Dividing a state pension in your Massachusetts divorce? Ask these questions, or leave thousands on the table. . .

Asset division is part of every divorce matter, and one of the most valuable assets may be a spouse’s interest in the Massachusetts State Employees Retirement System.

Employees of the Commonwealth of Massachusetts – teachers, judges, corrections officers, police officers, firefighters — participate in the state employees retirement system, commonly referred to as a “state pension.“

A pension is an asset that may be divided in a divorce, but dividing a Massachusetts state pension in a divorce requires different rules as compared to a 401(k) or an IRA.  Unfortunately, many divorcing parties (and some of their attorneys) routinely miss very critical points when it comes to dividing Massachusetts state pensions in a divorce.

Talking about pensions is about as exciting as watching paint dry in slow motion, so I won’t blame you for not reading all the way through this post.  But, if you are getting divorced and your spouse is a Commonwealth employee, make sure you at least ask the questions I have listed below.  If your lawyer doesn’t have the answers right away, keep asking until you get them.  Otherwise, you may be leaving thousands of dollars on the table.

The first and most important question is. . . 

Are we (1) dividing the future income stream from the pension (that is, when monthly payments are made from the pension, will you and your spouse share those payments as they are received?)


Are we (2) offsetting the pension against another retirement account (that is, is your spouse keeping all of his pension and, in exchange, you are getting another asset?)

It’s one or the other (usually) and that tells you which questions you need to ask next.

If you are (1) dividing the future income stream from the pension, then. . . .

You also need to ask:

Which payment option is my spouse required to choose upon retirement?

Will I be named as my spouse’s survivor beneficiary?

How am I protected if my spouse dies before retiring?

If you are (2) offsetting the pension against another retirement account then . . .

You also need to ask:

What is the lump sum present value of the marital portion of the pension?

Can’t we just use the number on the annual statement from the Retirement Board?  (Hint.  No!)

Why are the answers to these questions so important?  Keep reading below.  Or, stop here and contact me if you need help with a pension or other divorce issue.

If you are (1) dividing the future income stream from the pension, then. . . .

your divorce agreement or judgment (i) should address the “Option” the Commonwealth employee will select upon retirement and (ii) depending on your circumstances, may require the employee to name the other spouse as the survivor beneficiary for both the post-retirement and pre-retirement benefits.

When a Commonwealth employee retires, his/her monthly retirement is calculated based on a number of factors, including the “option” selected upon retirement.

When s/he retires, the Commonwealth employee can choose among three options for the monthly annuity payment — Option A, B or C.  Among the three available options, Option A provides the highest monthly payment during the employee’s lifetime, but has no survivor benefit — meaning, the monthly payment stops upon the death of the employee.  Option C provides the lowest monthly payment, but has the most valuable survivor benefit.  Under Option C, if the survivor beneficiary (the spouse or former spouse of the employee) outlives the employee, that survivor beneficiary will continue to receive the total monthly payment for the rest of his/her life.  Option B is in the middle, providing a monthly payment higher than Option A, but lower than C, during the employee’s lifetime; and, also providing a lump-sum payment to the survivor beneficiary if s/he outlives the employee.

So, if you are dividing the future income stream from your spouse’s pension, then you are dividing — in some fashion, whether equally or otherwise — the payment that will be received after your spouse retires and during his/her lifetime.

If your agreement stops there, then you have no control over whether or not your spouse elects an Option A, B or C payment upon retirement.  If you do not specify the Option in your divorce agreement, and your spouse chooses Option A or chooses another option and names someone else (a subsequent spouse) as the survivor beneficiary, then you are left without a benefit at the death of your now-former spouse.

For this reason, if you are the spouse of a Commonwealth employee, then it is important for you to ensure that your divorce Judgment requires your spouse to select Option C upon retirement and name you as the survivor beneficiary.

