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Basic Pension Principles
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Community Property
Dividing Marital or Community Property
Divorce & Retirement FAQs
Equitable Distribution
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Tax Treatment in Pension Evaluation
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Cash-Balance Pension Plan: A special kind of qualified ERISA defined benefit pension plan that reports the value of the current accrued pension to plan participants each year. Upon termination of employment with a vested pension, or retirement, the employee may request a lump-sum payout in lieu of a monthly pension.

Cash or Deferred Arrangement: A cash or deferred arrangement (CODA) is a feature of a qualified 401(k) plan under ERISA. When a plan has this feature, the participant has a choice each year of whether to receive a specified amount in cash as income or to defer the amount into the individual account in the plan as a tax shelter.

Cliff Vesting: A plan's vesting schedule is called cliff vesting when full vesting is obtained upon the completion of a specified period of service, such as ten years. In ten-year cliff vesting, if an employee leaves with nine years of service, all benefits are forfeited. However, at ten years or more, vesting is 100 percent. Typical cliff vesting is three or five years in single-employer plans and ten years in multiemployer plans.

COLA: See Cost of Living Adjustment. Typically adjusted annually based on th plans performance and funding. COLA must be inherent in a plan and a product of all member's retirement formula to be factored in a pension evaluation.

Collectively Bargained Plan: A plan established and maintained between one or more employers and one union or collective bargaining unit under a collective bargaining agreement. This type of plan was formerly called a Taft-Hartley plan. If more than one employer is involved in the collective bargaining agreement, the plan is called a multiemployer plan. Collectively bargained plans are subject to ERISA (or the PBGC if the plan is a defined benefit plan) and the Multiemployer Pension Plan Amendment Act of 1987. If only one employer (including affiliates) is required to contribute to the plan, the plan is treated in the same way as plans that do not cover union employees are treated.

Common Law Marriage: Common law marriage may be recognized in some states, but it is difficult to secure pension rights for the putative "spouse." Courts are reluctant to divide a pension as marital property when there has not been a bona fide marriage. The federal government has denied Social Security benefits to a "widow" of a common law husband. In a case reported in The Wall Street Journal (Dec. 31, 1990), a 74-year-old woman began receiving benefits when her husband died in 1985. However, upon routine paperwork processing, the woman appealed on the basis of a common law marriage, but she lost in federal appeals court. Similarly, a New Jersey court ruled that cohabitation without formal marriage did not give a woman any rights to a man's pension. Wajda, 570 A.2d 1308 (N.J.Super.Ct. 1989). In a Pennsylvania case, a woman was denied survivor's benefits from the pension plan of her deceased husband because she was not legally married to him. Flagg v. Allied Signal Inc., as reported in the Pennsylvania Law Journal-Reporter, April 16, 1990.

Community Property: In community property states, pension rights are not subject to the terminable interest doctrine, that is, the rights do not stop upon death but remain available for distribution after the death of a spouse. Otherwise, death of either spouse would end the community share of marital property interest in the pension. Chirmside v. Board of Admin. of Public Employees Retirement System, 143 Cal.App.3d 205 (May 20, 1983).

The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. (Mississippi is the only state that distributes property by title.)

Comparison of Pensions: In settling the property in a divorce where both husband and wife have pensions from their respective employers, it is sometimes suggested that each retain his or her own pension with no further investigation. This will almost always be a mistake. The plans may be of different types (e.g., defined benefit, defined contribution) and may have different retirement ages. The spouses' salaries and work histories are usually different, and the benefits provided are probably different. The only correct way to compare pensions is to compare their present values at the same point in time, when all of the variables can be accounted for.

Confidentiality: The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA '98) includes provisions extending attorney-client privileges to Enrolled Actuaries in the performance of certain actuarial duties under ERISA. The law protects confidentiality between actuary and client to the extent that the actuary is an Enrolled Actuary, authorized to practice with respect to specified IRS duties and responsibilities. An Enrolled Actuary's confidentiality is limited to issues involving the qualification of employee plans, the deductibility of employer contributions, the determination of funding requirements for defined benefit pension plans, preparation of annual IRS filings, advising with respect to the drafting of QDROs, and a long list of other minor duties under various IRS code sections. The privilege of confidentiality may be used in noncriminal process with the IRS or in federal court, but it does not apply to other regulatory bodies or in state courts. The confidentiality privilege for IRS matters is not blanket coverage, however, and any person seeking to use it should confer with counsel beforehand.

