Dividing Retirement Benefits
There are two options for the divorce court when dividing community property pension rights. The first option is the cash-out method, and the second option is the in-kind division. There is no preference for either of the two, and the court has the discretion to apply whichever method it believes is best suited to a particular situation.
Cash-Out Method
Under the cash-out method, the present value of the pension is determined using actuarial evidence. After the present value is fixed, the community property interest in the present value is based on the percentage of the party’s employment while married and before separation. Lastly, the pension right is awarded to the employee while the other spouse receives offsetting assets or an equalizing payment, or both.
In-Kind Division
Under the in-kind division method, the percentage of the pension that belongs to the community is based on the spouse’s employment during marriage and before separation. After determining the community property share of the pension, one-half of the community portion is paid to the nonemployee spouse as payment is received. This form of division may be more appropriate if there is a substantial community property interest in a CalPERS pension based on years of service.
The court can also order that payments from a retirement be made directly to the nonemployee spouse. However, the court cannot order retirement plan to:
- Make payments in any manner that will increase the amount of benefits provided by the plan, or
- Make the payment of benefits to any party at any time before the member retires, except as provided by law or unless the plan so provides.
Dividing Benefits When A Spouse Could Retire But Continues to Work
The law recognizes that the employee spouse has the right to postpone receipt of their pension and continue working. However, this leads to a risk for the nonemployee spouse; they may not receive their share of the community property pension if the employee spouse dies while still employed. To mitigate this risk, the nonemployee spouse is given the option to be paid even if the employee spouse postpones receipt of pension benefits.
Retirement Age
When the employee spouse reaches retirement age, he or she has the following options:
- Retire and thereby commence drawing from the stream of income that then begins to flow, with the result that the nonemployee spouse may start to draw their share of the community property interest as well; or
- Continue to work and thereby forgo the income they would have drawn, with the result that the nonemployee spouse must forgo what would have been their share as well.
If the employee spouse chooses the second option and continues to work, the nonemployee spouse has two options:
- Wait to draw their share when the employee spouse begins to receive benefits (with the possibility of increase as a result of a greater age, longer service, or higher salary); or
- Demand immediate payment to compensate for what would have been their share (without the possibility of an increase)
Should the nonemployee spouse choose the second option, which is immediate payment of their share, the employee spouse has another set of options. He or she may choose to:
- Make arrangements to meet the demand for immediate payment; or
- Retire and allow the nonemployee spouse to draw their share.
The court has two options when the nonemployee spouse chooses to avail of retirement benefits, even if the employee spouse has postponed receipt of them. The first option is for the court to order that the community interest be bought out by valuing the community interest and then awarding half of it in cash to the nonemployee spouse. The second option is for the court to order the employee spouse to make monthly retirement payments to the nonemployee spouse.
Valuation of Pension Plans
Pension plans can be divided into two types: defined benefit pension plans and defined contribution pension plans.
Defined Benefit Pension Plans
For defined benefit pension plans, the valuation depends on a combination of factors such as:
- Highest income achieved during service
- Years of service at the time of retirement, and
- Age at retirement
Defined Contribution Pension Plans
In defined contribution pension plans the valuation is based on:
- The amount of contributions made from marriage to separation, plus accruals; and
- All accruals from separation to trial of the issue.