Articles

New Jersey Lawyer

March 4, 2002
Marital portion of pensions: Immediate offset vs deferred distribution
By: Mark K. Altschuler

In determining the marital portion of pensions, most states use either the cutoff date or the current date as the point of allocation in present-value calculations for the purpose of immediate offset. States using the cutoff date typically use the cutoff benefit for deferred distribution. States using the current benefit in immediate offset typically use the benefit at retirement in deferred distribution.

In using a benefit accrued after the cutoff date, the marital portion is separated by means of a coverture fraction. Thus, the current benefit multiplied by the coverture fraction is used in present-value calculations, while in deferred distribution the benefit at retirement is multiplied by the coverture fraction at retirement. New Jersey is unique in that the cutoff-date benefit is used in present-value calculations under Hayden v. Hayden (665 N.J. Super. 772), while the coverture portion of the benefit at retirement is used in deferred distribution under Risoldi v. Risoldi (320 N.J. Super. 524).

My goal is to explain the rationale for this apparent dichotomy.

To understand the dichotomy in New Jersey, it is necessary to review Hayden. Under that case, it is not exactly true that the benefit accrued as of the date of complaint is used. Actually, the salary as of the complaint date is frozen, rather than the benefit. However, unless there is a formula enhancement after the complaint date, this essentially is the same as using the benefit accrued as of the cutoff date. It can be shown that under the New Jersey Public Employee Retirement System (PERS), the benefit accrued as of the date of complaint is exactly equal to the current (trial) date benefit, calculated with salary as of the date of complaint, multiplied by the coverture fraction as of the current date.

For example, a New Jersey PERS employee with a final average salary of $36,000 and 20 years' service as of Dec. 31, 1998 (complaint date) will have an accrued benefit of $1,000 per month as of that date. Assuming the hearing is Dec. 31, 2001, the benefit accrued as of the hearing date, using salary as of the date of complaint, is $1,150 per month. Multiplying this by the coverture fraction as of Dec. 31, 2001 (20/23), yields $1,150 x 20/23, which is equal to $1,000 per month, the benefit as of the date of complaint. The numerator in the coverture fraction is 20, since there are 20 years of marital service, while the denominator is 23, since there are 23 years of total service. This assumes the marriage preceded the date of hire.

Thus, freezing the salary as of the date of complaint effectively freezes the accrued benefit. Some plans are more complex than the PERS formula and include an offset for the Social Security earned during the period of employment. However, it turns out that even under more complex pension benefit formulas, the benefit accrued as of the date of complaint is very close to the coverture portion of the current benefit, using salary as of the date of complaint. Thus, in New Jersey pension valuations, under Hayden the benefit accrued as of the date of complaint is used for practical purposes.

Hayden, however, applies to immediate offset only, not deferred distribution. Under Risoldi, the coverture portion of the benefit at retirement (based on salary at retirement) is the marital portion. Thus, the marital benefit under Risoldi includes salary increases after the end of the marriage, while under Hayden, salary is frozen at the date of complaint. The key to this dichotomy is Moore v. Moore (114 N.J. 147).

COLA

The Hayden decision overturned Moore. In both cases, cost-of living adjustment was the major issue. Hayden involved a New Jersey State Police trooper pension, while Moore involved a New Jersey Police and Fire Retirement System pension (PFRS), both of which have post-retirement COLAs. Under both Hayden and Moore, these are to be included in the present-value calculation. The difference is that in Moore, the pre-retirement COLA increase also was considered marital property.

The Moore case was unique in that aspect and very controversial. A pre-retirement COLA increase is reflected in a salary increase. Therefore, to account for a pre-retirement salary increase between the date of complaint and date of retirement, the benefit at retirement must be used since the salary increase is reflected in the benefit formula. The only way to use future salary increases is to use a future benefit. Essentially, the Moore case used the projected benefit at retirement, with the projected salary increase from the date of complaint to retirement, for the purpose of present-value calculation in immediate offset.

But how can a projected benefit at retirement be meaningfully used in a present-value calculation? A projected benefit at retirement makes sense in a deferred distribution because the actual benefit at retirement will be used in deferred distribution at a later point. There is no speculation. But for present-value calculation, using the projected benefit at retirement makes sense only if the actuary knows the probability of the employee working until the retirement date, based on plan turnover statistics. Even if this was known, the future salary increase is not known, and a pension valuator must speculate what that will be.

