Glossary - Terms - Definitions
Terms and Definitions
This is a Qualified Defined Contribution Plan. An employee may contribute each year up to the I.R.S. permitted annual maximum. In some forms of this plan there are employer contributions. The contributions are made pre-tax and are taxed upon distribution to the employee. The employee has the right to "rollover" all or a portion of the contributions to an I.R.A.
The is generally expressed as a monthly accrued benefit. Such form of benefit is limited to Qualified Defined Benefit Plans. It is expressed a an accumulation to a specific date and payable at a specific date. For example William's monthly accrued benefit as of August 31, 2006 was $800.00. Assuming no further service this benefit will be payable upon William's attaining his normal retirement age.
As used in pensions this term relates to forms of an employee's benefit. It compares different forms of benefit payments and determines if they are mathematically equal or nearly equal. For example, a monthly Single Life Annuity of $800.00 could be the actuarial equivalence of a Single Lump Sum of $250,000.00. This means they both have a dollar value of $250,000.00.
Approved Domestic Relations Order. This term is used by some state and municipal retirement systems that prefer ADRO to the term QDRO.
Any spouse, former spouse, child or other dependents of a plan participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such plan participant.
Periodic payments, generally monthly. The payment period can be for life or for a stated period, e.g. ten years.
The forms in which retirement benefits may be paid to a retiring employee. Among the options are: Single Life Annuity, Periodic Payments for a stated period or a Joint & Survivor Annuity.
An agreement that delineates the pre-martial property of the respective parties to the agreement who are about to marry. It is a device to limit the rights of a spouse to property that was accumulated prior to the marriage.
Boyett A significant Florida Supreme Court decision. This decision discusses the formulas that may be used to divided pension benefits upon divorce.
Cash Balance Account Plan
A form of Qualified Defined Benefit Plan that has many features of a Qualified Defined Contribution Plan. It expresses the benefit is the form of a cash amount rather that as a monthly accrued benefit. The final benefit unlike most Qualified Defined Benefit Plans is payable in a Single Lump Sum.
Civil Service Retirement
This is the Federal Civil Service Retirement System. It has two components: CSRS and FERS. See both definitions below.
For pension purposes this is a post-retirement Cost of Living Increase to a retired person's pension. Generally these increases are based on the September to September changes in the Consumer Price Index as prepared by the Department of Labor. In virtually all plans these COLA increases are compounding. If you are reading this as an Alternate Payee, be sure to insert a COLA increase provision into your Property Settlement Agreement.
Collective Bargaining Agreement
A union negotiated agreement. This can be for a union and a single employer or a multi-employer group.
For property acquired during the marriage there is a presumptive basis that this is joint property.
Coverture FractionA pension division formula created in 1983 by William M. Troyan. The basic Coverture Fraction applies to a Defined Benefit Plan and is structured as follows:
The plan's administrator computes the benefit as of the employee's actual retirement date.
The monthly accrued benefit computed at Step I is multiplied by a fraction:
Numerator: total period of time the parties were married and the employee was accruing a benefit under this plan up to your jurisdiction's end of marriage date.
Denominator: the employees total period of benefit accrual up to his or her actual retirement date.
The product of this calculation is the marital/community property part of the pension.
Multiply the product of the Step II calculation by the agreed share of the Former Spouse (frequently 50%).
The product of this Step is the marital/community property benefit to be paid to the Former Spouse (Alternate Payee).
Let Step I equal a monthly accrued benefit of $800.00
Let the Step II numerator equal 15
Let the Step II denominator equal 27
So 15 divided by 27 equals 55.5%
So the marital/community property part of the pension is
$800.00 multiplied by 55.5%. That equals a monthly benefit of $444.00
For Step III assume the Wife is to receive 50% of the marital/community property part of the pension. So:
$444.00 multiplied by 50% equals $222.00.
Thus the Coverture Fraction gave the Wife a monthly benefit of $222.00.
Any form of compensation other than the direct wage or salary of the employee.
Deferred Distribution Settlement
A form of settlement that requires a Domestic Relations Order. The Alternate Payee must generally wait until the actual retirement of the employee to collect his or her pension benefit. It is possible for an Alternate Payee to begin collecting a benefit at the employee's Earliest Retirement Age. Alternate Payee's are strongly cautioned against beginning to collect prior to the earlier of the employee's normal retirement age or actual retirement. Reason: Under the federal pension a substantial actuarial reduction will be imposed on the Alternate Payee's pension benefit.
