Massachusetts State Employees’ Retirement System

Tips for Dividing State Pensions in Divorce

Summary

This paper provides important information for anyone who is party to a divorce where a pension from the Massachusetts State Employee’s Retirement System (MSERS) is being divided. Pensions through MSERS are governed by Massachusetts General Law, Chapter 32 and include the Massachusetts Teachers Retirement System (MTRS) as well as all Massachusetts city and town contributory retirement systems.

Divorces that involve a Massachusetts State Pension Plan require careful attention and specialized expertise to avoid unintended financial mistakes. Massachusetts State Pensions are more complex than private pensions as the State Retirement System has unique and limiting features that make dividing future benefits more challenging. The most restrictive feature of the Massachusetts State Retirement System is the timing of benefits. Unlike 401k-type plans, where benefits can be transferred shortly after the divorce is final, benefits from the State Retirement System are not paid out to the recipient spouse until the employee retires (or dies), which can often be many years after divorce is final. Most importantly, without very specific language in your settlement agreement, the amount of future benefits paid out can be much lower/higher than intended.

Overview

In most cases, the terms of the divorce are negotiated through mediation or litigation and determine which assets will be retained or divided. Once those decisions are agreed-upon, the instructions for dividing the assets are formalized within the settlement agreement. From this point (if the State Pension will be divided) an additional and final document is required to divide pension benefits. This document is called a Domestic Relations Order (DRO). A DRO is a legal document that contains detailed instructions outlining how the future pension benefits will be paid out. DRO’s should be prepared by an experienced QDRO/DRO specialist who has a comprehensive understanding of pension law and retirement plans.

The Problem

Although the QDRO/DRO specialist may have expert insight as to how best to divide State pensions and other complex retirement plans, he/she must draft the DRO according to the terms spelled out in the settlement agreement. In other words, if the language and “instructions” put forth in your final settlement agreement are unclear or incomplete, the final DRO will be less effective and in worst cases, cannot be drafted at all without revisions. The time for detailed discussions is before your settlement agreement is drafted.

Example

At Divorce Financial Solutions, we provide DRO (Domestic Relation Order) preparation and consulting services. In most cases we are retained after the divorce process and settlement agreement are completed. Very often, when preparing a DRO for a Massachusetts State Retirement Pension, we find the settlement agreement language provided is insufficient. As an example, we may receive an agreement that simply states, “wife is to receive 50% of husband’s State Pension as of the date of divorce”. While the intention may have been clear with the inclusion of that sentence, in practice, it fails to address the many variables that will arise before benefits are paid. This is typically when the parties learn that they must re-visit their divorce agreement, which will cost time money and added stress.

For more perspective, below is a list of items that should be addressed whenever a Massachusetts State Retirement Pension will be divided. If your settlement agreement language does not cover each item below, you are at risk of losing benefits or paying too much/little at the time of retirement.

Amount of the award to the recipient spouse.
Do you have a well-defined formula that the State will approve? *
Are there pre-marital years or service buy-backs to exclude from the award?
Have you properly addressed service that will be earned after the divorce but before retirement?
Have you addressed the annuity savings fund if returned?
What happens to benefits if the member retires with an ordinary disability?
What happens to benefits if the member retires with an accidental disability?
Life events.
What happens to benefits if the Member dies before or after retirement?
What happens to benefits if the member dies before or after retirement?
What happens to benefits if the member remarries before or after retirement?
What happens to benefits if the recipient spouse remarries before or after retirement?
Retirement Option Elections.
Will the member be required to retire under Option B or Option C?
If Option C or Option B is required, which provide for survivor benefits, who will pay for the added costs?
What are the risks to the recipient spouse if the member is free to choose any option he/she wants?
Under what conditions will benefits terminate for the recipient spouse?
What alterative solutions have been considered to account for early death of the member spouse?

As evidenced by the list above, awarding “50% of the State Pension” is not as simple as it sounds. Because the future pension benefit is dependent on many unknown factors (remarriage, death, future salary increases, additional years worked after the divorce and even service buy-backs), it is important that each possibility be discussed and addressed in the settlement agreement. The time to address these important items are during the agreement process and before final agreements are made.

Takeaway

Massachusetts State Pensions are complex assets that are very different from other types of retirement accounts as they have unique and restrictive rules.
Most employees do not have a clear understanding of the pension and how divorce will impact the final benefit.
There are no State-provided resources that cover all of the variables and life-events required when dividing a pension in divorce.
Without clearly defined options, the default is to place the process in the hands of the divorce lawyer, mediator or judge.
To assure that you make smart choices, you should consult with a State Pension Specialist during your agreement process.

About Divorce Financial Solutions, LLC

Founded in 2010, Divorce Financial Solutions provides specialized financial guidance specific to divorce. We work with individuals, couples and family law professionals. DFS provides QDRO preparation and consulting services as well as comprehensive divorce financial planning. If you have questions about your State Pension or other divorce-related items, call us today or visit our State Pension Page.

*Learn more about State Pension Mistakes HERE.