Okay, so we’ve identified the Option that should be selected upon the Commonwealth employee’s retirement, and why it is important.  If you are getting divorced while your spouse is still working for the Commonwealth, then you also need to know what happens to you if your (now-former) spouse dies post-divorce but before s/he retires.  Again, depending on the circumstances of the case and length of the marriage, I generally insist – if I am representing the spouse of a Commonwealth employee — that the Commonwealth employee name my client as the pre-retirement survivor beneficiary.

That designation alone, however, may not be enough to protect the spouse if the Commonwealth employee dies pre-retirement.  Here’s why.  If a Commonwealth employee dies pre-retirement and the employee was married at the time of his/her death, the Commonwealth will only pay the pre-retirement death benefit to the then-spouse of the Commonwealth employee.

To illustrate, let’s say husband A and wife B1 get divorced.  At the time of divorce, husband A was a Commonwealth employee.  The divorce agreement requires husband A to elect an Option C benefit upon retirement and to name wife B1 as his pre- and post- retirement survivor beneficiary.  Husband A then remarries wife B2.  After that, husband A dies before he retires from his Commonwealth employment.  In that scenario, the Commonwealth will only pay the pre-retirement death benefit to wife B2, even though the divorce agreement says wife B1 should get it.

During the divorce of husband A and wife B1, wife B1 should have included in her divorce agreement a provision requiring husband A to obtain a life insurance policy for wife B1’s benefit if husband A remarries before his retirement.  Of course, upon his retirement, husband A no longer has to carry the life insurance policy (because, at that point, husband A is selecting Option C and naming wife B1 as the survivor beneficiary, a designation that the Commonwealth will honor even if husband A is remarried.)

If you (2) are offsetting the pension against another marital asset, then. . .

you need to know the lump-sum present value of the marital portion of that pension.

Why?  Because a pension is not an isolated pile of money designated for one person, like a 401(K) or IRA, so it cannot be divided or valued like those other retirement plans.  When you contribute to a 401(k) or an IRA, your contributions are isolated into a single account that has your name on it.  These types of retirement plans are, appropriately, called “defined contribution plans.“  Over a period of years, your contributions to the plan are invested.  The balance of your defined contribution plan will grow over time because of your contributions and, hopefully, through passive investment gain.  At any point in time, you can see the current balance of your defined contribution plan (if you actually open and look at those quarterly statements that you receive in the mail. I’m not judging you — I usually throw mine away, too.)

A pension, on the other hand, is a pooled fund of money that a number of employees contribute to and that the employer also contributes to.  In the case of a state pension, the Commonwealth contributes to the fund along with the state employees.  So, there is no one pile of money with one particular employee’s name on it.  Rather, the pooled fund provides a monthly benefit to employees upon retirement.  Hence, pensions are sometimes referred to as “defined benefit plans.”

Upon retirement, a pension provides the retiring employee with a monthly payment for the rest of his or her life.  That monthly payment is calculated based on a number of factors, including the years and months during which the employee contributed to the state pension system, the employee’s age upon retirement, and which payment option the employee is going to elect upon retirement.

Because there is no single account for each Commonwealth employee, the number on that statement that the Commonwealth employee receives every year is not the real value of that employee’s pension.  For instance, spouse A is a public school teacher and his annual statement has a year-end “balance” of, say, $150,000, while Spouse B works for a private company and has $150,000 in a 401(k).  So, these spouses should each keep their own retirement account right?  Wrong.

The true value of that pension in a divorce is the lump sum present value of the future monthly payments the employee will receive.  The present value of this future stream of income is generally much higher than the number on the statement (because the number on the statement is simply what the employee has contributed to date plus interest that has accumulated on that contribution.)

How do you calculate the lump sum present value?  You or your lawyer will hire a pension appraiser to provide that number, and the cost of that appraisal (about $500) is well worth it.

I know, this stuff is bone dry, right?!  But pensions are extremely valuable and must be handled carefully in a divorce.

I hope this information was helpful to you.  If you would like to book a complimentary call with me to discuss your own divorce or family law issue, you can click here to get direct access to my calendar to book a complimentary call.  Talk to you soon.


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