Periodically, private and government employers offer pension enhancements over a finite block of time("window") in order to encourage employees to take early retirement. The nature of the enhancements, and the question as to whether or not the window enhancement is marital property, is a complex topic. Indeed, the Supreme Court recently split 3-3 as to whether these enhancements are marital property in the Gordon case. (1,2) This article will attempt to cover the issues involved in a logical and structured manner.
First, it is a good idea to review what window enhancements are in pension plans. This section will give a brief overview of window enhancements.
Concerning the types of window benefits mentioned above, a few examples may prove helpful. Recently, the Public School Employees Retirement System had a window early retirement incentive that expired July 1, 1997. Under this incentive, an employee could retire by June 30, 1997 with 30 years service, instead of the 35 years service required by the plan. This is an example of the relaxation of age/service conditions. PECO has given employees extra years of service as an early retire ment incentive. Both Sun Oil and John Hancock have offered supplemental annuities that were separate and in addition to the pension, and not otherwise available.
Reducing the early retirement reduction may appear to be confusing terminology. Again, an example may clarify the issue. Suppose the normal retirement age is 65, and the actuarial reduction for retirement at age 55 is 55%. In other words, since the benefit is being paid out over an additional ten years, the benefit payable at age 65 is reduced 55%, in order to keep the present value constant. Reducing the benefit by 25% would be an early retirement subsidy. Thus, the reduction is reduced from 55% to 25%.
Since we now have an overview of window benefits, we may proceed to establish when window benefits may be marital property. This will be broken down into 2 sections, covering separation before retirement and separation after retirement.
Assuming that the early retirement incentive is applicable will raise the present value of the pension, perhaps a great deal. In this case, the Participant is likely to claim that he/she will not take the early retirement incentive, unless there is obvious evidence to the contrary. Thus, use of immediate offset for equitable distribution will be highly contested. The solution in this case is a QDRO. The QDRO should state that if the Participant takes early retirement and there is an early retirement subsidy or enhancement, the Alternate Payee will share in this enhancement. This was discussed in the legislative history of the Retirement Equity Act (3).
If the Participant has taken the early retirement subsidy, the issue is now not a matter of debate, and immediate offset can apply as well as QDRO, if there are sufficient funds for immediate offset. Note that there still be may some pitfalls in this case. The following sub-cases will illustrate some of these pitfalls.
(1) Window benefit a lump sum or supplemental annuity that is normally not available:
If the early retirement incentive is a supplement outside of the basic pension, the Supreme Court has found that this is not marital property, in Gordon (1, 2). While the Supreme Court actually split 3-3 on this issue, the Superior Court found that this type of incentive is not marital, and the Supreme Court did not reverse. Please note that the summary in the Gordon Supreme Court ruling mistakenly states that the Supreme Court reversed the Superior Court. The Supreme Court split 3-3 on the supplements ("ORBIT", Social Security Supplement, and Supplemental Retirement Income). Justices Cappy, Flaherty and Newman moved to reverse the Superior Court, while Justices Castille, Nigro, and Zappala found that the ORBIT, Social Security Supplement (referred to as bonus in the Supreme Court ruling), and Supplemental Retirement Income (referred to as continuation of salary in the Supreme Court ruling) were not marital property.
(2) Window benefit is an enhancement to the basic pension, where the window existed at the time of marital separation.
Suppose that the incentive is a credit of extra years, early retirement subsidy, or a relaxation of age/service requirements, all applying to the basic pension in the plan. If the window existed at the time of marital separation, the early retirement incentive to the basic pension can be considered marital property. Note that rather than using the actual full retirement benefit, the benefit should be calculated using the salary as of the date of marital separation, in order to follow Berrington (4). Multiplying the actual retirement formula (including the enhancement, but plugging in separation date salary) by the coverture fraction then separates out the marital component of the enhancement.
(3) Window benefit is an enhancement to the basic pension, where the window did not exist at the time of marital separation.
If the window benefit occurred after marital separation, the early retirement incentive to the basic pension may or may not be marital, under Pennsylvania caselaw. Keep in mind that under Berrington, a passive post-separation enhancement not due to the efforts or contributions is marital. Thus, a permanent enhancement to the plan occurring after the date of marital separation would be appear to be marital property, under Bemngton. However, a window benefit is not a permanent enhancement, and does require the effort of the employee- that is, actually retiring. It is argued that the Retirement Equity Act makes an early retirement subsidy marital. Thus, consistency would imply that the early retirement subsidy, if a window benefit, is marital property also, in an immediate offset case. If the window benefit is extra years of service, it is our opinion that this is marital also, as a matter of consistency. However, the retirement benefit must be calculated using separation date salary.
This situation is much simpler logically than separation before retirement. The full retirement benefit is marital property. Any post-retirement enhancement, such as cost of living increase, is also marital under Berrington, since it is by definition a passive increase. Any supplemental annuity outside the basic pension is also marital property, having been in effect at the time of separation. Thus, a QDRO or immediate offset may equally apply. If the assets are sufficient, immediate offset is the recommended solution. There are two reasons for this. First, immediate offset is simpler. Secondly, in a non-ERISA plan, the Participant may change death beneficiaries after divorce, depending upon the plan. In fact, the authors have seen cases where the Retiree, planning separation soon after retirement, did not name the spouse as the death beneficiary at retirement, in a non-ERISA plan. This, of course, would not be possible in an ERISA plan. This would create serious problems for the Alternate Payee, in the case of the death of the retired Participant. But if a QDRO is used in this situation, the full retirement benefit, any supplemental annuity if it exists, and any cost of living increase is marital property, subject to a QDRO.
Mark Altschuler, Actuary, is president of Pension Analysis Consultants, Inc. located in Elkins Park.
Toby Dickman, Esq., is a partner in the firm of Rubin Glickman & Steinberg P.C. in Lansdale
Published with permission from Pennsylvania Family Lawyer
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.