In Part II of our series on Texas Retirements and Divorce, we will discuss Defined-Benefit Plans.
Defined-Benefit Plans: The best known defined-benefit plan is a pension, where the employer pays a certain amount to the employee for life upon retirement. The monthly benefit is often calculated by a formula based on the employee’s length of employment and salary. These plans also allow the employee to elect to protect a spouse in case of untimely death. Because there is no set value to the plan, it can be much more complicated to divide a defined-plan during divorce.
Community Property Interest in Defined-Benefit Plans: Formulas from two Texas cases govern the valuation of defined-benefit plans on divorce, based on whether the employee is retired and receiving benefits, or still working. The Taggart case governs retired employees. Under Taggert, the community portion of benefits = number of months of marriage during employment / total number months employed at the time of retirement. If the employee is not retired, the Berry formula applies: The community portion of benefits = the number of months the parties were married during employment / the total number of months employed at the time of divorce.
Value of the Community’s Interest in the Plan: If an employee is not retired, valuing the community’s interest in a plan will involve some calculations. First, the employee’s monthly benefit must be determined based on plan information. Next, the Berry formula is applied to determine the community’s interest in the benefit. Next, the employee’s earliest retirement age must be determined, which will also be listed in the plan documents. After that, we determine number of payments. This will be the difference between the employee’s earliest retirement age and his life expectancy according to government life tables. A discount rate will also need to be determined to offset inflation and the risk of default. Once you have a value at retirement, number of payments, and a discount rate, you can determine a lump sum value at retirement. That value is then reduced based on the number of months remaining before retirement and the discount rate. A matured plan is similarly valued, except the Tagger formula is applied and there is no need to reduce its value by the number of months before retirement since the employee would already be retired.
Dividing the Community’s Interest in the Plan: Much like a defined-contribution plan, a percentage share can be assigned to divide the community’s interest in the plan. Most pension plans allow the participant to buyout the divorcing spouse by borrowing against the value of the plan. The non-participant spouse can also wait until retirement and receive monthly benefits as if she had her own pension.