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Don’t Forget About Early Retirement Benefits in DRO Drafting

February 11, 2022

The ongoing COVID-19 pandemic has and continues to contribute to a spike in early retirements. Related benefits must be considered when domestic relations orders (DROs) are prepared to complete division of divorcing parties’ retirement benefits. Benefits related to early retirement include the following:

  • Buy-outs are typically one-time benefit enhancements offered by an employer. An example is an increased employee service period for purposes of calculating pension payments. They are generally considered to be a marital asset.
  • An early retirement supplement is usually an additional pension payment paid from the employee’s date of retirement until the employee reaches age 62 and becomes eligible for social security. Care must be given to address such supplements to avoid an unintended penalty on the employee party.
  • An early retirement subsidy is a benefit intended to induce early retirement for employees meeting certain requirements, such as a specified number of years of service. If the alternate payee takes early payment of his/her share of the pension, he or she may miss a significant benefit if the DRO does not allocate such a subsidy and the employee retires early.

A related pitfall can occur where the alternate payee elects to take his/her portion of a pension early based on an expected early retirement subsidy, but the employee works until full retirement age and the subsidy “ages out” or lapses, penalizing the alternate payee. Careful consideration of these issues must be given in DRO drafting.

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