Senate Bill 95

By: Mark K. Altschuler and Marvin Snyder

Senate Bill 95, recently signed by Gov. Rendell, has key provisions regarding the valuation of both defined benefit and defined contribution pensions, as explained below.

DEFINED BENEFIT Berrington¹ has been overturned. The marital portion regarding pension valuations is not the benefit accrued as of the date of separation, but the current benefit, multiplied by the coverture fraction as of current date. This is the formula under the Holland² Superior Court decision. In QDROs or other deferred distribution orders, the marital portion is the benefit at retirement, multiplied by the coverture fraction at that point in time.

All equitable distributions proceedings commencing on or after January 31, 2005 will fall under SB 95 regarding defined benefit pensions.

DEFINED CONTRIBUTION Paulone³ has been overturned. Under Paulone, the marital portion is the date of separation balance, along with gains from separation to trial date. If there is a pre-marital portion, the increase on the pre-marital portion, valued as of trial date, is also marital property. Under SB 95, the increase on the pre-marital portion is valued as of date of separation, while the contributions made during the marriage, and gains on those contributions, are valued as of date of trial.

Therefore, the pre-marital portion and increase on the pre-marital portion must be segregated from the marital contributions and gains on those contributions.

Actually, the increase on the pre-marital portion is valued as of date of separation or date of trial, whatever results in the lesser increase. If there have been net gains since the date of separation, this means valuing the increase on the pre-marital portion as of date of separation.

Under Senate Bill 95, no simple approximation will work, if there is a pre-marital portion. For example, suppose the marriage is 15 years long. Because of the time value of interest, a simple pro-rata approach used to segregate the gains on the pre-marital portion from the gains on the marital contributions cannot work. The pre-marital component generates much more interest than contributions coming in towards the end of the 15 year period.

Thus, the only method that works is the tracing method, under which the rate of return is calculated for each statement period over the marriage. For more information on tracing, please review the Defined Contribution link, under the Learn about Pensions tab, on our website www.pensionanalysis.com. More information is available in Chapter 19B of Valuing Specific Assets in Divorce (NY: Aspen Press).

All valuations for defined contribution pensions will be covered under SB 95 on or after January 31, 2005, regardless of the date of commencement of the equitable distribution proceeding.

CASH BALANCE SB 95 is silent regarding cash balance pensions. However, since cash balance pensions have the structure of a defined contribution pension, with individual accounts, it would appear that post-separation contributions are not marital property, since post-separation contributions are not marital property in defined contribution pensions.

A copy of the bill may be obtained by visiting the General Assembly website, www.legis.state.pa.us and searching for SB 95.

¹ 633 A.2d 589 (Pa. 1993)

² 588 A.2d 58 (Pa. Super. 1991)

³ 649 A.2d 691 (Pa. Super. 1994)