More About Those Pesky Points



Yesterday we got into a few of the details about Reserve Component Retirement Points and why the standard months married over months of service might not be the right way to go when calculating options for dividing a reserve component retirement annuity.  here’s a few general pension division rules and why I think some finesse is required when the pension is derived from Reserve Component service.  Obviously I am not an authority and not every state’s rules are the same, but this is the general format:

  1. Only the portion of retirement benefits accrued during the marriage are marital property subject to equitable division.
    1. Obviously under this interpretation, a pension earned entirely before (or after) a marriage need no be divided … again, YMMV (Your Mileage May Vary)
  2. Retirement benefits accrued during the marriage are marital property subject to equitable division even though the non-employee spouse did not contribute to the increase in their value.
    1. This is the most normal division of assets situation, and with military or other “defined benefit” pensions the situation where the “Time Rule” is often the best choice.
    2. The lay interpretation to this premise of spousal contribution is that the spouses contribution is made by the fact of marriage during the time interval of marriage.
  3. The value of retirement benefits must be determined at a date as near as possible to the date of the divorce.
    1. This rule is most applicable to pensions where the valuation depends upon the future .. investment type plans or “defined Contribution” plans.  An actuarial valuation is most often needed here.
  4. Marital property includes retirement benefits, both vested and unvested which accrue during the marriage.
    1. This means even unvested pension benefits must be considered and divided as part of the divorce.
  5. Pensions may be valued by a number of methods.  In most states a trial court is free to choose its own method and need not be constrained by mathematical precision. The method chosen must only be equitable.  Note that the definition of “equitable” and “fair” are not quite the same.  Two common division methods are:
    1. The Present Cash Value Method “often called “Net Present Value” or NPV, requires the trial court to place a present value on the retirement benefit as of the date of the final decree.
      1. To determine the present cash value, the anticipated number of months the employee spouse will collect the benefits (based on life expectancy) is multiplied by the current retirement benefit payable under the plan.
      2. This gross benefit figure is then discounted to present value allowing for various factors such as mortality, interest, inflation, and any applicable taxes.
      3. After the NPV is calculated, the court may award the retirement benefits to the employee-spouse and offset that award by distributing to the other spouse some portion of the marital estate that is equivalent to the spouse’s share of the retirement interest.
      4. In many cases where generous “Defined benefit” plans such as military or Civil Service retirement is at stake there is not enough cash value in a couple’s assets and this “Division by Offset” method is impractical.
  6. The Deferred Distribution or Retained Jurisdiction Method eliminates the need for a NPV and offsets.  The court may determine the formula for dividing the monthly benefit at the time of the decree, but delay the actual distribution until the benefits become payable.
    1. The marital property interest is often expressed as a fraction or a percentage of the employee spouse’s monthly benefit
    2. The percentage may be derived by dividing the number of months of the marriage during which the benefits accrued by the total number of months during which the retirement benefits accumulate before being paid.

This is the classic “Time Rule Formula”.  It works well for those pensions where each month is equal to every other month in earning the benefit.  For reserve retirement calculation, though, I recommend this strategy:

  1. Modify the classic formula to make the numerator reflect the number of points accrued during the marriage
  2. Make the denominator of the fraction the number of points accrued.

This will satisfy the standard requirement for an equitable distribution, while avoiding the inequity that might be present if one spouse earned a substantial of his or her retirement before (or after, in the case of all the reserve component troops on seemingly perpetual duty in Iraq) the marriage.

Disclaimer

As always remember that this site, although written by a retiree with substantial experience in the school of hard knocks, it is for personal, lay opinions and informational purposes only. If you have a legal question you should seek help from a legal professional. If you have questions involving current or future values of pensions you need an actuary or competent pension valuation expert. If your questions are tax-related, seek a competent tax advisor. In other cases, I recommend the base chaplain.




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