Articles

Pennsylvania Law Weekly

September 2001
Formula Enhancements to a Defined Benefit Pension:
Berrington, Brown, Gordon and Meyer

By: Mark K. Altschuler

If the employee spouse receives early retirement incentive benefits after separation or divorce, should these benefits be considered marital property? Meyer v. Meyer, 749 A.2d 917 (Pa. 2000), held that post-separation early retirement incentive benefits which are not attributable to the post-separation efforts of the employee spouse are a marital asset subject to equitable distribution. The type of enhancement that is marital under the Meyer case is called a formula enhancement. A defined benefit pension is defined by a formula usually using the salary and service of the employee. Under Meyer, a post separation early retirement enhancement to the formula is marital property. However, payments that are in addition to and separate from the pension, such as a special supplement or severance pay, are not covered by Meyer, and, under Gordon, not marital property.

An analysis of the case law regarding these post-separation enhancements is useful in understanding the logical sequence of these decisions. In Berrington v. Berrington, 633 A.2d 589 (Pa. 1993), the Supreme Court found that passive enhancements to a pension after the date of separation are marital property. The Court defined passive enhancements as "increases ... which are not attributable to the efforts or contributions of the participant- spouse..." In Berrington, the pension was distributed on a deferred distribution basis. In computing the marital portion, the salary as of the date of separation was to be used with the plan formula in place as of the date of retirement. The Supreme Court of Pennsylvania's approach is unique. Most states either freeze the marital portion as of the date of separation (these are the minority) or find that the marital portion is the actual retirement benefit, multiplied by the coverture fraction. The latter method was utilized in Holland v. Holland 588 A.2d 58 (Pa. Super. 1991), which preceded Berrington. The Supreme Court, in Berrington, left open the definition of passive post-separation enhancements.

In Brown v. Brown, 690 A.2d 700 (Pa. 1997), the Supreme Court found that enhancements due to a "back-loading" of a plan formula are marital. The pension plan involved was the Pennsylvania State Troopers plan. The plan calculates a pension as 50% of the highest salary after 20 years of service, but 75% of the highest salary after 25 years service. Both parties in the case agreed that the marital portion of the deferred distribution should be calculated using the date of separation salary. The dispute involved whether to use the 50% factor or the 75% factor if Mr. Brown serves 25 years, in determining the marital portion of the pension. The Supreme Court found that the deferred distribution award should be based on the actual formula at retirement, but with the date of separation salary, multiplied by the coverture fraction. Therefore, if Mr. Brown retires at 20 years service, the actual 50% factor will be used, but if he retires upon serving 25 years, the actual 75% factor will be used in calculating the marital portion. Note that this enhancement is a formula enhancement. Under Brown, the enhancement to the formula is marital property, while the input to the formula, the salary, is frozen as of the date of separation.

In Gordon v. Gordon, 681 A.2d 732 (Pa. 1996), the Court addressed whether early retirement enhancements that occur after separation are marital property. In Gordon, there were 2 types of early retirement enhancements. Regarding supplemental payments (in this case, until age 62) that are in addition to the pension, the Court split 3-3 on whether these are marital property. There were only 6 members of the Court at the time of the Gordon decision. Since the Superior Court in Gordon found that such supplements are not marital property, the Supreme Court upheld the Superior Court by way of the 3-3 split. Thus, under Gordon, supplemental payments that are outside of and in addition to the pension are not marital property. The Gordon case also included a formula enhancement to the pension, and the Supreme Court remanded this issue back to the trial court, leaving this unresolved.

In Meyer, a majority of the Supreme Court found that formula post-separation early retirement enhancements are marital property. The enhancement in Meyer consisted of a credit of 5 years of service. This was named a special retirement option (SRO). Since this was offered as an early retirement enhancement after the date of separation, the employee/spouse argued that the 5 years of service was non-marital. The Supreme Court found that the enhancement was marital, after reduction by the coverture fraction. Moreover, in order to qualify for the SRO, Mr. Meyer needed 25 years of service. He only had 23 years of service but the plan allowed him to purchase 2 years of service in consideration of his premarital military service. The Court still found the early retirement enhancement to be marital property. The Court reasoned that without the marital service, he would not have been entitled to the 5 year credit. Thus, the Court found that the actual retirement benefit, calculated with the date of separation salary, multiplied by the coverture fraction at retirement, is the marital portion.

There is a logical and mathematical connection between all these cases. Berrington freezes the salary as of the date of separation but allows passive post-separation enhancements. Brown and Meyer together say that enhancements to the formula of the defined benefit pension are marital property, whether due to late or early retirement. In fact, Berrington lends itself to formula enhancements, since salary is an input to the formula. It is mathematically easy to freeze the salary and allow the formula to change. However, supplemental pay, severance pay, and bonuses do not fit readily into the Berrington scheme. It would be mathematically awkward to take a supplement that is given in fixed dollars and reduce it by the salary as of the date of separation. Moreover, such supplements are excluded under the Labuda case (503 A.2d 971, Pa. Super. 1986) as well as Gordon. Labuda excluded the early retirement incentive because the payments were "in addition to the regular pension..." In fact, Justice Castille, in his concurring and dissenting opinion on Gordon, cited Labuda. In the Meyer common pleas decision, Judge Mulligan found that Labuda is "distinguishable from this (Meyer) case." nother aspect of the Labuda decision is the so called "time test:" whether the right to receive the property accrued before or after the date of separation. According to Judge Mulligan, the "Berrington language effectively overrules Labuda" in allowing post-separation enhancements to be marital property. Thus, the Labuda time test has been superseded. However, regarding payments that are not part of the pension, at this time Labuda still remains, as Judge Mulligan stated, "good law." Thus, supplemental payments awarded after the date of separation that are in addition to the pension are not marital property, while post-separation enhancements to the pension formula are marital property.

Published with permission from Pennsylvania Family Lawyer

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Mark K. Altschuler
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