Pensions and Retirement Upon Divorce

Once a couple facing divorce identifies all the assets of the marriage, and because California is a community property state, the next step in finalizing a divorce is dividing and valuing pensions and retirement upon divorce. This can be done equally or equitably, depending on how the parties want to approach it. If there is not agreement between the parties as to how property will be distributed, then the court will follow default community property law, which states everything is equally divided in half.  

One common type of asset that requires presents special problems is pensions, or retirement accounts. Pensions must be divided upon divorce, since they are considered community income, even if it is deferred until retirement. This can be difficult because often a spouse who was earning pension during the marriage was also earning at some time before getting married, and/or after the parties separated.

Where the pension and retirement benefits are traceable to employment both before and during marriage and/or after separation, the first task will usually be to apportion the respective amounts Then, depending upon how the pension is divided, it must also be valued so the parties know exactly how much currently goes to the non-earning spouse, or will eventually go to the other spouse, once the working spouse retires.

To add to the confusion of valuing a pension, the court must also consider that a pension may be “vested” or “non-vested.” A vested pension is when the employee has the right to the benefits, even if they were to be fired from that job. The employee spouse could later collect on retirement from the years worked. Non-vested pensions require more additional months or years of employment before the employee can collect the benefits at retirement that have been accruing.

Similarly confusing, pension rights may be “matured” or “un-matured.” A pension matured if the employee has an unconditional right to retire and start receiving payments. This is true, even if that employee were terminated. An un-matured pension is when the employee has not yet reached retirement age, so if they were to retire voluntarily, then they could not collect retirement payments. Both “vesting” and “maturity” impact valuation of pension rights because if the employee spouse him or herself has not right to benefits or to start collecting those benefits, then that is not an amount the non-earning spouse may claim to be paid at divorce.

There is no particular formula that must be used in allocating retirement benefits, unless the particular pension plans states otherwise (for example, certain public employee pension plans). The court is given very broad discretion to allocate pension in a way that is equitable, as long as it is reasonable and fairly representative of the relative community and separate contributions.

Usually courts will use the “time rule” where the community is given a fraction of the amount of pension earned, calculated by dividing the amount earned during marriage, by the total amount earned over the total employment. Using this calculation is reasonable so long as the amount of the retirement benefits is substantially related to the number of years of service. For example, if an employee earned a large pension amount only over a two-year span while married, the non-earning spouse will not be entitled to one-half. That is because the large amount earned was not substantially related to the two years worked while married, especially if that employee worked a large number of other years while not married, but wasn’t earning as much or any retirement funds.

One can see why valuing and apportioning pension and retirement accounts can be tricky, especially if the earning spouse earned over a span of years while married and while single or separated. If you need assistance dividing up your pension assets, schedule a consultation with an experienced attorney at Cage & Miles, LLP today.