How is a pension divided in a Utah divorce?

Defined benefit vs. defined contribution

A defined benefit plan promises a monthly payment at retirement based on a formula, usually years of service times a percentage times final average salary. There is no account balance to split. A 401(k), 403(b) or TSP is a defined contribution plan with a balance that can be divided as of a date. The Woodward formula is built for defined benefit plans, where the value depends on service and salary that may continue after the divorce.

The Woodward formula

The marital fraction is:

Years of service during the marriage ÷ Total years of service at retirement

The fraction is multiplied by the monthly benefit actually paid at retirement. The non-employee spouse typically receives 50 percent of that marital portion. Because the denominator is total service at retirement and the fraction is applied to the final benefit, the non-employee spouse shares proportionally in later salary increases. Service before the marriage and after the divorce stays with the employee spouse.

The 50 percent share is common but not required. Utah courts divide marital property equitably, and the court can award a different share when the facts support it.

Deferred division vs. present value offset

There are two ways to handle a pension:

Deferred division: The plan pays the non-employee spouse directly once the benefit goes into pay status, using the Woodward fraction written into the order. Nobody has to guess at future salary, retirement age or life expectancy.

Present value offset: The pension is valued today and the employee spouse keeps it while the other spouse receives other assets of equal value. This ends the financial connection between the parties, but the result depends on the discount rate, retirement age, mortality table and cost-of-living assumptions. Small changes in those assumptions move the value a great deal.

The order that divides the plan

• Private employer plans covered by ERISA are divided by a qualified domestic relations order (QDRO).
• Utah Retirement Systems and other state and local government plans are not covered by ERISA and use a domestic relations order that meets the plan's own rules.
• Federal civilian plans (FERS and CSRS) use a court order acceptable for processing (COAP).
• Military retired pay is divided under the Uniformed Services Former Spouses' Protection Act. For divorces after December 23, 2016, federal law freezes the divisible benefit at the member's rank and years of service at the date of divorce, which changes how the Woodward fraction is applied.

Survivor benefits

A pension usually stops when the employee spouse dies. Unless the order assigns a survivor benefit to the former spouse, the former spouse's share can end with the employee's death. Electing a survivor benefit reduces the monthly payment, so who bears that cost should be addressed in the decree.

Taxes

Pension payments are taxed as ordinary income. Under a QDRO or qualifying government order, the former spouse pays the tax on the share they receive. When a pension is traded for a home or cash in a present value offset, the after-tax value of each side needs to be compared, not the face value.

Factors that typically matter

• Years of service before, during and after the marriage
• Whether the plan is private (ERISA), state or local government, federal civilian or military
• Whether the benefit is vested and the earliest retirement date
• Final average salary formula and expected raises
• Cost-of-living adjustments in the plan
• Survivor benefit options and their cost
• Whether the parties want a clean break (present value offset) or a deferred division

Documents commonly reviewed

• Summary plan description and the plan's QDRO or domestic relations order procedures
• Most recent annual benefit statement showing service credit and accrued benefit
• Service history showing hire date and any breaks in service
• Marriage date and the date used for the end of the marital period
• Pay records if the benefit is based on final average salary
• For military pay: retirement points statement or rank and service history at divorce

Common mistakes and misconceptions

• Using the account-balance approach for a defined benefit plan, which has no balance to split.
• Leaving survivor benefits out of the order, so the former spouse's share ends when the employee dies.
• Sending a QDRO to a Utah Retirement Systems or other government plan that requires its own form of order.
• Accepting a present value without reviewing the discount rate, retirement age and mortality assumptions behind it.
• Trading a pension for the house dollar for dollar without adjusting for taxes and liquidity.
• Waiting until retirement to prepare the order, when the employee spouse or the plan rules may have changed.

When a professional may be useful

A CDFA® is useful when one spouse has a defined benefit pension and the parties are deciding between a deferred division and a present value offset, when the plan is a government or military plan with its own rules, when service before the marriage needs to be separated out, or when a pension is being traded against the house or other assets and the after-tax values need to be compared.