The evolution and changes of caselaw may lead to logically simple situations, or complex situations. For example, if one case supersedes an earlier one, or if a higher court reverses a lower court, there is little room for argument.
However, the recent changes of Pennsylvania caselaw regarding pensions in divorce seem to be contradictory.
This article will attempt to reconcile the recent Superior Court and Supreme Court decisions concerning what exactly is the marital benefit in equitable distribution cases concerning pensions.
The Berrington, 598 A.2d 31 (Pa. Super. 1991), 633 A.2d 589 (Pa. 1993) and Katzenberger, 633 A.2d 602 (Pa. 1993) cases are consistent with each other.
Both cases imply the use of the benefit accrued at the date of marital separation. In this regard, both cases supersede Holland 588 A.2d 58 (Pa. Super. 1991), which uses the retirement benefit, multiplied by a coverture fraction.
However, the non-employee spouse gets the benefit of post-separation increases using this method. In Berrington, the Superior Court, noting this, used the separation date benefit:
"Only those pension benefits available on the date of separation are marital property."
Multiplying this benefit by the separation date coverture fraction, where the numerator is marital service and the denominator is total service up to separation, then converts the benefit to the marital benefit.
The Supreme Court upheld the Superior Court, but used the retirement benefit, without salary increase, multiplied by the retirement date coverture fraction.
Applying this methodology to a benefit that increases linearly with salary and service, such as PSERS and SERS, will result in the separation date marital benefit.
However, the Westinghouse plan in Berrington is more complex, and using the Supreme Court method results in a marital benefit of $3,599.24 x (350/509) = $2,474.92. This is the monthly benefit at retirement without salary increase, multiplied by the retirement date coverture fraction, the numerator of which is marital service, and the denominator of which is total plan service.
But the actual separation date monthly benefit is $2,052.75 in this case. The separation date coverture fraction is 350/353, which is marital service divided by total service up to separation. Multiplying the separation date benefit by the separation date coverture fraction gives a marital benefit of $2,035 per month.
Thus, there is a difference between the Superior Court and Supreme Court methods in Berrington. There are other situations where this difference is significant.
Berrington allows for the divorced spouse to benefit from post-separation plan enhancements that are not due to the efforts of the employed spouse, i.e., "passive" enhancements: "However, should there be increases in retirement benefits payable to the employee spouse between the date of marital separation and the date the non-participant spouse begins receiving benefits which are not attributable to the efforts or contributions of the participant-spouse, any such increased benefits may be shared by the non-participant spouse based upon his or her proportionate share of the marital estate."
However, some questions have arisen as to what exactly are passive enhancements, particularly regarding "backloaded" plans and early retirement incentives.
Suppose a plan formula calculates the benefit at .025 (2.5%) times final average salary times years service if an employee works 20 years, but 3.0% times final average salary times years service, if the employee works 25 years.
This is the SERS plan for state troopers. In a deferred distribution case, Berrington clearly indicates the use of the separation date salary, but the formula is subject to debate.
Brown, 669 A.2d 969 (Pa. Super. 1995) addresses this issue. The formula at the date of separation utilizes a factor of 2.5%, but the benefit at retirement could be calculated using 3%, if the employee-spouse works 25 years.
One could say that this enhancement is due to the effort of the individual, for his effort is working 25 years, instead of 20. However, the Superior Court has found this enhancement to be "passive" and ordered the use of the formula at retirement, with the separation date salary.
As private corporations "downsize," there has been a marked increase in early retirement incentives in the 90's. If the early retirement enhancement is post-separation, can it be considered a marital asset?
Gordon, 647 A.2d 530 (Pa. Super. 1994), 681 A.2d 732 (Pa. 1996), addresses this issue. The Superior Court found that such an enhancement is not marital property. The reasoning is that the employee has to make an active effort to obtain this enhancement, by actually retiring.
However, this reasoning can lead to the following vexing situation. Suppose the case is immediate offset, and has been contested for a long time, so that the case has not been settled long after the actual retirement.
This is the situation in Gordon, and there are others like it, in the author's experience.
Suppose the separation date benefit, payable at normal retirement (age 65) is $2,000 per month, but the separation date benefit for early retirement (age 55) is only $1,000 per month.
Again, these are the benefits accrued at the time of marital separation, possibly many years before the enhanced early retirement. Assume that the actual enhanced early retirement benefit is $4,800 per month. Since the employee actually did retire at age 55 (or 56, as in Gordon), there is an argument for using the early retirement benefit as of the separation date.
However, this decision was made long after separation, and in the light of the early retirement enhancement. Using the early retirement separation date benefit of $1,000 penalizes the non-employee spouse, especially since the actual retirement benefit is $4,800 per month.
Thus, there is an argument to use the normal retirement benefit. These arguments can make the case drag out for many years.
The Supreme Court has attempted to resolve this problem, by rehearing Gordon.
Regarding the early retirement enhancement, the outcome was a 3-3 tie, since there are now only 6 members on the Supreme Court, with the retirement of former Chief Justice Robert N.C. Nix. In the opinion in favor of reversing the Superior Court, Justices John Flaherty, Sandra Schultz Newman and Ralph Cappy found the early retirement enhancement to be passive: "simply benefits based upon years of service, and so required no effort or contributions from Mr. Gordon."
In upholding the Superior Court, Justice Ronald Castille cited the Labuda case, in which the Superior Court found that an early retirement incentive that was offered after separation was not marital property.
The crucial point, however, is that in the Labuda case and Gordon, the early retirement incentive was an entity in addition to and separate from the pension.
To quote justice Castille: "Furthermore, it appears that these incentives were not provided in lieu of any of the original pension benefits which accrued during the marriage; rather they were given in addition to those benefits."
Therefore, we can conclude that some sort of bonus, special lump sum payment, or salary continuance offered as an early retirement incentive is not marital property.
However, if the early retirement incentive is an enhancement to the basic pension, rather than a separate entity, then justice Castille's opinion may not apply.
For example, Brown allows the alternate payee to benefit from an enhancement to the plan after separation, due to extra service. If the early retirement. incentive is an enhancement to the basic pension, and if the incentive existed at the time of separation (to other plan members), then a very good - argument can be made that such an enhancement is marital property.
In fact, the Federal Retirement Equity Act allows the alternate payee in a QDRO to share in an early retirement subsidy to the pension, if the participant actually elects early retirement and enjoys the subsidy.
It appears illogical for an entity to be marital in a deferred distribution case, but not immediate offset.
The Superior Court used the actual retirement benefit of the basic pension in calculating the marital property. Regarding this, the Supreme Court was unified.
In reversing the Superior Court's ruling on Gordon, the Supreme Court upheld and cited Berrington: "In sum, for purposes of an immediate offset, the value of the marital-property portion of Mr. Gordon's defined benefit pension is to be determined by using the salary on the date of separation."
Thus, the Berrington, Brown, and Gordon (Supreme Court) rulings can be viewed in a consistent light, especially in view of federal law.
In a deferred distribution case, or a post-retirement immediate offset case, use the actual retirement date formula, but with the separation date salary inserted into the formula, and multiply this by the coverture fraction, the numerator of which is marital plan service, and the denominator of which is all plan service.
The exceptions would be where the early retirement incentive is an entity outside the basic pension. If the enhancement to the basic pension did not exist at the time of separation, it may or may not be marital, under Pennsylvania caselaw.
However, in this gray area federal law indicates that the enhancement is marital property. In a post retirement immediate offset case, use the actual retirement formula, with the separation date salary.
Published with permission from Pennsylvania Law Weekly
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.