Does it matter if my spouse’s retirement is a defined benefit or a defined contribution plan?

Yes. This matters when it comes to calculating the value of the plan. Equitable distribution is a four step process – First property and liabilities are identified, then they are classified as marital, separate, or divisible. Next, property must be valued – the fair market value as of the date of separation is the applicable value to assign any asset or liability. Finally, the property must be distributed.

A defined contribution plan is a plan designed so that the employer, employee or both make contributions on a regular basis. For instance, a plan setup so that each pay-period a percentage of an employee’s paycheck is deposited into a 401(k), and the employer matches a certain percentage of contributions, is a defined contribution plan. A defined benefit plan, on the other hand, is a type of pension plan in which an employer agrees to pay a specified monthly benefit upon retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age. The two plan types are very different, and understandably the way you value the plans is different.

For a defined contribution plan, there is a simple math equation, known as the coverture fraction, that helps determine how much of the plan is marital. You would divide the length of time a spouse was simultaneously married and contributing to the pension plan by the total length of employment during which the pension was earned.

A defined benefit plan is harder to value. For these plans, the amount paid at retirement is typically based on the salary of the employee’s last years of work. So if a couple is separating and the spouse with the defined benefit plan is only 35, how can you place a value on what the plan is really worth? In these situations, the courts will apply a five-step process to determine the value of a defined benefit plan:

  1. Determine the earliest date that the spouse can retire.
  2. Determine the life expectancy at the date of separation to determine how many months the employee-spouse will get the benefits.
  3. Determine the value of the pension at the earliest retirement date.
  4. Discount the value to the date of separation (figure out the future value and discount that value to the date of separation).
  5. Determine any contingencies that may occur and discount the value further.

 


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