Defined Benefit Plan
A form of pension that guarantees the employee a stated benefit at his or her retirement. This benefit is actuarially determined and does not depend on investment gains or losses. The form of benefit paid under this type of plan is generally a monthly annuity.
An inability to perform the services for which one was hired. The duration may be temporary or permanent. To qualify for a disability pension the employee must meet the written criteria established by the plan.
Division of Retirement Benefits
Retirement benefits are considered marital/community property. Upon divorce, this asset will be divided between the parties incident to a Property Settlement Agreement or imposed by a court as a result of a trial. In all states other than Florida and Texas, some form of the Coverture Fraction (Time Rule) discussed above is used to determine the respective shares of the parties.
The legal and formal termination of marriage.
Domestic Relations Order
As used herein it is a written instrument delineating the marital/community property interest of an Alternate Payee in the pension benefits of the employee. This Order is without effect until it is executed by a court and then "Qualified" by a plan administrator.
A participant's earliest retirement age is specified in the Plan document. There is no federal law mandating that a Defined Benefit Plan contain an early retirement provision. Nevertheless, the majority of these plans permit retirement prior to normal retirement age (defined below).
Employee Welfare Plans
employee welfare benefit plan'' and ``welfare plan'' have the same meaning. These plans include: plans providing medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services
End of Marriage Date
Each state (jurisdiction) has a time beyond which the assets of the parties are treated as separate property rather than marital/community property. In some states this is called: Date of Filing, Date of Complaint, Date of Service of Summons, Date of Separation.
First, understand that Equitable Distribution need not mean "equal" distribution of assets. "Equitable" is a subjective term subject to the facts and circumstances of each case.
The key piece of federal law relating to pensions and divorce. Employee Retirement Security Act.
Excess Benefit Plan
A Non-Qualified Plan that provides an executive with a pension in excess of the limits permitted for general employees.
For federal and military plans use this term in place of "Alternate Payee".
Former Spouse Survivor Annuities
Under both Federal Civil Service plans this is a survivor annuity for the exclusive benefit of the prior spouse. It can be as little as $1.00 per month or to a maximum of 55% of the employee's total retirement allowance.
A plan that is no longer accumulating benefits. However, the assets of this plan have not been distributed.
Government Pension Offset
International Brotherhood of Electrical Workers. Divorcing spouses are alerted that these members can have a many as seven separate benefits.
Individual Retirement Account. Technically, this is not a pension plan. However, it is divisible upon divorce. Moreover, a Qualified Domestic Relations Order is not required.
Immediate Offset Settlement
A form of settlement of the pension aspect of a case in which the non-working spouse gives up his or her interest in the pension in exchange for assets of equivalent value. For this type of settlement, no Qualified Domestic Relations Order is required.
Joint & Survivor Annuity
An annuity payable as a result of the death of a retiree. This form of survivor annuity is payable after the death of a retiree. This is not the form of survivor benefit payable as a result of the death of an employee prior to retirement. See QPSA.
Life Only Annuity
An annuity payable for the lifetime of the retiree. Upon the death of the retiree, all payments cease. There is no survivor component to this form of annuity.
An early but significant New York case regarding Equitable Distribution. It contains a good description of the traditional Coverture Fraction.
In non-community property states this is the pool of assets that belong to the marriage and are subject to division upon divorce.
A most significant New Jersey decision regarding the division of property upon divorce.
A divorce involving either a Regular or Reserve Component member of the armed forces.
Military Reserve Benefits
Retirement benefits exclusive to Reserve Component retirees.
New York Retirement System
One of the two major New York retirement systems. There are separate systems for: Police&Fire, Teachers and another system for other Public Employees.
Normal Retirement Age
The age stated in a plan document when a plan participant may retire without any reduction in accrued benefit.
The husband or wife of the employee whose pension is subject to division in your divorce action. Generally reference as "Alternate Payee" or "Former Spouse"
Plan Approved Domestic Relations Order. This format may be used by some Deferred Compensation Plans.
Pension Benefit Guaranty Corporation (PBGC)
Pension Benefit Guaranty Corporation. For bankrupt plans the benefits are administered by this agency. For more on this agency go to the Troyan web site and read the article on PBGC.
