Defined Benefit Plans

Defined Benefit Plan

Defined benefit plans (e.g., pensions) can be confusing to the Participant as well as their attorney.

Generally, there is no “account balance” maintained nor are their investment earnings or loans to consider. The purpose of a traditional defined benefit plan is to create a future income stream for the Participant based on years of service and salary. Often, there are additional benefits to the Participant including supplements, subsidies, cost-of-living adjustments and Social Security offsets, all of which need to be considered when awarding an Alternate Payee an interest in the future benefit.

Payment options commonly include a single-life annuity, which provides a fixed monthly benefit until death; a qualified joint and survivor annuity, which offers a fixed monthly benefit until death and allows the surviving spouse to continue receiving benefits until death; or a lump-sum payment, which pays the entire value of the plan in a single payment. Selecting the right payment option is important because it can affect the benefit amount the employee receives.

There are two common methods for determining future pension benefits. The “accrued method” considers only the value of benefits accrued specifically during the marital years. If these marital years are during the early years of pension plan participation, this often results in less of the eventual pension being shared with the alternate payee, the ex-spouse. This is because many pension plans use formulas that devalue the early years of plan participation and disproportionately value the final years of plan participation. The “coverture method” values each year of pension plan participation equally, based on the idea that the marital years of pension plan participation lay a foundation of years of service that allow a participant to reach the high years of service, eventually, that result in high pension benefits. For example, if a couple is married for 15 years, and the spouse with the pension ends up participating for 30 years, the “marital portion” (or “coverture factor”) of the total benefit is 15/30, which is equal to 50%. This 50% of the eventual benefits thus “belong” to the marriage. The non-pension-participant spouse would get one half of this marital portion of the pension, which would be 25% of each monthly pension benefit payment at retirement.

The QDRO Company can review the plan documents and help you understand the various components of the Plan to ensure they are accurately considered.