Contributions: In a defined benefit pension plan, the employer makes contributions for the covered group. Contributions are not made on an individual basis, and a pooled fund of assets provides benefits when they come due. A defined benefit pension plan may allow employee contributions. If so, a separate account is maintained for employee contributions and investment growth thereon. The plan may include the employee contributions (if any) in its funding of benefits, providing no additional benefits, or the employee money may be used to increase benefits. A plan with employee contributions should be reviewed to see if benefits are affected.

In a defined contribution plan, employer contributions are immediately allocated to the individual accounts of the participants. If there are employee contributions, they may go into the same account or into a subaccount earmarked for the person. Contributions to a defined contribution plan result in eventual benefits. In a defined benefit pension plan, there is no direct relationship between contributions and benefits.

Cost-of-Living Adjustment: The cost-of-living adjustment feature (COLA) in a pension plan provides for increases in retirees' pensions to help keep pace with inflation. Not often found in corporate plans, a COLA is standard in federal pension plans and in many state plans and is often a feature in state or municipality pension plans for schoolteachers, police officers, and firefighters. The COLA feature may be equal to inflation as measured by a particular consumer price index or may be a percentage. A QDRO or equivalent order may include a potential COLA but does not have to. A valuation of present value for immediate offset purposes usually does not include a COLA, but it may in some jurisdictions. For example, New Jersey courts recognize a COLA in present values when the plan provides for it. See, e.g., Moore v. Moore, 553 A.2d 20 (N.J.Super.Ct. 1989).

Coverture Fraction: A coverture fraction is used to determine what portion of a pension value is marital property subject to equitable distribution (usually in a defined benefit pension plan). The fraction is constructed as follows: The numerator is the period of time from the later of (1) date of marriage or (2) date of plan entry to the cutoff date in the applicable jurisdiction. The cutoff date may be the date of marital separation, the date of filing of the divorce complaint, the date of hearing or trial, or the date of the divorce decree. The denominator is the period of time from the date of plan entry to the cutoff date in the applicable jurisdiction. The ending point of the denominator should agree with the date as of which the benefit is being measured. This is also known as the time rule.

Cutoff Date: There is a cutoff date for the measurement of the values of marital property for equitable distribution, and pensions are no exception. In pensions, the cutoff date is the date as of which the accrued benefit will be determined. After that date, no benefit increases due to continuing service or increases in pay will be considered. The cutoff date varies by jurisdiction. It may be the date of marital separation, the date of filing of the complaint, the date of the divorce hearing or trial, the date of the divorce decree, or the date the plan participant retires with benefit commencement. In deferred distribution, the QDRO should clearly specify the cutoff date for benefit determination. In present value computations, it should be understood that the cutoff date refers to the benefit, not its value. That is, the benefit may be the amount of the accrued benefit as it stood five years ago, but its present value is determined by the employee's current age and using current interest rates.

Deferred Compensation: A general term that encompasses all retirement and savings plans; also the name of a specific type of plan often used for key employees with an employment contract that defers payment of salary or bonus until after termination of employment.

Deferred Distribution: A method of providing pension benefits in equitable distribution of marital assets. The two basic approaches are (1) the court retains jurisdiction and will award benefits of the employee-spouse to the nonemployee-spouse on an if-as-when basis and (2) a QDRO. QDROs are more common because they permit the case to be settled without further involvement of the court. Deferred distribution is in contradistinction to present value for immediate offset. In deferred distribution, it may be helpful to know the present value of the pension, but it is not required. Deferred distribution is used for a defined benefit pension plan, not usually for a defined contribution plan. A favorable aspect of deferred distribution is that both parties share the risk that the pension will ever be payable and both parties have to wait to receive any funds. The disadvantages are the administrative difficulties of drafting a QDRO and obtaining its approval, the continued linkage of ex-husband and ex-wife, and the fact that the alternate payee has to wait to receive a distribution.

Deferred Pension:

1. A former employee who was a plan participant and who terminated service with vesting and is waiting to receive a pension upon attainment of a certain age has a deferred pension in the sense that it is delayed until it begins.

2. An employee who is a plan participant and who continues to work beyond normal retirement age without collecting the pension is said to have a deferred pension in that it is deferred past the age at which it was normally expected to begin.

Defined Benefit Plan: A plan designed to provide participants with a definite benefit at retirement (such as a monthly benefit of 20 percent of compensation upon reaching age 65). Contributions under the plan are determined by reference to the benefits provided for the total covered group, not on the basis of an individual's compensation.

