Why Does the Pension Get Divided?

There are several difficult realities that both parties must face when divorce is imminent. To effectively manage costs and expectations during this process, I believe that education prior to initiating proceedings is the most useful tool. When it comes to clients who are service members, specifically those in law enforcement and firefighting, it can be challenging for these men and women to come to terms with the fact that retirement benefits earned during the marriage may be viewed as marital property and therefore split between the participant, or member of service, and their ex-spouse, who is also known as the alternate payee.

In addition, the participant may be required to designate their ex-spouse as a pre-retirement and post-retirement death beneficiary, ensuring that the former spouse continues to receive the monthly benefit payment in the event of the participant’s passing. Furthermore, the ex-spouse may also be entitled to a portion of the participant’s cost-of-living adjustment. It is easy to imagine that in a contested divorce litigation, where emotions are high, the prospect of losing a significant portion of a pension benefit that was earned through years of hard work can lead to a great deal of bitterness and conflict in the future.

In New York State, the Court of Appeals has determined that pension funds are considered marital property and are therefore subject to equitable distribution. The court has established a formula where the percentage of the pension attributable to the duration of the marriage is typically split 50-50. This can be an extremely difficult reality to accept, particularly in a high-conflict divorce where there are no other retirement assets to consider trading off.

Many city workers, such as police officers and firefighters, express concerns regarding the potential tax consequences associated with dividing retirement benefits. Since a portion of retirement funds are typically held in tax-deferred accounts, such as 457 plans, they fear that splitting the benefits may result in tax liability.

To divide pension benefits in accordance with defined benefit and defined contribution plans, a Domestic Relations Order (DRO) is required by most municipal plans. A DRO is a court order that provides specific instructions to the plan administrator on how the pension or retirement asset should be divided between the participant and alternate payee.