Pensions at separation: CPP credit splitting, workplace pensions and QDROs

The pension is often the asset nobody talks about. It does not show up on a bank statement, it cannot be spent today, and when everyone is focused on the house it is easy to forget. In many long marriages, though, the pension is one of the largest assets the couple has, sometimes the largest. If you are the spouse without a workplace pension, this is the part of the settlement that most affects how comfortable your retirement will be. It deserves a proper look even if you are exhausted by the process.

What are the two kinds of pension?

Defined contribution plans, including group RRSPs and defined contribution RPPs in Canada and 401(k)s and 403(b)s in the US, have an account balance. What you see is roughly what it is worth. Division is relatively simple: a portion of the balance is transferred into the other spouse's own registered or retirement account.

Defined benefit plans promise a monthly income at retirement based on salary and years of service. There is no balance, only a promise. Valuing that promise today needs actuarial assumptions about retirement age, life expectancy and interest rates, and the result is often larger than people expect. Public sector workers, teachers, nurses and many unionised employees have defined benefit plans.

How are pensions divided at separation in Canada?

Canada Pension Plan credit splitting

The CPP contributions both of you made during the years you lived together can be added up and divided equally. This is called a credit split. According to Service Canada:

• Divorced spouses qualify if they lived together for at least 12 consecutive months. There is no deadline to apply.
• Married spouses who are separated qualify if they lived together for at least 12 consecutive months and have lived apart for at least 12 consecutive months.
• Common-law partners qualify on the same 12-month tests, but must apply within 48 months of the date they began living apart, unless the former partner agrees to waive that deadline.
• The split covers only the time you lived together, and once approved it is permanent.

Spouses generally cannot sign away the credit split. The exception is a spousal agreement in a province whose law allows it, which Service Canada lists as Quebec, Saskatchewan, British Columbia and Alberta. Quebec residents contribute to the Quebec Pension Plan, which has its own partition process through Retraite Québec.

The split can be small for couples with similar earnings and significant when one of you earned much more or spent years out of paid work caring for the family. It is free to apply. You can see your contributions through My Service Canada Account. Our glossary entry on CPP credit splitting has a plain-language summary.

Workplace pensions

Each province regulates pension division for plans under its law, and federally regulated plans (banks, airlines, telecoms) and federal public sector plans follow federal rules. In Ontario, the plan administrator calculates a Family Law Value on request, for a fee set by regulation. That value goes into the member's net family property, and up to 50 percent of it can be transferred to the other spouse's locked-in account, with separate rules for a pension that is already being paid. Other provinces have similar but not identical processes, and some divide the pension at retirement rather than now.

Two practical points. A transfer out of a pension plan is usually tax-deferred and locked in, so the receiving spouse cannot simply cash it out. And the member may prefer to keep the whole pension and give up other assets instead. Both approaches are legitimate. The mistake is not valuing it at all.

RRSPs, RRIFs and TFSAs

RRSP and RRIF money can be transferred directly between separating spouses without immediate tax, using CRA form T2220, when the transfer is made under a written separation agreement or court order. TFSA money can also be transferred directly on a breakdown of the relationship without affecting the receiving spouse's contribution room. Both count as property and are often used to balance a settlement.

How are pensions divided at divorce in the United States?

QDROs

A Qualified Domestic Relations Order is a court order that directs an employer retirement plan, such as a 401(k) or private pension, to pay part of a participant's benefit to a former spouse. Without one, the plan generally cannot pay the former spouse, and the divorce decree alone is not enough. The order must meet the plan's own requirements, so many attorneys use a QDRO specialist and ask the plan administrator to review a draft before it goes to the judge.

A QDRO transfer rolled directly into the former spouse's own retirement account is not taxed at the time. If the former spouse takes the money as cash instead, it is taxable income, but a distribution paid under a QDRO from an employer plan is generally exempt from the extra 10 percent early withdrawal tax. That exception does not apply to IRAs.

