for Processing. State or local government plans exempt from ERISA may require their own orders, or they may not be divisible at all.
For example, in one case, an attorney represented a county deputy whose wife’s counsel insisted on hastily drafting a settlement agreement. The agreement purported to divide the husband’s county pension, even though wife’s counsel had very little information about that plan. They later discovered that type of pension was not divisible in divorce. Obviously, a good bit of litigation followed after the divorce was final.
Drafting the Order
Pension and retirement plan trustees are very particular about distributing assets to anyone other than the named beneficiaries, unless they have perfect court orders in place.
Whether it is a QDRO, a Court Order Acceptable for Processing, or some other order, it’s a good idea to submit a review draft to the plan administrator. Many plan administrators are very accommodating about reviewing orders and commenting on orders so that a perfect order can be presented to a judge for signature.
For plans that can’t be divided, such as the county plan discussed above, other compensating items can be negotiated.
In a CPA’s perfect world, analyzing the division would involve simply calculating the present value of future benefits, then dividing that number based upon the length of the marriage, the number of years of marriage that contributed to earnings in the plan, and similar factors. But the law has other ideas.
The federal government, in the case of federal plans, and each state will have its own law addressing how pension plans are to be divided. Many will be similar, although community property states might be substantially different from non-community property states. Regardless, it’s important to discuss the particular law involved with the valuation expert to ensure both the attorney and the expert have the same perspective.
These negotiations require ammunition. It’s difficult to negotiate a plan division without being able to lay a solid financial analysis on the table. Anything less would be pure speculation, putting counsel at a disadvantage.
Rule No. 1 in analyzing plans for divorce cases is – do your homework. Push clients to provide good information about their own plans, and demand it from opposing counsel. The amounts involved can be significant and well worth the investment in obtaining the information needed to negotiate a strong deal.
Understanding the plan involved, the law that applies to that plan, and the nuances of how to get the particular information and secure the division with a proper court order, can make the case move forward efficiently. It also can help avoid a catastrophic consequence, as in the case of the county deputy’s spouse.