Disposition of Retirement and Pension Plan Benefits During a Divorce

During a divorce, one of the main issues that the parties have to resolve is the division of marital property. Marital property includes all tangible property of the parties acquired during the marriage, as well as retirement plans, pension plans and 401(k). Pursuant to 750 ILCS 5/503, property acquired before the marriage is considered non-marital property. However, there is an exception to this, retirement plans that may have both marital and non-marital characteristics are considered marital property. Pension benefits earned during the course of the marriage are presumed marital property even though they may not actually be distributed until after the dissolution of the marriage.

In order for retirement plans to be divided between the parties as part of their divorce, the court must issue a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that creates or recognizes the existence of an alternate payee's right to receive all or a portion of a participant's accrued benefits in a retirement plan. 40 ILCS 5/1-119. An alternate payee can be a spouse, former spouse, child or other dependent of a participant. A QDRO must contain the following four elements in order to be valid: (1) the name and last known mailing address of the participant and alternate payee; (2) the dollar amount, percentage, or method to calculate transfer amount; (3) the number of payments or period of payments that are to be paid; and (4) the name of the plan.

Courts use two different methods in distributing pension benefits between the parties: the immediate-offset approach and the reserved-jurisdiction approach. In re Marriage of Ramsey, 792 N.E.2d 337, 343 (Ill.App. 5th Dist. 2003). The immediate-offset approach determines the present value of the pension plan, awards the entire pension to the participant of the plan, and awards the other party enough other marital property to offset the pension award. Ramsey 792 Ill.App.2d at 343. This approach is determined by multiplying the participant's totally accrued benefit, as of the date of entry of judgment, by a fraction, the numerator of which is the number of months of credited service earned during the marriage, and the denominator is the total number of months of credited service earned by the participant as of the date of entry of judgment. Id. The courts have found the immediate-offset approach to be an impractical method of distributing pension benefits between the parties because the parties may lack sufficient assets to provide the alternate payee. Id.

The second method is the reserved-jurisdiction method. In this method, the court defers distribution of the pension plan to each spouse when the benefits are actually received by the participant. Id. The court determines the marital interest in a pension plan by dividing the number of years or months of marriage during which the pension benefits accumulated by the total number of years or months pension benefits accumulated prior to retirement or being paid. Id. Once the participant begins receiving pension benefits, the amount actually received is multiplied by the value of the marital interest and then divided according to the property division determined between the parties at the time of dissolution. Id. The reserved-jurisdiction method is more equitable between the parties as both parties share the risk that the participant will change job or die before retiring, which may reduce the pension substantially or completely forfeit the benefits. Id.

Pursuant to 750 ICLS 5/503(b)(2), all pension benefits acquired by or participated in by either spouse after the marriage and before a judgment of dissolution are presumed to be marital property. Social Security benefits are not marital property under the Dissolution Act. Participants in the Social Security program do not have accrued property rights to their benefits. In re Marriage of Mueller, 34 N.E.3d 538, 543 (Ill. 2015). Although the Social Security program is funded by contributions by Participants over the course of their working lives, Participants are never guaranteed to get the money out that they put in because Congress has reserved the ability to alter, amend or even repeal parts of the Social Security Act. 34 N.E.3d at 543. Unlike pension benefits, Social Security benefits are not owned in any proprietary sense, therefore, they are not marital property subject to division. Id.

Pension plans and retirement benefits may incur a great deal of money over the working life of the Participant, but after a divorce the non-working spouse is only eligible to receive a portion of the accrual if a QDRO is ordered by the court. Once the QDRO is in place the court will use either the immediate-offset approach or the reserved-jurisdiction approach to determine the distribution amounts of the pension benefits between the parties. Social Security benefits are never considered marital property and therefore will not be divided between the parties at the time of a divorce. Even if pension benefits are acquired after the marriage but before a judgment of dissolution, the benefits are considered marital property unless the spouse can prove, through clear and convincing evidence, the benefits were acquired by a method such as a gift, inheritance, by valid agreements, or any other technique listed in 750 ILCS 5/503(a).