Finally, how is the salary increase due to COLA separated from raises based on promotion and performance? Thus, Moore was overturned by Hayden. In Hayden, the actual, known benefit accrued as of the date of complaint is used rather than a projected benefit at retirement. Post-retirement COLA is included in the present-value calculation.

Fine point

There is one fine point in understanding how Hayden overturned Moore. Actually, a better word is "clarified" rather than overturned. In Moore, the Appellate Division never explicitly stated that a pre-retirement salary increase was marital property, only a post-retirement cost-of-living increase. But the court used a valuation based on the pre-retirement salary increase in Moore. In Hayden, the Supreme Court rejected the trial court's use of a valuation with pre-retirement salary increase, saying, "The judge, however, was incorrect in determining that Moore v. Moore requires the inclusion of the cost of living component of any pre-retirement salary increases in a pension.

There are two fundamental differences between Moore and Hayden. In allowing post-retirement COLA but not pre-retirement COLA, Hayden uses a fixed benefit in a present-value calculation rather than a projected benefit. Thus, there is no speculation about a projected benefit at retirement. Under Hayden, a present value of the known benefit can be calculated under various cost-of-living scenarios.

There definitely will be post-retirement COLA; the question is just what it will be. Under Moore, there was the added level of speculation of using a projected benefit at retirement. How does the valuator know how much longer the employee will work, absent plan turnover statistics? In addition, post-retirement COLA is entirely passive; it's not due to the efforts of the employee. The issue under Moore of separating the salary increase due to inflation from the increase due to the employee's effort disappears under Hayden.

Since the Hayden decision, pension valuations in New Jersey have used the benefit accrued as of the date of complaint, along with post-retirement COLA when this applies, as in New Jersey PERS. Risoldi, however, was a deferred distribution case. Because of Hayden, the benefit used in the Risoldi case was fixed as of the date of complaint. The QDRO included a fixed amount as the award payable to the alternate payee. Counsel for the alternate payee objected and the case went to the Appellate Division.

The court found the fixed award inequitable and also inequitable for the alternate payee to have to wait under a deferred distribution, yet receive a fixed award that would be eroded by inflation. In fact, the rationale in jurisdictions that use the coverture portion of the benefit at retirement in deferred distribution is exactly that: The benefit accrued as of the cutoff date is eroded by inflation in deferred distribution.

Of course, this was the argument in Moore. In fact, the Risoldi court cited Moore, but there is a huge difference between the two cases. Since Risoldi is a deferred distribution case, the actual benefit at retirement is used and there is no speculation about future service and salary increase. Thus, New Jersey, under Risoldi, is like many jurisdictions nationwide in using the coverture portion of the benefit at retirement in deferred distribution.

The remaining question is the reason for the dichotomy between Hayden and Risoldi. Most jurisdictions that use the benefit at retirement in QDROs use the current benefit rather than cutoff-date benefit in the immediate offset present-value calculation. The reason for the dichotomy is the Moore case. Without it, New Jersey would likely use the current benefit in immediate offset.

But Moore, because of the use of pre-retirement salary increase and thus use of a projected benefit at retirement, created problems. To correct this, the Appellate Division, in clarifying Moore in the Hayden decision, eliminated the use of salary increase, thus freezing the salary as of the date of complaint. Specifically, the court said, "We, therefore, reject the inclusion of anticipated post-divorce, pre-retirement cost-of-living increases in valuing defendant's pension. On remand, the trial court shall re-compute the value of plaintiff's pension, excluding the cost-of-living increases from the date of filing of the complaint through the date of retirement."

This language, of course, freezes the salary on the date of complaint for present-value calculation. Thus, in overturning (clarifying) Moore, which was biased toward the non-employee spouse, the Appellate Division limited the marital portion to the date of complaint rather than the date of equitable distribution. Perhaps, under different language to the effect of excluding cost-of-living increases from date of equitable distribution until retirement, rather than from date of complaint, Hayden would indicate the use of current salary. If that were the case, Hayden would be more in keeping with Risoldi. However, since Risoldi followed Hayden, this is not the case and New Jersey has this curious dichotomy, essentially due to Moore.

The application of this dichotomy is the property settlement agreement regarding deferred distribution. A property settlement agreement awarding the non-employee spouse a portion of the benefit accrued as of the date of the complaint does not give all that he or she is entitled to under New Jersey case law. The marital portion in a deferred distribution is the benefit at retirement, multiplied by the coverture fraction. Despite Hayden, this is indeed the marital portion under a deferred distribution.

Reprinted with permission from New Jersey Lawyer

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Mark K. Altschuler
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