Divorce Tips Database

ACT 175 Now Effective

By:Mark K. Altschuler

ACT 175 Now Effective

Act 175 (Senate Bill 95), signed by Gov. Rendell in November of 2004, has key provision regarding the valuation of both defined benefit and defined contribution pensions. Act 175 became effective on January 31, 2005 for all defined contribution plans and for defined benefit pensions in cases with equitable distribution proceedings commencing after January 31, 2005. This difference created some confusion. There was some dispute as to exactly what the date of equitable distribution commencement actually is, although most matrimonial attorneys agree that it is the date of complaint. This is because of Rule 1920.3: an action shall be commenced by filing complaint with the prothonotary. In order to clarify the situation, Senate Bill 124, amending the effective date of Act 175, was passed and became effective on June 15, 2005. As of June 15, 2005, all defined benefit pensions are now covered under Act 175, as well as all defined contribution plans.

DEFINED BENEFIT Under Act 175, Berrington [1]has been overturned. The marital portion regarding pension valuations is no longer the benefit accrued as of the date of separation, but the current benefit, multiplied by the coverture fraction (length of plan service while married divided by length of plan service as of valuation date). This is the formula under the Holland[2] Superior Court decision. In Qualified Domestic Relations Orders (QDROs or other deferred distribution methods such as PSERS/SERS ADROs), the marital portion is the benefit at retirement, times the coverture fraction at that point in time.

Using the Holland formula means that the benefit is not frozen as of the date of separation, but grows over time as the numerator of the coverture fraction (length of plan service while married) grows faster than the denominator (length of plan service as of valuation date). Assuming the period of time from separation to trial is typically 3 years, the marital portion will typically grow about 10 percent under Act 175 for purpose of immediate offset. However, in the deferred distribution (QDRO) case, the marital portion at benefit commencement will be much greater than the benefit accrued as of date of separation, due to the long time delay.

DEFINED CONTRIBUTION Paulone[3] 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 Senate Bill 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.

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

Under Act 175, 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.

The only accurate method is the tracing method, under which the rate of return is calculated for each statement period over the marriage. Tracing, and other methods, are described in Why value a 401(k)? found on the Defined Contribution tab on our website, www.pensionanalysis.com, under Learn About Pensions. More information, including valuation methods and case studies, can be found in Chapter 19B of Valuing Specific Assets in Divorce, Editor: Robert D. Feder; Publisher: Aspen Law & Business, NY.

CASH BALANCE PLANS Act 175 is silent regarding cash balance pensions. Cash balance pensions have the structure of a defined contribution pension, with individual accounts. It therefore would appear that post-separation contributions are not marital property, since post-separation contributions are not marital property in defined contribution pensions.

WHY SETTLE FOR LESS? We take extraordinary pride in the level of excellence that we provide to attorneys and mediators, at competitive fees.. For expertise and guidance on pension valuation and QDRO matters, I invite you to call us at (215) 782-9845. We look forward to being of service.

Mark K. Altschuler
President & Actuary

[1] Hayden 284 N.J. Super. 418 (1995)
[2] Risoldi 320 N.J. Super 524 (1999)
[3] Marx 265 N.J. Super 418, 627 A.2d 891 (1993)
[4] Panetta 370 N.J. Super. 486 (App. Div. 2004)
[5] White 284 N.J. Super. 300 (1995)
[6] Cornbleth 580 A.2d 369 (Pa. Super. 1990)

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

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