Sometimes when couples defer the distribution of retirement benefits, disputes arise later because the nonemployee spouse contends he or she should receive a share of subsequent increases. This is why property settlement agreements should be clearly and carefully written, particularly when the agreements involve a QDRO. A well-crafted QDRO insures and protects the parties’ rights both pre- and postretirement, including a Qualified Preretirement Survivor Annuity and a joint and survivor annuity.

An immediate distribution of pension rights is the preferred route in some jurisdictions. This method makes for a clean break between the parties and it minimizes court involvement in the future. However, some courts hold that deferred distribution makes for a more equitable settlement because both spouses can share in future increases if the QDRO provides for them. "Choosing a deferred distribution via a QDRO instead of offsetting assets may prevent an inequitable result," wrote an Ohio court in one case.

The downsizing of many large corporations through voluntary and involuntary early retirements has created particular considerations for divorce courts. In the past generation, millions of American workers have been squeezed out the work force early. Many longtime employees retire voluntarily but not by their own choice, or they retire involuntarily. Retirements under these circumstances may obscure an easy distinction between types of severance pay and early involuntary retirement benefits, particularly when a person retires early after a divorce. Sometimes early retirement benefits can be seen as compensation to an employee for a specific service, that is, retiring early. Courts face the challenge of deciding what portion of these benefits are separation pay (and separate property) and what portion are retirement benefits earned during a marriage (and marital property).

Courts are divided about the sharing of postdivorce pension increases (e.g., early retirement subsidies and benefit enhancements), particularly for deferred distribution pensions. Predictably, when a dispute arises, the employee spouse argues that the increase happened after the marriage, and the sharing spouse asserts that the increase happened as a result of years of employment during the marriage.

Courts have taken different positions about the sharing of postdivorce separation pay. Generally, separation pay after a divorce as a result of involuntary retirement is viewed as separate property because they are seen as compensation for lost future earnings. Overall, courts may look at early retirement benefits as compensation for past service if the employee is at a high point in his or her productivity rather than a low one.

Voluntary early retirement by the pension-owning spouse creates the risk that he or she may retire for the bad-faith reasons for a larger share of the retirement pie.

In recent years, some workers, particularly those in state and local government, have elected to participate in DROP retirement programs. DROP means deferred retirement option program. Under DROP, the worker no longer accrues service, and he or she is treated as if he or she retired. Benefits he or she has earned are paid into an account in his or her name, which is paid interest and any cost of living increases he or she would have received if he or she had been retired. DROP permits an employee to postpone collection of benefits he or she has earned, and they are classified, in the event of a divorce, in the same way they would have been classified if the DROP route had not been taken.

Authored By: Theodore K. Long, Jr., President, Pension Appraisers Online, Inc.

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