Dividing New York State Teachers' Retirement System (NYSTRS) Pensions in a Divorce
When a marriage involving a New York State teacher ends, dividing marital property can be complex, especially when it comes to retirement benefits. New York State Teachers’ Retirement System (NYSTRS) pensions are considered marital property and are subject to equitable distribution in a divorce. This means that a portion of the pension earned during the marriage may be awarded to the non-employee spouse. Divorce may affect retirement benefits in several ways: an ex-spouse may be entitled to a portion of the pension, a member may be required to name their ex-spouse as beneficiary of a death benefit, or a member may be required to elect a pension payment option that provides a continuing benefit to their ex-spouse in the event of the member’s death. To ensure a fair and legal division of these assets, it’s crucial to understand the process and requirements for dividing NYSTRS pensions.
What is a Domestic Relations Order (DRO)?
A Domestic Relations Order (DRO) is a court order that instructs a retirement plan administrator to divide a pension between a plan participant and an alternate payee, usually a former spouse, as part of a divorce settlement1. In the context of NYSTRS pensions, a DRO is used to allocate a portion of the pension earned during the marriage to the non-employee spouse.
A Qualified Domestic Relations Order (QDRO) is a specific type of DRO that meets certain requirements under federal law (ERISA) to divide retirement benefits2. However, since NYSTRS is a governmental plan, it is exempt from ERISA’s QDRO provisions3. Therefore, while the terms “QDRO” and “DRO” are often used interchangeably, NYSTRS prefers the term “DRO” to refer to orders dividing its pensions, though both terms are commonly used3.
How are NYSTRS Pensions Divided?
New York State law dictates that pension benefits accrued during a marriage are marital property subject to equitable distribution in a divorce4. The most common method for dividing these benefits is the Majauskas Formula, established by the New York State Court of Appeals. This formula ensures that the non-employee spouse receives half of the pension portion earned during the marriage.
Here’s how the Majauskas Formula works: 4
- Calculate the Marital Share: Divide the years of service credit earned during the marriage by the total service credit at retirement. This determines the percentage of the pension accrued during the marriage.
- Divide the Marital Share: Multiply the marital share percentage by 50%. This gives both the member and the ex-spouse an equal share of the pension portion earned during the marriage.
Example:
A teacher has 30 years of total service credit at retirement, and 18 years of service credit were earned during the marriage.
Step
Calculation
Result
1. Calculate the Marital Share
18 years / 30 years
60% (marital share)
2. Divide the Marital Share
60% * 50%
30% (ex-spouse’s portion)
In this example, the ex-spouse would be entitled to 30% of the teacher’s monthly pension benefit.
Other Division Options:
While the Majauskas Formula is the most common method, courts can also order other equitable distribution choices, such as:
- Flat Dollar Amount: The ex-spouse receives a fixed dollar amount per month4.
- Flat Percentage: The ex-spouse receives a set percentage of the pension benefit4.
- Modified Majauskas Formula: The standard formula can be adjusted to account for specific circumstances4.
NYSTRS Pension Tiers and Division Options
NYSTRS has different membership tiers with varying rules and requirements. Understanding these tiers is crucial when dividing a pension in a divorce. Here’s a summary of the tiers:
- Tier 1: Membership prior to July 1, 1973.
- Tier 2: Membership from July 1, 1973 to July 26, 1976.
- Tier 3: Membership from July 27, 1976 to August 31, 1983.
- Tier 4: Membership from September 1, 1983 to December 31, 2009.
- Tier 5: Membership from January 1, 2010 to March 31, 2012.
- Tier 6: Membership on or after April 1, 2012.
Each tier has specific rules regarding eligibility for retirement, benefit calculations, and death benefits. These rules can significantly impact how a pension is divided in a divorce. For example, Tier 1 and 2 members have different pension factors and age factors that affect their retirement benefits. It’s essential to consult with an experienced attorney to understand how the specific tier of the NYSTRS member will affect the division of their pension.
Preventing Reduction of Alternate Payee's Share Due to Loans
One important consideration in dividing NYSTRS pensions is the potential impact of outstanding loans on the alternate payee’s share. If the participant has taken out a loan against their NYSTRS account, the DRO should address how this loan will be handled in the division of benefits5. Failing to address loans in the DRO can lead to the rejection of the order and increase legal expenses6.
