How to Divide Pension Interest: The Coverture Formula
Whether you are in Chicago, its suburbs or outside of Illinois, dividing pension plans in a divorce is a question of math. A pension is oftentimes the most valuable asset that will be divided. There are different ways to divide this asset and this article covers one of the most common methods, the coverture formula, in Illinois often referred to as the Hunt formula because of a seminal case that heralded the method.
The first step is to confirm the type of plan you are dividing: is it a defined contribution plan, like a 401(k), or a defined benefit plan, a pension that will pay a monthly benefit at least until the Participant dies. Assuming we have a true pension plan, the next issue is that of timing.
Did the Participant work for the employer sponsoring the plan at the time of divorce and did s/he continue participating in the plan (working with same company/branch of government, etc.) after the divorce? If the answer is yes, the Hunt formula may be appropriate. However, even if the answer is yes, and the participant has not yet retired, and if the plan allows it, the most appropriate approach might be the separate interest method, which will be subject of another blog.
The coverture or Hunt formula calculates the marital portion of interest in a plan by multiplying a fraction, numerator of which is the time of participation in the plan during the marriage and the denominator of which is the total time participating in the plan, by the monthly pension amount. The outcome is typically multiplied by 50%, which is the alternate payee's portion.
This might sounds complicated, but really it is just dividing the time participant worked while married, say 5 years, by the total time the participant worked for that employer, say 10 years. In this scenario we have 1/2 (or 0.5). Say the monthly benefit at retirement is $1,000, which multiplied by 1/2 amounts to $500. The marital portion is $500, and the amount the alternate payee will get is $250 (if it's an equal split).
A natural question that often arises once someone understands the Hunt formula, is why is the alternate payee receiving the benefit of work performed after the divorce? This is after all, non-marital effort. Yet the formula accounts for it in that the denominator is the total time of participation in the plan. The answer is in the policy of many states, and certainly in Chicago and throughout Illinois.
The policy argument is that pension earnings depend on income earned. The more you earn, the more you and the employer contribute to your pension. The longer you work, the more seniority and the higher your position, which means higher income. You earn more later and in a higher paid position because you worked earlier years and at lower-paid positions. The increased yearning years after divorce are in a sense made possible, at least in part, by the earlier years during the marriage.
Having said that, the alternate payee gets an ever diminishing share of each year after the marriage. The numerator of the fraction (the number divided) never changes, so in the example above, the 5 stays the same. The denominator (the number divided by) increases as you work more, so in the same example, it might grow to 15. The result has decreased the multiplier from 1/2 (0.5) to 1/3 (0.33). Of course, since you worked longer, the monthly pension grew, so lets say it is $2,000 a month. The result of the smaller multiplier, 1/3rd, and the larger benefit, would be $66.67. Increasing the alternate payee's portion to $333.
What if the participant participated before and after the marriage? The same argument could be made for the use of the Hunt formula, but perhaps a different percentage (other than 50%) could be used. What if the participant only worked at the company before and during the marriage, and not at all after? In this case, the coverture formula may not be appropriate at all. The answer depends on your specific circumstances.
These questions are ones to be addressed by an attorney that knows your specific case and has a firm understanding of QDRO law and methods of dividing pension plans. If you are a party to a divorce or an attorney seeking a consultation or just a little help in this regard, please contact me.