Government and military plans use their own orders. Federal civilian plans use a court order acceptable for processing (COAP), and military retired pay is divided under the Uniformed Services Former Spouses' Protection Act. Each has specific wording requirements.

IRAs

IRAs are divided by the divorce decree or settlement itself, not a QDRO. The transfer is tax-free when it is made under the decree as a direct transfer to the other spouse's IRA, not a withdrawal.

Social Security

Social Security is not divided in divorce. Instead, a divorced spouse may claim benefits on an ex-spouse's work record if the marriage lasted at least ten years, they are at least 62, and they are currently unmarried. Claiming does not reduce the ex-spouse's own benefit. If your marriage is close to the ten-year mark, the date of the final decree can matter, so raise it with your attorney.

Should you transfer the pension or offset it?

In both countries you can usually either split the pension itself or leave it intact and balance it with other assets. Things to weigh:

• Liquidity. Pension money is locked away. If you need cash for a home now, taking more of the house equity may serve you better.
• Security. A defined benefit pension can be guaranteed income for life. Investments are not guaranteed.
• Tax. Pension, RRSP and 401(k) money is pre-tax. House equity often is not taxed on sale. A dollar of pension is not worth a dollar of home equity, and agreements often discount registered and retirement assets for tax. Get advice on the rate.
• Survivor benefits. If the pension stays with the member, the former spouse usually loses survivor benefits unless the agreement or order preserves them. In the US, a QDRO can name the former spouse as surviving spouse for some or all of the benefit.
• Timing. Defined benefit values change with interest rates. Use valuations at the correct date under your jurisdiction's rules.

If you are separating later in life, or a pension is already being paid, the stakes are higher and the rules more technical. Our guide to grey divorce after 55 and the worked example of a pension in payment in Florida go into more detail.

What to gather

• The most recent annual statement for every pension plan, for both of you
• The date of marriage or when you started living together, and the separation date
• The plan booklet or summary plan description
• Recent RRSP, RRIF, TFSA, 401(k), 403(b) and IRA statements
• Your CPP Statement of Contributions or your Social Security statement
• For Canadian workplace plans, the provincial or federal family law valuation forms

What to do this week

1. List every pension and retirement account either of you has, including old plans from previous employers.
2. Download the latest statements, or ask the plan administrator for them.
3. In Canada, check your CPP contributions online and note whether you meet the 12-month tests for a credit split.
4. In Ontario, ask the plan administrator how to apply for the Family Law Value. Elsewhere, ask how the plan values pensions on separation.
5. In the US, ask each plan administrator for its QDRO procedures and any model order.

Common questions

Do we have to split the CPP credits?

Generally yes, if you qualify and one of you applies. Spouses can only agree not to split credits under a spousal agreement in a province whose law allows it, which Service Canada lists as Quebec, Saskatchewan, British Columbia and Alberta.

What does a pension valuation cost?

In Ontario, the plan administrator provides the Family Law Value for a fee set by regulation. Elsewhere, an actuarial valuation is a separate professional cost that depends on the plan and the report needed. Get a quote before ordering one.

Can I take my share of the pension in cash?

Usually not from a Canadian workplace pension, because transfers go into locked-in accounts. In the US, money paid under a QDRO can be taken as cash, but it is taxable income, so most people roll it into a retirement account.

What if my spouse is already retired and receiving the pension?

A pension in payment can still be divided, typically as a share of each monthly payment or through an offset, subject to your jurisdiction's rules and the plan's terms.

Can I claim on my ex's Social Security?

Possibly. You generally need to have been married for at least ten years, be at least 62 and be currently unmarried. Your claim does not reduce your ex's benefit.

This guide is legal information, not legal advice, and it is written for a general audience across Canada and the United States. Family law is provincial and state-based and changes over time. Before you rely on anything here for your own situation, confirm it with a qualified family lawyer in your province or state. FairWell can connect you with one through the professional directory. How we write and check our guides.