What’s a Fair Way to Determine a Pension Plans Marital Portion
A pension plan, technically known as a defined benefit plan, pays a monthly annuity for the life of the member or participant. Examples of these are fewer and fewer in the private sector, only a few companies retaining defined benefit plans. In the public sector, there are many for laborers, teachers, police and firefighters, clerks and other public employees. Some of these include Illinois TRS, SURS, SRS, MEABF.
When a member of such a plan divorces, the marital portion of the plan is divided, typically 50/50, using a QILDRO. A QILDRO is a special court Order that is the sole and only way to divide an Illinois public pension.
How the marital portion is calculated makes all the difference for the member and his/her former spouse, the alternate payee. If the coverture formula is used, and the member continues to work and participate in the plan after marriage, the marital portion is not cut off at divorce. The actual number, the monthly figure that is the marital portion, cannot be calculated until the member retires.
At retirement, the total amount of monthly retirement (so what was earned before, during and after the marriage) is multiplied by a fraction. The numerator of the fraction is the credit earned during the marriage only. The denominator is the total credit earned. Since we are dividing the numerator by the denominator, the longer the member works after divorce, the smaller outcome we get, but remember, that the outcome is multiplied by the total monthly benefit. While the multiplier gets smaller, it is multiplied by an ever increasing amount (since the benefit at retirement increases with each month worked).
For example, if the total monthly benefit is $1,000, and the member earned 5 credits during the marriage, and 10 credits in total, we get: $1,000 x ½ = $500. Assuming the alternate payee gets half of the marital portion, s/he gets $250.
This formula is contained in the QILDRO, but it is not the only way to divide a pension plan. A pension plan can be divided as of the date of divorce, period. The Plan Administrator or an actuary can calculate how much the retirement benefit would be had the member stopped working on the date of divorce.
In the above example, say that if the member quit on the date of divorce, he would only have 5 credit years, and based on that, upon retirement, he would get $300 per month. His former spouse would receive half of the marital portion, so $150 per month.
How the marital portion is defined makes a huge difference, but often, if it not defined at all. Many Judgments for Dissolution of Marriage simply state that the alternate payee will receive half of the marital portion. It is imperative that the Judgement and Marital Settlement Agreement clearly define the marital portion. Without a clear definition, the Court is likely to use the coverture formula.
The coverture formula has become something of a default position for QILDROs and QDRO’s in Illinois because later years of service, those after divorce, are greater paid and so result in a greater pension. Those years are only possible as a result of the earlier, lower earning years during the marriage. Therefore, it is fair to reward the former spouse with his/her share of the benefit.
On the other hand, if the member moves to another job, one that does not participate in the same pension plan, the former spouse gets nothing. The new pension plan, if there is one, is completely the member’s non-marital property. For example, a suburban teacher participating in the TRS, gets a position in Chicago and starts participating in the CTPF. If s/he does not combine the plan, the CTPF interest is her/his non-marital property.
The same is true of a move from the public sector to the private section. Say that a professor at a university, a member of SURS, quits and moves to a corporation where s/he consults in his/her area of expertise. If the corporation has a pension plan or makes a large contribution into a 401(k) for him/her, all those funds are his/her to retain.
Obviously, the new job is in large measure due to the old job, the job performed during the marriage. The teacher that moved to another system is likely to get some credit for the years worked in the former system. The professor will likely commend a much higher salary in the private sector precisely because of his experience gained in the public sector during the marriage. This is common practice among politicians and other executive or academic public employees: a lucrative move to the private sector, enabling them to save a lot for retirement.
Yet, no law exists and no court would grant the former spouse an interest in this new retirement. The default view is that a new job and what it entails is non-marital. However, we could argue that the same view should hold true for those staying in their jobs precisely because they are free to go somewhere else. It could be argued that they are not treated equally or on par with those that moved to a different position.