In New York State, all marital property is subject to the state’s Equitable Distribution Law. This includes, but is not limited to, assets such as real property, personal property, checking/savings accounts, and of course retirement accounts. Traditional/Roth IRAs, 401(k)s, 403(b)s, and 457(b)s are the types that most often come to mind and frequently are the simplest to deal with. Another type of retirement account that is waning in popularity and sometimes overlooked, but potentially holds the greatest value, is a pension.
Although becoming increasingly rare in the U.S private sector, roughly 83% of public employees still participate in defined-benefit pension plans. A defined-benefit plan guarantees a specific benefit or payout upon retirement. This payout may be in the form of a lump sum or a monthly payment for the life of the employee. Unfortunately, they are often difficult to deal with during the equitable distribution process due to the special challenges in both their evaluation and distribution. When dividing a 401(k) or the like, determining the value is often as easy as looking a recent statement. On the other hand, determining the value of a pension can be complicated. Is the plan a fixed benefit or one calculated according to a formula that factors in years of service, age at retirement, average salary, and a percentage multiplier? Is there the choice of a lump sum or monthly annuity? Does the plan cover a single-life payout or is joint-life payout an option? The only thing that is crystal clear is that determining the value and how to divide that value it is not always simple.
It can be simple though…
If the pensioned spouse is already retired and has received or is receiving their benefits it can be as simple as one step…applying the Majauskas Formula. This formula is the most commonly used equitable distribution formula for pensions and was established by the New York State Court of Appeals. Although couples are not required to use the Majauskas Formula, it is what the court will use if couples are unable to reach an agreement because it is the baseline to determine what each spouse’s share of the pension is. The formula provides the non-pensioned spouse with one-half of that part of the pension that was earned during the marriage.
The Majauskas Formula can also be used before the pensioned spouse has retired and without the pension’s value being determined. In that situation, the formula is simply applied, and the plan administrator will be directed to pay the non-pensioned spouse their marital share of the benefit upon the pensioned spouse’s retirement. The downside to this is couples sometimes lose the ability to fully plan for their financial future or project a value necessary to negotiate a cash buyout today or a trade of equity in another asset.
The Majauskas Formula
(Years of pension service credit accrued during the marriage ÷ Total years of pension service credit at retirement) x .50 = Non-pensioned spouse’s share
Example: John is receiving $2,000 per month from his pension. He accrued benefits over 30 years and was married for 18 years while accruing benefits. Applying the formula, (18 years/30 years) x .50% = .30 or 30%. That means 30%, or $600, of the $2,000 is the non-pensioned spouse’s share of the pension.
When it’s not simple…
It is important to consider all of the factors the plan administrator will use when determining the benefit value. When will John retire? What will his average salary be when he retires? How many years will John be expected to receive benefits? Will he choose a lump sum payment if that is an option? Is a joint-life payout an option? These are all important questions that need to be answered to truly determine the value of a pension during divorce.
In the end, almost every divorce is a negotiated settlement and retirement assets are just one piece of the puzzle. Whether your situation is contested, uncontested, or you choose mediation, at Bates Family Law we truly understand the multiple ways that all these pieces can fit together in a way that is focused on your future. Give us a call at today at (585) 433-4661 to schedule your consultation.
