16.07 Early Retirement Incentives

For immediate offset, present value purposes, a pension's present value may double if the actuary uses the employee's early retirement age rather than normal retirement age. Since the benefit at early retirement is payable over many more years than the benefit at normal retirement, the monthly benefit must be reduced to compensate. However, this reduction is often less than the reduction needed to keep the present value the same. This is called a subsidized reduction. Thus, the present value using early retirement age can be much greater than the present value assuming normal retirement. In addition, there may be special early retirement enhancements that further lessen the reduction. In any given year, about 10 to 15 percent of large companies offer early retirement incentives. Typically, the percentage is higher in recession years and lower in "boom" (full employment) years. As part of an early retirement incentive, there may be a special early retirement enhancement. Typically, this is accomplished by adding 5 or 10 years to the employee's actual age, making the employee mathematically closer to the normal retirement age. Another way companies enhance a pension as part of an early retirement incentive is to credit the employee with additional years of service, and/or create a supplemental annuity until the employee reaches age 62 (the earliest age for Social Security payments).

The legislative history of REA indicates that an early retirement subsidy may be shared by the alternate payee, if taken by the participant. Reported case decisions from New York² and California³ have found that the alternate payee should share in early retirement subsidies.⁴ The California court in Oddino found that the alternate payee would not share in the subsidy if the participant has not yet retired. This reasoning follows IRC 414(P)(4)(A)(ii), which states that QDRO benefits are payable to the alternate payee before the participant retires, at the participant's earliest retirement age, without taking into account any early retirement subsidy if the participant has not yet retired. In the New York case, Olivo, the court found that special early retirement supplements that did not exist at the time of the divorce were not marital property. However, the enhancement to the basic pension was found to be marital property. Many state courts have struggled with whether these subsidies are or are not marital property.⁵

² Olivo v. Olivo, 624 N.E.2d 151,604 N.Y.S. 2d 23 (1993).

³ Oddino v. Oddino, 939 P.2d 1266, 65 Cal. RptT. 2d 566 (1997), cert. denied. 1185 S. Ct. 1302 (1.998).

⁴ See also Lehman v. Lehman, SO 26850, Cal., May 28, 1998 and Reinbold v. Reinbold, 710 A.2d 556, N.J. Super. App. Div. 1998.

⁵ See Gordon v. Gordon, 545 Pa. 391,681 A.2d 732 (1996). For a detailed discussion of the case law across the country, see Feder, R., Valuation Strategies in Divorce, 4th ed., 15.56, Aspen Law and Business, New York, NY, 1997.

Reprinted with permission. 2007, Aspen Publishers, Inc., from Valuing Specific Assets in Divorce, edited by Robert D. Feder.

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