I have read various articles about the impact that the Pandemic is having on married couples and divorce. Some articles suggest that with couples forced to spend more time together, that they have decided to hit the pause button on moving forward with their divorce. The fact that they are not being pulled in so many different directions by their kids’ activities, time spent commuting and their jobs has led them to rediscover the qualities that attracted them to each other in the first place. On the other hand, I have read other articles from matrimonial attorneys that feel divorce rates will spike after the pandemic ends. The incompatibility and the stress that led them to break up their marriage in the first place are only being exacerbated now that they are being compelled to shelter together in place. Bloomberg reported a divorce spike in China in March after couples emerged from weeks of strict lockdowns aimed to stop the spread of COVID-19. “The city of Xian, in central China, and Dazhou, in Sichuan province, both experienced, “record-high numbers of divorce filings in early March, leading to long backlogs at government offices.”
What I have not seen however, are articles that discuss the impact that death or disability due to COVID-19 might have on the retirement plans of couples that are already divorced or are contemplating divorce. These are significant issues that if ignored, can leave one party or the other in an untenable situation.
For many couples, after the equity in their home, their retirement plan represents their second biggest asset. But, as the below examples will illustrate, failure to pay attention to the impact that death or disability due to COVID-19 could have on one party’s or another’s retirement plan can be dramatic.
For example, in the midst of the pandemic, as the number of people falling ill was rapidly rising, a former spouse reached out to us. Her ex-husband had reached his retirement age, but had continued to work. Then he fell ill with the COVID-19 virus. His ex-wife was 55 years old. The Qualified Domestic Relations Order (QDRO), named the ex-wife as the beneficiary of either a 100% pre-retirement death benefit or a joint and survivor annuity option. She could not get both. The Joint and Survivor option though, was only available to her if her ex-husband actually retired. It is what is known as a post-retirement benefit. If her ex-husband died before officially submitting his retirement papers, she would have been entitled to the pre-retirement death benefit of $450,000.
However, if her ex-husband was able to submit his retirement papers and then subsequently died, she would have been entitled to collect the post-retirement death benefit, which was a pension of $6,000 a month, payable for the rest of her life. The ex-wife hired us to perform an actuarial valuation to determine which of the two benefits was more valuable: the pre-retirement death benefit of $450,000 or the life only monthly pension of $6,000. Spoiler alert: given the age of the ex-wife, the $6,000 a month converted into its actuarially equivalent lump sum had a present value of $1,478,783. She might still have opted for the pre-retirement death benefit of $450,000 because that would have been paid to her as a lump sum. The retirement benefit would have been paid as a monthly annuity of $6,000 for the rest of her life. The monthly annuity was the option she would have chosen. Sadly, in the end, it did not matter. The virus took her ex-husband’s life so quickly that he was never able to submit his retirement papers. In other similar situations though, unless the separation agreement is properly drafted, the death of the participant prior to reaching their retirement age can result in the ex-spouse receiving nothing. What if the QDRO was never effectuated? What if the Separation Agreement/QDRO failed to grant the former spouse a pre-retirement death benefit? Then she could very well have been left with nothing.
Participants or their ex-spouses do not even have to fall ill to be impacted by the virus. Part of the Corona Aid, Relief, and Economic Security Act (the CARES Act), which was signed into law on March 27, 2020 allows participants with 401(k) vested account balances of $100,000 or more to basically self-certify that as a result of COVID-19, that they need take either a loan or an in-service distribution of up to $100,000.
Let’s assume that a participant has a vested account balance of $200,000. It is not unusual for the QDRO to be drafted after the divorce has been finalized. What might have been the impact on the Alternate Payee if their agreement had language in it that said that “the Alternate Payee shall receive 50% of the account, plus gain or loss as of the date of distribution?” If the ex-husband took a COVID-19 related distribution subsequent to the divorce, then the language in the QDRO may not have prevented him from taking a distribution of $100,000. Accordingly, the account would now be worth $100,000 versus $200,000. Rather than receiving $100,000 ($200,000 X 50%), the Alternate Payee would not receive only $50,000 ($100,000 X 50%).
COVID-19 has wreaked havoc with people’s health, their careers and their family. The law of unintended consequences has been defined as an intervention into a complex system which tends to create unanticipated and often undesirable outcomes. And for couples getting divorced in a COVID-19 world and its impact on their retirement plans, unanticipated and undesirable outcomes are exactly what they may be experiencing.