Retirement Funds and Divorce

There are two ways in the state of Maryland in which a spouse may claim an interest in a participating spouse’s retirement fund.  Maryland considers the retirement fund marital property and the current spouse has the right to make a claim on a part of the fund.  If the contributing spouse has named the other spouse as a beneficiary that spouse has the right to that person’s funds.  If the property has been distributed as part of the divorce decree, the divorce does not automatically terminate a former spouse’s interest in the fund if the spouse has been named as a beneficiary.

Parties are often under the misnomer that even if a waiver is drafted, if the party is named as a beneficiary they are still entitled to a portion of the fund at the time of the participating spouse’s death.  Many pension and IRA’s are governed by ERISA and Internal Revenue code provisions, which are both complex.  It is vitally important if a waiver is drafted that it accommodates the fact that there was an ex-spouse.  If a former spouse has waived their rights to interest in the fund, but is still a beneficiary at the time of the participating spouses death they may still retain an interest in the fund even though they have signed a waiver.  To protect the participating spouse’s family interest in the fund they should make sure that the beneficiary has been changed thru the fund administrator.  Additionally, a waiver should be drafted to include a waiver of the spouse’s right to claim under the plan as a named beneficiary not just as a spouse and to bind the administrators of the plan to the decision.

Maryland law gives the court the discretion to transfer interest in retirement, pension and deferred compensation plans in divorce proceedings; however, they are not required to do so.  While they have the discretion to transfer funds they also have the discretion of how much to award and when payments will be received.  Next to the marital home, a retirement fund is often one of the largest assets, and often a major negotiating factor.

The court has very broad discretion when deciding how to divide pension and retirement funds.  In Maryland, they can be valued as:

• Equal to an employee’s contributions to the pension plus accrued interest or market experience thereon
• As the “present value” of future benefits expected to be received by the employee after retirement
• Through determination of a percentage to be paid to the nonemployee spouse from any future retirement payments received by an employee spouse, payable “as, if, and when” received.

Each case will depend upon the individual circumstances involved with each case.  Under the “present value” approach, future benefits have to be discounted for future earned interest, mortality and for vesting if the spouse is not fully vested at the time of the divorce.  The benefitting spouse’s life expectancy will be taken into account also, and involves much uncertainty, which make the amount change with respect to mortality, job turn over, and other conditions.  This is a very difficult method and the courts tend not to use this method for calculation.

Depending upon the court’s discretion the payments may be made as a lump sum or as monthly or yearly payments.  The “if, as and when” method recognizes that the value of the retirement fund cannot be ascertained until the retirement of the contributing spouse.  The formula used to determine the amount is referred to as the Bangs formula.  It calculates the value of the pension to which the non-employee spouse is entitled, commonly 50%, multiplied by a fraction, which is the number of months and years of employment during the marriage and the total number of months and years of employment at the time of the retirement.

Survivor benefits are like a pension and are treated apart from the pension.  A separate request must be filed if the benefitting spouse feels they are entitled to the distribution. 

The court may issue a QDRO (pronounced quadro), as one type of order to transfer retirement assets.  The administrator of the plan as well as the court must approve of the QDRO before it is carried out.  Benefits payable to the benefitting spouse under an ERISA plan can be re-directed to an alternate payee non-employee spouse only through a Qualified Domestic Relations Order.  If this is not filed the administrator can refuse to implement the court’s decision.

Social Security

If two people are married for at least 10 years, a spouse can collect retirement benefits based on their former spouse’s Social Security earnings record if they are at least 62 and if the former spouse is entitled to or receiving benefits.  Re-marriage will disqualify you from receiving your former spouse’s benefits unless your later marriage ends.  This can be by death or divorce.