Gray divorce and COVID-19: Retirement plans and pandemic-caused death or disability

As this pandemic rages on, one story not getting enough attention is the impact of COVID-19 on couples and divorce.

Some stories suggest that with courts having been closed and couples spending more time at home together, many of them may have hit the pause button on moving forward with their divorce. With these folks no longer being pulled in so many different directions, whether it be their kids’ activities or the time they might normally spend commuting to and from the office, this has led them to rediscover the qualities that attracted them to each other in the first place.

On the other hand, there are matrimonial attorneys that feel divorce rates are poised for a spike after the pandemic ends. The incompatibility and stress that led to the breakup of their marriage in the first place are only being exacerbated now that they are forced to shelter in place together. Bloomberg reported an increase in the number of divorces in China in March of 2020 after couples emerged from weeks of strict lockdowns aimed to stop the spread of the virus.

What I have not seen, however, are stories that discuss the impact that death or disability due to COVID-19 may 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 or both parties in an untenable situation. For many couples, after the equity in their home, their retirement plan represents their second largest asset. For other couples, without question their retirement plan constitutes their largest asset by far.

But, as the following examples illustrate, failure to pay attention to the impact that death or disability due to COVID may have in such a situation can prove to be costly.

In the midst of the pandemic, as the number of people falling ill was rapidly rising, one former spouse for whom we had completed a Domestic Relations Order (DRO) contacted us. Her ex-husband had reached his retirement age, but continued to work. Unfortunately, he became gravely ill with COVID-19.

His ex-wife was 55 years old. The DRO named the ex-wife as the beneficiary of either a 100% pre-retirement death benefit or a joint and survivor annuity option. However, the Joint and Survivor option was only available to her if her ex-husband actually retired.

If her ex-husband died before officially submitting his retirement papers, she would have only been entitled to the pre-retirement death benefit. That benefit was equal to three times his salary, which would have amounted to a lump sum death benefit of $450,000.

If, however, he was able to submit his retirement papers and then died after qualifying for retirement, as his beneficiary, her post-retirement death benefit would have been a pension of $6,000 a month payable for the rest of her life.

We were hired by his former spouse to prepare an actuarial valuation to determine which of the two benefits was more valuable: the pre-retirement death benefit of $450,000 or the monthly pension of $6,000.

Given the age of the ex-wife, the annuity option converted into its actuarially equivalent lump sum had a present value of $1,478,783. That does not mean under certain circumstances such as if she were a different age, or ill, or in financial need that she might not have opted for the pre-retirement death benefit, as that would have been paid almost immediately as a lump sum upon her ex-husband’s death.

But given her age and the fact she was in good health the monthly annuity was the option that 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 similar situations, unless the separation agreement is properly drafted, the death of the participant prior to or after retirement 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? She very well could have been left empty-handed.

Living with uncertainty

We know that the mortality impact of COVID-19 has been devastating. But what about the impact morbidity will have on retirement? Many people who have been infected with the virus have struggled to regain their pre-COVID vitality and energy. It is not yet known what the long-term effects of COVID-19 will be on an individual’s health.

This may very well result in a higher percentage of individuals retiring earlier than expected due to a disability caused by the virus. For city and state employees (policemen, firemen, etc.) disability pensions may result in greater monthly pensions than service-related pensions. Generally, any portion of a pension deemed to be related to disability is “separate property” and not subject to equitable distribution.

Any part of the pension that had already been accrued during the marriage is subject to equitable distribution. What if the participant faces long term health effects as a result of COVID, causing an inability to continue working? Some of the potential long-term effects that have been written about include heart problems, lung and other major organ issues such as damage to the liver and kidneys. When disability is part of the reason that an individual stops working, it is extremely important that this be addressed in the separation agreement. If the agreement only provides the alternate payee with their percentage of the retirement benefit, and does not address the disability component of the pension, then someone is likely to have a very unhappy client on their hands.

As a result of the pandemic, many people have elected to work from home. But what about essential workers like teachers, police officers and older age individuals? Rather than continuing to work and perhaps jeopardize their health, we are starting to see groups like this elect to accelerate their retirement. What if the divorce is not finalized or the QDRO is not yet in place?

One item you want to think about when it comes to your agreements is ensuring that the participant doesn’t take a lump sum, or select a maximum single life annuity. For most retirement plans, once a single life annuity has been selected as the preferred form of monthly benefit, it cannot be changed. Unless life insurance is in place as per an agreement between the parties, if the participant dies after retiring, the alternate payee would be left with nothing.

Even if life insurance is agreed upon, other questions remain: is the participant insurable? Who will pay the premium? What is the right amount of insurance? What if the premium is not paid and the policy lapses? Clearly, life insurance is an imperfect solution.

Finally, as I’m sure you are aware, the divorce process can take years to play out. The participant may have already started receiving their retirement benefit. Accordingly, if the participant does retire and begins collecting his or her pension, arrears or back pay to the alternate payee may be in order. In that case, the separation agreement would need to address how the participant will make the alternate payee whole with regard to missing back payments (plus interest).

The CARES Act

Even if neither party contracts the virus, COVID-19 can still play a significant role in splitting up their retirement plan assets. Normally, while you are actively employed at a company, you cannot take a distribution from your employer’s 401(k) plan. Many 401(k) plans allow for loans. But taking a distribution before 59 ½? No.

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, they need to take either a loan or an in-service distribution of up to $100,000. The CARES Act coupled with ambiguous language in the separation agreement can result in the alternate payee being negatively impacted.

Let’s assume that a participant has a vested account balance of $200,000 as of the parties’ date of commencement. It is not unusual for the parties and their attorneys to be focused on completing the divorce. They then circle back and have the QDRO drafted after the divorce has been finalized. What would the impact be on the Alternate Payee if their agreement included language that stated “the Alternate Payee shall receive 50% of the account balance as of the date of distribution” and failed to divide the marital assets as of the date of commencement?

If the spouse participating in the plan took a COVID-related distribution subsequent to the date of commencement and prior to the QDRO, the benefit awarded to the alternate payee would fall short.

Accordingly, the account would now be worth $100,000 as of the date of distribution opposed to $200,000 as of the date of the parties commencement. Rather than receiving $100,000 ($200,000 X 50%), the Alternate Payee would now 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 suggests that it is an intervention in a complex system which tends to create unanticipated and often undesirable outcomes. For couples getting divorced in a pandemic world and its impact on their retirement plans, unanticipated and undesirable outcomes are exactly what they may be experiencing.

David Gensler is the president of Pension Actuaries, Inc., an actuarial firm specializing in the modeling of Qualified Domestic Relations Orders and pension valuation.