Generally speaking, retirement benefits that are earned during the marriage are considered marital property under the Illinois Marriage and Dissolution of Marriage Act. However, determining the amount of spousal retirement benefits that are marital property is often times a central issue to the division of the marital estate upon divorce. In particular, retirement benefits such as a defined benefit plan or a pension can be more complicated to value at the time of divorce, especially where the employee spouse is not yet eligible for retirement.
A defined benefit plan is a type of retirement plan that accrues benefits usually pursuant to some formula. This formula often will take into account several variables such as salary, length of service, and a multiplier. Because of these variables, the exact amount of the benefit that the employee will receive cannot actually be determined until they retire and the variables become fixed. Sometimes, after a certain number of years of employment, the pension plan may be able to produce an estimate of what the employee will receive upon retirement. However, the accuracy of the benefit amount depends on how close the employee is to actually retiring. Generally, under a defined benefit plan, the benefits are not considered to be “mature” because they depend upon the employee spouse reaching a certain age and they cannot be immediately paid to the other spouse (or “alternate payee” under the plan) at the time of divorce or entry of the Qualified Domestic Relations Order (“QDRO”). So, what do courts do when an employee is not yet eligible for retirement, but a portion (or all) of the pension or defined contribution plan is marital and subject to division upon divorce?
When valuing an unmatured pension upon dissolution of marriage, a court can use one of two approaches: the “immediate offset” approach or the “reserved jurisdiction” approach. See In re Marriage of Richardson. Under the “immediate offset” approach, the court determines the present value of the pension benefit and then awards the value of the pension to the employee spouse and offsets that with an award of marital property to the non-employee spouse. However, the “immediate offset” approach is considered impractical by courts for several reasons: (1) there are often valuation difficulties when a spouse is not close to retirement, or (2) because the couple lacks other sufficient readily divisible assets to provide an offsetting property award to the nonemployee spouse. See In re Marriage of Culp.
One major problem with the “immediate offset” approach is that it entails elements of pure guesswork. This is because this approach attempts to reduce pension plan benefits to their present value before calculating what the marital interest in them is. See In re Marriage of Wisniewski. If the court finds that it is best to divide the pension interest prior to it vesting, it must use actuarial evidence to value the pension, discount this amount in consideration of the probability that the benefits will not vest, discount this amount further to account for the time value of money (which involves assumptions regarding expected rates of return), and then determine the marital portion of that amount. However, this generally requires expert testimony as to the discount factors and evidence to create an evaluation of the probability that the benefits will actually vest. This is because there is always a probability that an employee may die or some other event may occur that prevents vesting. Because of these difficulties in valuation under the “immediate offset approach,” the “reserved jurisdiction” approach is often the more feasible and widely preferred approach by courts.
Under the “reserved jurisdiction” approach, the court will reserve jurisdiction to divide the pension “if and when” it becomes payable. A court using this approach does not immediately compensate the non-employee spouse upon divorce. Rather, the court will award the non-employee spouse a percentage of the marital interest in the pension and retain jurisdiction to divide the pension later upon the employee’s retirement. This approach is often used in cases where it is difficult to place a present value on the pension due to uncertainties regarding vesting or maturation. This is the most commonly used method by courts. It also seems to be a more preferable approach for litigants because it assures a more accurate valuation of the interest in the employee spouse’s benefits.
If you will be receiving a pension upon retirement, currently involved in divorce proceedings, or have questions about how your pension will be divided upon divorce, please contact our office for further assistance.