Defined Contribution Plan: A plan with individual accounts for participants. The benefits are unknown in advance, as they are provided by the account balance when they become due and payable. Contributions from the employer and/or employee are made into the employee's account. The investment risk is borne by the employee. If investment results are poor, the account balance is low; if results from investment performance are strong, the account grows. The employer is under no obligation to guarantee investment growth. The common defined contribution plans are profit-sharing plans, Keogh plans, 401(k) plans, money-purchase plans, thrift/savings plans, and target plans. Defined contribution plans may be valued for immediate offset or may be set for deferred distribution by use of a QDRO.

Disability Pension: In jurisdictions in which a disability pension is not marital property, it may be possible to determine that the disability pension has two components: a pension for service and compensation for the disability. Thus, if the "pure" pension portion can be split out, it can be valued and considered marital property. For deferred distribution, a QDRO may be designed to pay a portion of the nondisability component of the pension to an alternate payee.

Early Retirement: Early retirement refers to leaving employment with a pension starting before the plan's normal retirement age. A plan may have one stated normal retirement age or several possible ages determined by a combination of age and service. Early retirement does not mean merely before age 65; it depends on the plan. Some rare plans have no early retirement provisions at all. An early retirement pension may start at a particular time even when the employee has terminated service many years earlier. For example, a plan has an early retirement provision of age 55 with 15 years of service. An employee leaves at age 50 with 17 years of service, fully vested. The retiree is a terminated vested participant with a deferred pension. When she reaches age 55, the retiree may ask for her early retirement pension to begin. In a defined benefit pension plan, the early retirement pension will be reduced to allow for its early commencement and for its longer payment period over the person's lifetime. The reduction may be calculated using actuarial factors or using a formula in the plan. If the reduction is less than computed by actuarial factors, it is known as subsidized early retirement.

Employee Retirement Income Security Act: The Employee Retirement Income Security Act of 1974 (ERISA), as amended, is the basic federal law governing all qualified retirement plans. It is designed to protect the rights of beneficiaries of employee benefit plans offered by employers, unions, and others. ERISA established the PBGC, set limits on benefits and contributions, created the title of enrolled actuary, and set forth the basic and standard conditions for qualified plans. IRAs are not covered by ERISA, but Keogh plans are covered.

Employee Stock Ownership Plan/Trust: An employee stock ownership plan/trust (ESOP/ESOT) is an ERISA defined contribution plan in which the participant's account consists primarily of the employer's stock. Valuation of an individual's interest at any particular time may be difficult because it would depend on the market value of the employer's stock at that time. Nevertheless, such plans may be valued for equitable distribution, and they are subject to a QDRO.

Employer-Sponsored IRA: An IRA that is sponsored by the employer to help its employees make a tax-deductible contribution to an IRA and to invest the funds in a particular type of investment. The employer-sponsored IRA should be distinguished from a simplified employee pension plan (SEP), which requires employer contributions and must meet certain requirements with respect to participation, discrimination, withdrawals, and contributions. However, both are subject to the requirements of a QDRO, as they are considered marital assets.

Equitable Distribution: The concept of marital property that attempts to allocate a fair division of the marital assets not based on community property or titled property alone. A pension that accrues during the marriage, which is neither vested nor measured, is still subject to equitable distribution.

ERISA: See Employee Retirement Income Security Act of 1974.

ERISA Plan Types: ERISA divides plans into two broad categories: pension plans and welfare plans. Under the rubric of pension plan fall both pension plans and profit-sharing plans of all types. Welfare plans include medical, health, hospital, disability, and life insurance coverage plans. Pension plans are subdivided into defined benefit plans and defined contribution plans. Defined contribution plans include money-purchase pension plans, Keogh plans, target benefit plans, thrift/savings plans, profit-sharing plans, and 401(k) plans. Defined benefit plans, in addition to the traditional defined benefit pension plan, include cash-balance pension plans and defined benefit Keogh plans (the latter are rare). Defined benefit plans are distinguished in that they all require an annual certification by an enrolled actuary. Defined benefit plans may be single- or multiple-employer or multiemployer, and they may or may not be covered by the PBGC. Plans of professional corporations with fewer than 25 participants are exempt from PBGC coverage, as are plans covering only one employee or only a husband and wife.

Expert Witness: A certified public accountant's appearance as an expert witness regarding the method of valuing a pension in a divorce case was disallowed because he had limited experience with pensions, did not understand PBGC tables, and could not explain the source of the figures he presented. His sole function was to perform the mathematical calculations, and this was considered insufficient to qualify him as an expert. Hegerfeld v. Hegerfeld, 555 N.E.2d 853 (Ind.Ct.App. 1990).

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