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How Does a Pension Get Divided in a Divorce in Texas?

In Texas, pensions and other retirement benefits earned during the marriage are typically considered community property, which means they may be subject to division between spouses in a divorce.

First, let’s look at the definition of a pension:

A pension is a type of retirement plan offered by employers to provide financial support to employees after they retire. It is a specific type of retirement benefit and falls under the broader category of retirement plans. The different types of pensions are designed to offer a steady stream of income to retirees during their post-employment years.

Now let’s dive a little more into the steps of dividing a pension plan during a divorce.

First, during the discovery period of a divorce, the pension or part of it must be classified as community property and valued to determine the portion subject to division. This might be easy if the pension began during marriage and all of it will vest before the divorce. However, if the pension began before divorce or won’t vest until after, it will need to be valued. This may require obtaining a formal appraisal or seeking the assistance of a financial expert. If there is a dispute on the value, sometimes the other side will hire their own expert.

How Does a Pension Get Valued?

To value a pension, experts use a number of formulas. Different formulas may yield slightly different results. Below are a few common methods experts use:

  • Present Value Calculation: This method calculates the current lump-sum equivalent of the future pension payments based on various factors such as the employee's age, retirement age, life expectancy, years of service, and the pension's payout formula. The present value is the amount that, if invested today, would generate the same stream of payments as the pension over the course of the employee's retirement.
  • The "Frozen Benefit Rule": In community property states, the Frozen Benefit Rule considers the portion of the pension earned during the marriage as community property subject to division. The present value is determined based on the benefits accrued during the marriage.
  • Defined Benefit Pension Formulas: Some pension plans have specific formulas to calculate retirement benefits based on factors like salary, years of service, and age. Experts use these formulas to project future retirement benefits and then calculate the present value using discount rates and life expectancy assumptions.
  • Appraisal/Tracing Method: This method involves obtaining a professional actuarial appraisal of the pension, which takes into account various factors, including the pension plan's terms, interest rates, life expectancy, and retirement age. The appraisal provides an estimated present value based on actuarial calculations.

Qualified Domestic Relations Orders/Forms

Once the value is determined, a Qualified Domestic Relations Order (QDRO) may be prepared if the plan administrator requires one in order to avoid tax penalties and consequences. This is a complex document that should be drafted by an attorney or company experienced in family law and qualified plans. The QDRO must be submitted to the court for approval. If the court finds the QDRO to be fair and meets the legal requirements, it will be signed and become a court order. The approved QDRO is then sent to the pension plan administrator. They will review the order to ensure it complies with their specific requirements. Once approved by the plan administrator, the pension benefits can be divided accordingly.

If no QDRO is needed, certain forms will need to be filled out for the plan to divide the pension. It’s important to contact the plan immediately after a pension has been divided to determine what needs to be done as some of these forms and procedures may take some time.

Dividing a Pension

There are various ways to divide a pension, depending on the circumstances. The most common approaches include dividing the pension at the time of the divorce or offsetting the value of the pension against other assets. The less common approach is to divide it upon retirement, as the many unknown variables in this option make it risky.

It's important to note that each case is unique, and the specific division of a pension in a divorce can depend on various factors, such as the length of the marriage, the overall property division, and the specific terms outlined in a divorce settlement agreement or court order. Therefore, it's crucial to consult with a family law attorney who can provide guidance tailored to your situation.