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Valuation of Assets in Divorce; Part II- Retirement/Pension Plans

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The two basic types of retirement plans, defined benefit and defined contribution plans, are valued in accordance with the characteristics peculiar to the type of plan.

By Attorney Jeffrey B. Engle, Divorce Lawyer, Harrisburg, PA

The Two Types of Retirement Plans

Defined Benefit

A defined benefit plan determines the retirement payment that is to be provided, usually stated as a specific amount payable for the life of the participant. Some defined benefit plans also provide alternative payment options, such as a lump sum distribution. The benefit pursuant to a defined benefit plan is determined by a formula that typically references salary history and years of service. The benefit for all participants under a defined benefit plan is funded by employer contributions that are actuarially determined on a participant class basis. Contributions to fund the plan are not made for each individual participant, and separate accounts for individual participants are not maintained.

Defined Contribution

A defined contribution plan focuses upon the contribution that is being made for each individual employee. The individual account may be comprised of contributions by both employer and employee. At retirement, each participant has an individual account balance which may be distributed or withdrawn as permitted under the plan; for example, as an annuity or as a lump sum distribution.

Defined contribution plans, such as profit sharing plans, are easy to value because each employee has an individual account. The value of the individual account will equal the total employer and/or employee contributions, together with any earnings on these contributions. For example, if the account has a balance of $100,000, all of which is subject to distribution, the court could award either a fixed percentage or a fixed dollar amount. Thereafter, each party will have that amount of money to fund the acquisition of any payment option permissible under the plan. There is no need for a present value calculation in the case of defined contribution plans because the value of the account is its current balance.  The marital component of a defined benefit plan is determined by application of a coverture fraction, the denominator of which is the total number of years or months during which the employee earned the pension benefit and the numerator being the number of those pension-credited years or months during which the parties were married.  It is generally inappropriate to apply a coverture fraction to determine the marital property component of a defined contribution plan, since the portion of the account acquired during the marriage is readily ascertainable.

Since the benefit to be ultimately received by the employee under a defined benefit plan is not determined by the contributions actually made but is based on other factors, the valuation of defined benefit plans is more complex and less precise than that of defined contribution plans.

Actuaries have developed a number of methods for determining the present value of defined retirement benefits to be received in the future.  It is important to note that actuarial methods are not scientifically precise, but are estimates based on probabilities.

If there is a retirement plan, whether it's a defined contribution or a defined benefit plan, it's usually best to get an updated statement from the retirement plan provider.  An actuary is typically employed to assist a lawyer in determining the marital portion of the benefit.  If you have questions concerning the equitable distribution of a pension or retirement plan, which may be marital property (see link to my article on this topic), you may contact Shaffer & Engle Law Offices, LLC toll free or email us today.

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