Marital portion of NJ pensions
September 21, 2005
In New Jersey, the marital portion of pensions for purpose of immediate offset and present value calculation is the benefit accrued as of date of complaint, under Hayden v. Hayden, 284 N.J. Super. 418 (1995). However, the marital portion under a deferred distribution (QDRO) is the benefit as of retirement, multiplied by the coverture fraction as of retirement, under both Risoldi v. Risoldi, 320 N.J. Super 524 (1999), and Marx v. Marx , 265 N.J. Super 418 (1993). This means that while the marital portion is fixed for purpose of present value calculation, this portion keeps growing under a QDRO. This is because, in almost all cases, the benefit increases
Growth of Marital Portion (PERS)
Benefit at Complaint (2,439) x C.F. (1.000) = 2,439 = Marital Portion under Hayden
In the model case shown on the chart, the final average salary as of date of complaint is $70,000. This is a reasonable salary for some New Jersey public employees with 23 years of service. The accrued monthly benefit
[FAS x (service/55)] / 12
where FAS equals 3 year final average salary. Assuming a salary increase of 2.5 percent annually, the monthly benefit as of date of retirement is $6,455 per month, based on a final average salary of $106,513 and 40 years of service at retirement. The coverture fraction as of date of complaint is 1, since there is no pre-marital service. The coverture fraction as of date of retirement is .5750 (23/40), since there are 23 years of marital service and 40 years of total service. Multiplying the benefit at retirement ($6,455 per month) times the coverture fraction at retirement (.5750) yields the marital portion shown, $3,712 per month. Again, the marital portion increases because the benefit grows faster than the coverture fraction decreases.
Suppose the case involves an ERISA (private sector) pension where the formula is not as generous as PERS/TPAF and salary increase is not guaranteed to be greater than inflation. The marital portion at retirement is still significantly greater than the marital portion as of date of complaint. In this model, the 3 year average salary as of date of complaint is assumed to be $60,000 per year, growing at 2 percent annually, and the pension formula is based on 3 year final average salary times service times 1.667 percent. In this case, the growth in the marital portion is shown in the chart below:
Growth of Marital Portion (ERISA Private Sector Pension)
Benefit at Complaint (1,921) x C.F. (1.000) = 1,921 = Marital Portion under Hayden
While it would appear that the marital portion under a QDRO is well-established to be determined by the coverture formula as defined in Marx and Risoldi, this issue has continued to be litigated, although Marx was decided in 1993. Indeed, one of the key issues in the recent Panetta v. Panetta 370 N.J. Super. 486 (App. Div. 2004) was the issue of the marital portion in a deferred distribution. The dispute was over use of the benefit accrued as of date of complaint in a deferred distribution order (called a COAP, rather than QDRO, in the Federal Civil Service Retirement System), rather than the coverture formula. The New Jersey Appellate Court upheld the Marx formula and found the pension appraiser to have incorrectly used the benefit as of date of complaint. Thus, counsel representing the non-employee spouse in deferred distribution cases should not draft property settlement agreements basing the marital portion on the benefit accrued as of date of complaint, but use the Marx formula.
Social Security offset
Another issue in Panetta was the Social Security offset, because the employee spouse did not pay into Social Security while in the Civil Service Retirement System (CSRS).
The reasoning behind the Social Security offset is the spouse with the CSRS pension does not have Social Security while the non-employee spouse does. Since Social Security is non-divisible, this means the non-employee spouse has a non-divisible asset, while the CSRS employee spouse does not have the same asset. This disparity is deemed to be unfair in several states, including New Jersey and Pennsylvania.
In New Jersey this is accounted for under White v. White, 284 N.J. Super. 300 (1995), by offsetting the CSRS pension by the Social Security benefit actually earned by the non-employee spouse, since the employee spouse under CSRS does not earn Social Security benefits. If the non-employee spouse has no Social Security of his/her own, the offset is zero, which is equitable. The reason for the offset is because the CSRS employee has no Social Security, while the non-employee spouse does. If the non-employee spouse has no Social Security, there is no offset. Below is an example of a pension valuation under White:
PENSION VALUATION REPORT
WITH NON-EMPLOYEE SPOUSE’S IMPUTED SOCIAL SECURITY NETTED OUT (PER WHITE 664 A2d 1297) AND COLA ILLUSTRATION PER HAYDEN 655 A2d 772
Marital portion contingent on jurisdictional cut-off date.
Like the Marx/Risoldi coverture formula, Social Security offset has been long established under White, but has continued to be litigated, although White was decided in 1995. In Panetta, the pension appraiser used the method established in Cornbleth v. Cornbleth, 397 Pa. Super. 421 580 A.2d 369 (1990) for the Social Security offset. Under Cornbleth, the offset is based on the hypothetical imputed Social Security earned by the employee spouse, as if the CSRS employee paid into Social Security, rather than the actual Social Security earned by the non-employee spouse, as determined under White. In other words, the salary history of the CSRS employee is used to determine a hypothetical Social Security benefit, using the same formula used by the Social Security administration, under Cornbleth. However, Cornbleth is a Pennsylvania decision with no bearing in New Jersey.
In Panetta, the appellate court found the pension appraiser incorrectly applied the Cornbleth formula for the offset, and upheld use of the White method. Hopefully, since both Marx and White were decided more than 10 years ago, the marital portion, both pertaining to QDROs and the Social Security offset, is now clarified in New Jersey. This would then imply that property settlement agreements for deferred distribution schemes have language referring to the Marx formula, or simply “the marital portion under New Jersey case law,” rather than the benefit accrued as of date of complaint.
Actuary Mark K. Altschuler is president of Pension Analysis Consultants of Elkins Park, Pa. He has prepared more than 10,000 marital pension valuations and draft QDROs for counsel and writes a national newsletter on pension issues in marital dissolution. Reach him at 800-288-3675.
Reprinted with permission of New Jersey Lawyer © 2006