Articles

Marital portion of NJ pensions

September 21, 2005
Marital portion under QDRO
By Mark K. Altschuler

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
faster than the coverture fraction decreases, and so the product of the two continues to increase. This is shown graphically on the chart below:

Growth of Marital Portion (PERS)

Entry & Marriage Complaint Retirement
1977 2000 2017

Benefit at Complaint (2,439) x C.F. (1.000) = 2,439 = Marital Portion under Hayden
Benefit at retirement (6,455) x C.F. (.5750) = 3,712 = QDRO Marital Portion under Marx
*C.F. = Coverture Fraction

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
as of date of complaint is then $2,439 per month, based on the PERS/TPAF formula:

[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)

Entry & Marriage Complaint Retirement
1977 2000 2017

Benefit at Complaint (1,921) x C.F. (1.000) = 1,921 = Marital Portion under Hayden
Benefit at Retirement (4,677) x C.F. (.5750) = 2,689 = QDRO Marital Portion under Marx
*C.F. = Coverture Fraction

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
September 21, 2005

PREPARED FOR:  New Jersey Lawyer

Name:      
Employer: U.S. Customs Service    
Plan: CSRS    
Birth Date: 03/24/1957 Retirement Age: 60
Entry Date: 09/10/1979 Retirement Date: 04/01/2017
Marriage Date: 04/12/1990 Status: Active
Cut-off Date: 04/13/2005 Sex: Female
Valuation Date: 09/21/2005  Age: 48 

1) Accrued monthly pension at cut-off date $3,112
2) GATT annuity factor (present value of $1 per year annuity) 8.52832
3) Present Value (12 x Item 1 x Item 2) 318,482
4) Length of plan service while married 15.00342
5) Length of plan service to cut-off date 25.59069
6) Coverture Fraction (Item 4 ÷ Item 5) 0.58628
7) Marital present value as of 09/21/2005 (Item 3 x Item 6) $186,721

Annual  Percentage  Increase Actuarial Present Value
Post-Retirement Cost-of-Living Benefit Marital  Coverture  Portion of Pension Spouse’s  Social  Security  Marital Portion of Pension after Social Security Offset
0% $186,721  $66,667  120,054
3% $267,038  $85,212  181,826
5% $356,353   $103,022 253,331

Pension form: Life Annuity

GATT Interest rate: 4.38%

Mortality table: GAM-83

Marital portion contingent on jurisdictional cut-off date.
Calculations in accordance with generally accepted actuarial standards.

9960450

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

PAC provides pension valuations, QDROs and actuarial reports for divorce attorneys and marriage dissolution mediators nationwide. Our Philadelphia offices are located in the suburb of Elkins Park, Pennsylvania, from where we serve the needs of legal professionals nationally, including east coast states such as New York, New Jersey, Virginia, North Carolina, Florida, Washington, D.C., and Maryland. Our Florida office located in Coral Gables, FL serves Florida family attorneys.
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Mark K. Altschuler
President & Actuary

ASPPA Member

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