Pension QDRO or Buyout Which Is Best

Whether to QDRO a pension or accept a buyout is a common question in divorce cases. There is no perfect answer that fits every case since clients are of different ages, income and have different needs. Instead, I will simplify or explain the key differences.

If one spouse has worked for a company for many years and that company has a pension plan, the contributions to the pension plan during the marriage are marital property. So for this example assume that the couple is married for 25 years and the employment and membership in the pension plan has also been for 25 years. Assume also that the employee is entitled to retire and receive an annual pension of $40,000 if a single life option is chosen. Assume also that the pension or its value will be shared equally.

If a QDRO is chosen the non-employed spouse will receive one half of each monthly pension benefit that the employee spouse receives. If the single life option is chosen there are NO survivor benefits. This means that upon the death of the retired employee all pension payments end. If you are the surviving spouse of the employee, this could be a financial disaster. The safer choice is to have a retirement option providing joint survivor benefits for the spouse, so that upon the death of the retired employee, pension benefits continue to the surviving spouse. The amount that is paid annually to both the employee and spouse is less than what would be paid if there were no survivor options. The reason is that the pension plan needs enough money to pay benefits for the lifetime of two persons instead of just one.

If a buyout is chosen, the pension is examined and the present value of the pension is determined. The value is then reduced if the pension is taxable. So in the above example, lets assume that the value of the pension is $500,000 and after taxes is worth $400,000. A buyout would mean that the non-employee receives $200,000 as a one time lump sum payment and that all annual income from the pension is waived forever.

Whether to choose one option over the other may depend upon what each person thinks is their life expectancy, how much money they will have for retirement and whether they need money now or would rather have a monthly check in the future. Some clients will trade anything and almost everything to keep their pension intact. The risk is that if the employee dies shortly after retirement they never received the benefit of their bargain. In other words, they paid to keep their pension intact but never lived long enough to get enough payments back to break even.

A spouse who is not employed and is worried about income during the later years of their life will often decline the buyout and insist upon the QDRO to guarantee monthly payments during their lifetime.

These decisions are not always easy and this blog cannot only summarize a few basic key points. If you need help making this very important decision please call my office so that I can discuss your situation in detail to help you save money and plan for retirement.