Language Comes Back to Bite a Decade Later

Language Comes Back to Bite a Decade Later

Johnson v. McCarthy, 10th Dist. No. 17AP-655, 2019-Ohio-3489 (August 29, 2019).

Issue:  What is the date of valuation used for dividing a defined benefit pension plan when no specific date is listed?

Decision:  The Tenth District Court of Appeals determined that the judgment entry language at issue in this case “clearly” required the defined benefit plan to be divided using the “frozen” method—meaning the benefit is valued at the time of divorce and not at the time of retirement.  In this case, the parties were divorced in 2005.  Two retirement plans were divided in the divorce—one of which was an IBM pension.  In regard to the IBM pension, the judgment entry stated, in part:

[Wife] is awarded an equal division of the [IBM] personal pension plan . . . [Husband] shall promptly and fully cooperate with the transfer of the one half interests awarded to [Wife] in each of the above retirement plans to [Wife’s] name via a Qualified Domestic Relations Order, rollover or other appropriate instrument.

In 2015, the Husband retired.  In 2017, nearly 12 years after the parties’ divorce, Wife moved the court for clarification of the 2005 judgment entry regarding the IBM pension.  Wife contended that the pension was meant to be divided using the traditional coverture approach, which values the marital portion of a pension at retirement.  Husband argued that the judgment entry valued the marital portion of the pension at the date of divorce (i.e., the frozen method).

The trial court determined that the language of the judgment entry was “unambiguous” meaning no cannons of contract construction needed to be employed to interpret the judgment entry.  The trial court determined that the judgment entry meant for the IBM pension to be valued on the date of divorce.  The trial court acknowledged that no date of valuation was listed but determined that where the judgment entry fails to designate a date of valuation then the date of the marriage’s termination controls.  On appeal, the Tenth District affirmed the trial court’s decision.

We will be following this case and provide any updates if it is appealed.

Discussion:  This case represents an unsettling trend that we have noticed in recent years.  Ohio courts of appeals are ignoring and contradicting the Ohio Supreme Court’s decision in Hoyt v. Hoyt, 53 Ohio St.3d 177 (1990), and its progeny, which held defined benefit plans are, generally, to be divided using the traditional coverture method as said method is, generally, the most equitable manner of division.  See Cox v. Cox, 12th Dist. Warren Case Nos. CA98-04-045, CA98-05-054, 1999 Ohio App. Lexis 227; see also Blair v. Blair, 3rd Dist. Paulding No. 11-15-04, 2016-Ohio-256.  The difference of valuing a pension using traditional coverture method instead of a frozen benefit method can be drastic. See Napi v. Napi, 11th Dist. Ashtabula No. 2013-A-0041, 2014-Ohio-2696 (if the court applied a frozen method of dividing the pension, the non-participant spouse would have received a monthly benefit of $77.82; if the court applied the traditional coverture method, which the court did, the non-participant spouse’s monthly benefit would be $302.77 per month).  We find this topic of courts moving further away from Hoyt to be particularly interesting.  We made a presentation to the Ohio Judicial College and wrote an article for the July/August 2019 Issue of the Domestic Relations Journal of Ohio, titled “Essential but Frequently Missing Pension Evidence in Divorce” on this subject.

Domestic relations attorneys should carefully review the language in their separation agreements and judgment entries regarding the division of retirement assets.  A few omitted words or the wrong language can make a world of difference to your clients.  Worse, the mistake may not become apparent until years later—or like this case over a decade later. 

How we can help:  We are always available to help attorneys with dividing retirement benefits in divorce, including before the separation agreement/judgment entry is final.  Also, we offer free recommended agreement language at qdrogroup.com and are willing to discuss your case and point you in the right direction.

Danger of Offsetting Pension and 401(k) Plans

Danger of Offsetting Pension and 401(k) Plans

Defined Benefit (DB) Pension and Defined Contribution (DC) 401(k) plans have very different characteristics, including valuation methods, funding and investment risks, and distribution options.  Even retirement plans of the same type very rarely have the exact same features and risks.

To illustrate this let’s assume a divorcing couple, Tom and Nancy, are both age 45. Tom has worked 25 years and has a pension benefit of $2,200 per month at age 65, the present value of which is $245,000.  Nancy has a 401(k) balance of $245,000.  Each party wants to keep his/her own plan in exchange for his/her share in the other party’s plan.  After all, both assets have the same value.  However, before counseling your client about this matter, consider the following:

Pension Valuation Risks

Calculating the present value of a pension benefit is complicated and takes into account several actuarial factors. However, the present value may not include a benefit enhancer that vests after divorce, like an early retirement subsidy, but that is based largely on marital service.

