Pennsylvania Family Lawyer
Monday, July 1, 2002
In DeMarco v. DeMarco, 787 A.2d 1072 (Pa. Super. 2001), the issue presented to the Superior Court was to determine the retirement age to use in performing a present value calculation, when the employee was past normal retirement age. In cases where the employee is younger than the normal retirement age, the standard has been to utilize the normal retirement age in present value calculations. The normal retirement age is defined as the earliest date the employee can retire with an unreduced benefit, assuming no future service. In DeMarco, the employee was 51 at time of trial and the normal retirement age was age 50 as a City of Pittsburgh policeman. The valuation that Mr. DeMarco appealed assumed retirement age 50. Since Mr. DeMarco had not retired at age 50, the Superior Court found this to be an unreasonable approach. The Court then determined that the retirement age to be used should be based on statistical data regarding average age of retirement from the company or industry with which the employee/spouse is affiliated, as well as other related factors.
This decision removes subjectivity from the valuation. While the non-employee spouse may argue for use of a normal retirement age as of a date in the past, the employee may argue use of a retirement age based on intent, leaving no objective standard. Obviously, the employees stated intent of retirement date will be biased, just as use of a retirement date as of a past date is biased, as one is intended to lower the present value, the other intended to raise the present value. The Superior Court addressed this in the following language, The trial court concedes its selection of age fifty was an arbitrary age chosen to maximize the value of this asset. Similarly, if the employee is allowed to use his or her intended retirement age, this is likely to be far beyond normal retirement age, which will greatly lower the present value of the asset. Use of plan statistics sets an objective standard, If the case is settled with an immediate offset using a present value based on the average retirement age, the case is then closed. However, DeMarco is a mixed distribution case which does leave one issue open.
Although a present value was calculated, there were insufficient funds for immediate offset. The original present value was used, along with other assets, in order to determine what percentage went to wife under deferred distribution. Wife received 50% of the marital portion of the pension under a domestic relations order, based on the original present value. But the Superior Court ordered the pension to be re-valued, using the average retirement age, which will change the present value: If the value placed on the pension is changed, Wifes proportional share of the pension is changed as well. Thus, we vacate the trial courts equitable distribution order in its entirety.
After the pension is re-valued using the average retirement age, Wifes portion of the pension under a domestic relations order will then be determined using the new present value, assuming the same mixed method of distribution is used. What if Mr. Demarco does not retire at the average retirement age? If this were an ERISA pension, it would not matter, since the Alternate Payee (Wife) can receive payments as soon as the Participants earliest retirement age, whether or not the employee retires. However, in a non-ERISA pension, which is the case in DeMarco, Wife cannot commence the receipt of benefits until the employee retires. If Mr. DeMarco does not retire at the average retirement age (used in the present value calculation), the present value of the benefit Wife receives will be less than that used to determine her portion. This, in effect, results in the dissipation of a marital asset.
Note that the issue of intent to retire has no bearing on the situation. The employees stated intended retirement age would only be meaningful if it were used in a present value calculation, at time of equitable distribution. But the Superior Court has stated that intent is not to be used, but rather the plans average retirement age, in a situation like DeMarco, regarding present value calculation. In the case of delayed retirement in a non ERISA pension, it is the actual delay of retirement that will cause dissipation of the marital asset, in a deferred distribution scheme.
This exact issue has been dealt with in California in Cornejo vs. Cornejo, 916 P.2d 476,1996). In Cornejo, the court held that if the Participant delays retirement in a non-ERISA pension when there is a deferred distribution, the Alternate Payee must receive an immediate cash payment equal to the present value of his or her benefit under the DRO, assuming normal retirement age. If the Participant lacks sufficient funds for the payment, Cornejo essentially forces the Participant to retire. A less onerous method would be use of a sliding scale, adjusting the award to the Alternate Payee upward to account for delayed retirement.
The use of the sliding scale allows much more flexibility, since the employee would not be forced to retire. The Superior Court, in DeMarco is not clear on this issue. Thus, in cases such as DeMarco, it may be reasonable to use a sliding scale for delayed retirement, until this issue is clarified by an appellate court, as was in the case in California.
Mark K. Altschuler is president and actuary of Pension Analysis Consultants, Inc. Jeffrey M. Williams is a principal in the Bucks County law firm of Baldi, Cepparulo & Williams, P.C. and a Fellow of the American Academy of Matrimonial Lawyers.
Reprinted with permission from Pennsylvania Family Lawyer