How Are Pensions Valued in Connecticut Divorces?
In divorces where a pension is one of the assets, a common question is “how are pensions valued in Connecticut divorces?” Retirement accounts are one of the major property types that Connecticut divorce courts divide. Even though very few companies still provide a traditional defined benefit pension to employees, pensions remain a common type of “defined benefit” retirement plan. This is because virtually all city, State of Connecticut, and federal employees are currently eligible for a defined benefit pension.
Read on to learn the three major pension valuation methods commonly used in Connecticut divorces.
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What is a Defined Benefit Plan?
Defined benefit plans — like pensions or cash balance plans — are retirement accounts for which your employer contributes all the money and promises you a defined monthly income when you retire. Sometimes you are enrolled on day 1 of your job, sometimes there is a waiting period. Defined benefit plans generally require that you work in a position for several years before you are “vested” or able to receive pension benefits. Here is one 5 to 10 year vesting example from the Connecticut State Employees Retirement System.
Defined benefit plans are different from defined contribution plans like 401(k)s and 403(b)s. Defined-contribution plans are funded primarily by the employee, often with the employer matching some portion.
How are Pensions Valued in Connecticut Divorces?
In Connecticut divorces, generally speaking, three methods are often used to determine both the value and distribution of pension benefits:
- Present value
- Present division
- Reserved jurisdiction
Three Major Pension Valuation Methods Used in Connecticut Divorces
You and your spouse can agree to select which method to apply, or if you cannot agree, the judge will select which approach to take. You (and the judge) do not need to be confined by these three approaches, you may also use a different method if it’s more appropriate given your particular circumstances.
Present Value Method
Under the present value method, the pension funds are valued at the time of the divorce. The employee spouse’s life expectancy, account interest rate and projected retirement date are all taken into consideration. The nonemployee spouse is then granted different marital property to offset the amount of pension benefit to which he or she would have otherwise been entitled. This method’s advantage is that it provides a clean break. Because the valuation and offset can be made prior to the finalization of the divorce, the parties are financially untangled.
Present Division Method
The present division method delays the actual distribution until the pension matures. At the time of the divorce, the spouses agree (or the judge decides) the respective percentage each spouse will receive once the pension begins paying out.
The final method, reserved jurisdiction, can only be used in Connecticut courts for vested pensions. This approach delays both (1) division until the pension has matured (as with the present division method), and (2) the percentage determination. Jurisdiction to make these later determinations stays with the trial court until the benefits are to be paid out, typically at retirement. The former spouses then return to court for these decisions.
The Comprehensive Connecticut Property Division Guide
How to divide property is one of the most important issues in divorces. And, it’s one of the most confusing. There are no set formulas or rules on how property will be divided. The good news is that creates tremendous flexibility for experienced divorce attorneys to craft an individualized approach. In order to prepare to make solid and informed decisions, you need to understand how property division works. Our Comprehensive Connecticut Property Division Guide tells you everything you need to know about property division in Connecticut.
Now that you have learned more about how pensions are valued in Connecticut divorces, you may want to learn more about the factors that Connecticut courts consider when dividing retirement accounts and about why pensions are often so emotionally loaded.
Or, now that you have more information about the types of employer retirement accounts that can be divided in Connecticut, you know that it isn’t simple. Considering the level of discretion courts have when dividing marital assets, it is vital to have experienced legal counsel on your side. There is a lot of opportunity for creative negotiations, strategy, and solutions.
Our first step at Freed Marcroft, the Goals & Planning Conference, is designed to get to the heart of your problem and unveil your true goals. Then, we take those goals along with the facts of your case and analyze them so that we can present you with recommendations and options on how to move forward.