Plan Certified Domestic Relations Order. This format may be used by some Deferred Compensation Plans.
A formal Order of a court dividing marital/community property pension assets. This Order requires the approval of the Plan Administrator of the plan that will be distributing assets to both spouses.
Qualified Pre-retirement Survivor Annuity (QPSA)
A form of retirement benefit payable prior to retirement, but, subsequent to the death of the employee. The amount of this annuity is generally 50% of the benefit that would have been paid to the employee had he or she retired on the day before death.
For a Domestic Relations Order it is the benefit to which the Coverture Fraction is applied. For the Traditional Coverture Fraction it is generally the actual retirement benefit of the titled-spouse at the time of his or her retirement.
Restricted Stock Plan
It is a Non-Qualified Plan for executives and other mid to high level executives. The general period of the plan is ten years and vesting takes place within that period. Generally an employee will fully vest in not more than five years. Upon vesting there is a taxable event as the property becomes the asset of the employee. Many firms will divide Restricted stock upon divorce. For the procedure to value this type of stock for divorce: contact Troyan, Inc.
Retirement Equity Act
The federal legislation enacted in 1984 that made the division of pensions on divorce possible.
The various forms in which a retiring employee may receive his or her pension benefits. Among the major options are: Single Life Annuity, Joint & Survivor and period certain (e.g. an annuity certain[guaranteed] for 10 years).
Generally a non-taxable event in which assets are transferred from either one pension plan to another or from a pension plan to an IRA for the benefit of an alter.
A form of Qualified Defined Contribution Plan. This is an individual account balance plan. To know the worth of this plan obtain an account balance statement from the employee's employer.
Separate Interest Domestic Relations Order
This form of Domestic Relations Order assigns to an Alternate Payee a portion of the titled-spouse's monthly accrued benefit as his or her sole and separate property. It is the view of this firm that not all ERISA employers fully accept this format. It is strongly suggested that you question the Plan's Administrator to determine if this separate interest becomes effective upon qualification of the Domestic Relations Order or upon the actual retirement of the titled-spouse.
Shared Payment Domestic Relations Order
This form of Domestic Relations Order does not automatically give an Alternate Payee an interest that is payable over the lifetime of said Alternate Payee. To insure that payments to this Alternate Payee are not extinguished by the death of the titled-spouse it is necessary to specifically award in the Property Settlement Agreement that the Alternate Payee is entitled to both QPSA (see above) and Joint & Survivor Annuity benefits.
Single Life Annuity
Upon retirement an annuity that is payable over the lifetime of the titled-spouse. Upon his or her death all payments cease. To avoid this outcome for an Alternate Payee you must use either a Separate Interest QDRO or award an Alternate Payee both QPSA and Joint & Survivor Annuity benefits.
State Retirement Plans
Retirement benefits provided by a state or any of it subdivisions.
Stock Option Plan
A Non-Qualified Plan. There are two forms: Non-Qualified Stock Options and Incentive Stock Options (ISO). You must be familiar with the differences, especially the tax treatment upon distribution to either the employee or an Alternate Payee.
Stream of Payments QDRO:
This form of payment to an Alternate Payee is applicable when the benefit payments to an Alternate Payee begin after the commencement of annuity payments to the titled-spouse.
Subsidized Early Retirement
A form of benefit enhancement that many ERISA plans provide as an incentive for employees to retire early.
See Coverture Fraction above.
The pension holder. The employee whose plan is to be divided upon divorce.
Uniformed Services Former Spouse's Protection Act
A must read for Former Spouse's of military persons. This act gives detailed rights to the Former Spouse. However, to receive a part of the service person's benefits or survivor annuity one must follow the federal rules. This is a most complicated area. It is suggested that you Troyan on this issue.
Benefits provided to member's of collectively bargained agreements. It is useful to note that benefits generally come from more than one source.
The point when an employee's pension benefit is not subject to forfeiture.
Waiver of Survivor Benefits
A major caution to Former Spouse's and Alternate Payee's. Do not sign such waivers of rights unless you are absolutely clear on the impact of your action. You may be signing away very valuable rights.
An employer provided benefit other than a pension. For example: Insurance, health or disability benefits. Such benefits are generally divisible upon divorce. Check the rules of your state to be clear on your rights to these valuable employee benefits.