To prevent the alternate payee’s share from being reduced due to the participant’s loan, the DRO can include provisions that:
- Specify how the loan balance will be allocated: The DRO can state whether the loan balance will be deducted from the participant’s share, the alternate payee’s share, or both7.
- Prohibit the participant from taking out further loans: The DRO can include language that prevents the participant from taking out any new loans against their NYSTRS account until the pension division is finalized6.
In addition to these provisions, the alternate payee can take proactive steps to protect their share, such as:
- Making partial lump-sum payments on the loan: The alternate payee can make a lump-sum payment to reduce the outstanding loan balance and minimize the impact on their share.
- Requesting a change in the repayment period: The alternate payee can request that the participant change the repayment period of the loan to either shorten or lengthen the time it takes to repay. This can affect the amount of each payment and potentially reduce the overall impact on the alternate payee’s share.
By carefully addressing loans in the DRO and taking proactive steps to manage the loan balance, the alternate payee can help ensure that their share of the NYSTRS pension is not unfairly reduced.
Model DRO Forms for NYSTRS Pensions
NYSTRS offers an online tool to help draft a DRO proposal8. This tool generates a customized proposal based on the member’s tier, retirement plan, and retirement status8. While using the online tool is not mandatory, DRO proposals created this way are given priority review by NYSTRS8.
You can access the online DRO form here: https://www.osc.ny.gov/retirement/members/divorce/draft-dro-using-nyslrs-template
Survivor Benefits and DROs
Survivor benefits are an important aspect of pension division in a divorce9. NYSTRS offers different types of survivor benefits, including pre-retirement and post-retirement death benefits10. A DRO can ensure that the ex-spouse receives a portion of the survivor benefits if the member dies before or after retirement11. It’s crucial to clearly define the ex-spouse’s entitlement to survivor benefits in the DRO to avoid potential disputes or complications12.
It’s important to note that a divorce does not automatically nullify a member’s designation of the former spouse as the beneficiary of the death benefit. However, NYSTRS will automatically remove a former spouse as beneficiary in instances of divorce, annulment, or judicial separation, unless directed otherwise by a DRO. Therefore, it’s essential to clearly state in the DRO whether the ex-spouse should be retained as the beneficiary for any death benefits.
Finalization of DRO and Retirement
While it’s highly recommended to finalize the DRO before the member retires, it’s not an absolute requirement3. However, finalizing the DRO beforehand can prevent complications and ensure a smoother division of benefits13. If a member retires before a DRO is finalized, the order may be rejected if it contradicts the member’s chosen retirement option or beneficiary designation14.
Can a DRO Prohibit Loans?
Generally, a DRO does not restrict a member’s ability to take out a loan against their NYSTRS account. However, if the DRO explicitly prohibits loans or the transfer or encumbrance of retirement benefits, NYSTRS will enforce those restrictions.
Conclusion
Dividing NYSTRS pensions in a divorce requires careful consideration of various factors, including the Majauskas Formula, survivor benefits, loans, and the different NYSTRS tiers. It’s essential to work with an experienced attorney who specializes in divorce and retirement benefit division, particularly with NYSTRS pensions, to ensure that your rights and interests are protected and that the DRO is prepared correctly. By understanding the process and requirements for dividing NYSTRS pensions, you can navigate this complex aspect of divorce with greater confidence and achieve a fair and equitable outcome.
If you need assistance with dividing your NYSTRS pension in a divorce, contact Peacock QDROs today to schedule a consultation. Their team of experienced QDRO attorneys can help you understand your options and ensure that your DRO is prepared correctly.
Phone: (505) 998-1500 15
Attorneys & Staff
William "willie" peacock, Esq.
Willie is an attorney licensed to practice in California since 2011. He has since added admissions in Missouri, New York, New Jersey, and Iowa, with Kansas and North Dakota pending.
He was born and raised in Missouri, went to high school and college in California, and returned there after attending the prestigious Washington and Lee University, School of Law in Lexington, Virginia. He relocated to New York and relaunched his law firm in 2018, focusing exclusively on retirement – estate planning and division of retirement accounts through qualified domestic relations orders (QDROs).
He has written for Thomson Reuters, Clio, and California Lawyer, and his writings have been cited by the American Bar Association, Above the Law, and other leading legal publications.
He is currently rated a perfect 10.0 by Avvo.com, and more importantly, has a perfect 5-star rating from his past clients on all major review sites.
