Several articles have recently been written concerning the effects of divorce on retirement planning and future lifestyles. This is especially relevant when the divorcing couples are older and have fewer years left to accumulate additional retirement benefits. Benefits accumulated during the marriage and existing at the end of the marriage must be divided just as any other marital asset. If the parties have near or equal benefits, the impact of divorce is minimal. If, however, as is often the case, one party accumulated benefits during the marriage and the other did not, the impact on future retirement plans is magnified.
If a party can continue to accumulate retirement benefits, the divided portion lost at divorce may be replaced before retirement. If, however, one spouse is not eligible for employer provided retirement benefits, there will be no substantial increase to the benefits received at divorce. If the benefits to be divided are in the nature of an IRA or 401K plan each party can invest their retained accounts to maximize growth.
Ohio courts have recognized two basic methods of dividing pension plans which provide for a future monthly benefit. The choice of the method will determine if the share of the spouse who was not the plan participant will grow in the future. If the court order or provision of a separation agreement provides that the non participant's interest in the benefit is a set dollar amount or set percentage of the existing benefit as of the date of divorce, that amount is “frozen” and will not grow. In what is referred to as the “traditional coverture” method, the non participant's share will continue to grow by an interest factor or market appreciation attributable to the divided share. The plan participant's share will grow likewise, but also by additional employee and employer contributions.
The method of distribution can have a substantial affect on the amount actually received at the plan participant's retirement. There has been extensive litigation over which method should be employed to create an equitable result. When it is unclear as to what the order or the parties intended, the traditional coverture method is most often ordered. The document which divides the plan benefit must contain the same terms as in the underlying agreement or order. It is, therefore, essential to clearly define which method will be used when drafting settlement agreements. It is, obviously, advantageous to the non plan particpant to have the benefit grow rather than be frozen.