In our example, let’s further assume Tom’s plan has an early retirement subsidy that allows him to retire with full benefits after 30 years of service.  In this case, the value of Tom’s pension just 5 years in the future, at age 50, is about $600,000.  Nancy would have to achieve an almost 20% rate of return over those 5 years for her 401(k) to be worth a similar amount.

Pension Funding and Investment Risks

Generally, a pension plan sponsor cannot reduce a person’s previously earned benefits, and must sufficiently fund the plan to make promised benefit payments.  As a result, the plan sponsor typically assumes both the funding and investment risks.  However, if the sponsor does not have the assets to fund the plan, or if the plan’s investments underperform, a participant may not receive all the benefits he/she earned.  Although the PBGC guarantees most private employer pensions against bankruptcy, its guarantee has limits.  Union plans, many of which are severely underfunded, may be able to reduce previously accrued benefits.  Also, several state governments are considering cutting pension benefits to deal with budget shortfalls.

401(k) Funding and Investment Risks

Whereas a pension promises a certain amount of benefits at retirement, a person’s 401(k) benefit at retirement depends entirely on the amount he/she contributes to the plan (plus employer contributions, if applicable) and investment performance.  As a result, although a 401(k) account balance may be equal to the present value of pension benefits at divorce, that balance may be materially less or greater than the pension value at retirement.

Equally Sharing the Risks/Rewards

There may be legitimate reasons to offset retirement assets; however, the only way to accurately equalize the parties’ retirement assets, including sharing risks and other plan features, is to divide each plan with a QDRO.

Issues with Offsetting a Pension Decision

Issues with Offsetting a Pension Decision

Ganues v. Ganues, 3rd Dist. Seneca No. 13-18-36, 2019-Ohio-1285 (Decided April 8, 2019).

Issue: Can Husband terminate spousal support for Wife, which he agreed to pay for life in lieu of splitting his military pension, after suffering a significant decrease in income and after the Wife has remarried?

Decision: The Third District Court of Appeals affirmed the trial court’s decision that Husband could not terminate his spousal support obligations. The Husband and Wife were married for almost 30 years. During that time, the Husband served in the military and, after 20 years of service, retired and received his benefits of approximately $20,000 per year. When the parties divorced, the Husband agreed to pay the Wife spousal support until one of them died in exchange for retaining 100% of his military retirement benefits. Six years after the divorce, and after the Husband had a significant decrease in his wages, Husband was over $18,000 in arrears on his spousal support. The Wife was remarried at the time, so Husband sought to have his spousal support obligations terminated. The trial court denied the Husband’s motion to terminate because the parties agreed Wife would receive spousal support for life in exchange for her interest in the military pension, which is a lifetime benefit. However, the Wife was merciful to the Husband and agreed to have his spousal support lowered to $10,000 per year—which represented her share of his military pension.

Observation: This case represents just one of the perils that can arise when trying to offset assets/support payments to avoid dividing a pension. At the time of divorce, the Husband clearly did not want to divide his military pension and believed it was a good idea to pay spousal support instead. However, as he learned the hard way, life circumstances and incomes can change. Instead of simply dividing the military pension, the Husband found himself in arrears and had to pay additional court costs/legal fees just to end up dividing the pension several years later.

How we can help: Our services go beyond just drafting QDROs, we act as advisors to our attorney clients. We can provide you with our expertise, gained over decades on concentrating solely on dividing retirement benefits, to help you formulate the best strategy for your clients. With the proper advice in the beginning of the case, we can help you draft the correct separation language and draft a correct QDRO that will secure the benefit your client gained through negotiations. We can help you with the burden of the technical; arduous; and to the unsuspecting novice, perilous issues of dividing retirement accounts so you can concentrate on custody, child support, and the other litany of immediate issues faced in a divorce.

A QDRO Only Implements a Settlement Agreement; It Cannot Change the Agreement

A QDRO Only Implements a Settlement Agreement; It Cannot Change the Agreement

Reynolds v. Turull, 12th Dist. Butler No. CA2018-10-197, 2019-Ohio-2863 (Decided July 15, 2019).

Issue: Is a QDRO valid that contains a different coverture fraction from the Separation Agreement, even if one of the parties claimed the change was bargained?

Decision: The Twelfth District Court of Appeals affirmed the trial court’s determination that such a QDRO is invalid.  In this case, the parties agreed that the Wife “shall be granted a [QDRO] granting to her fifty percent (50%) of the portions of the Husband’s Pension and 401(k) plans” that were accrued during the marriage.  That Separation Agreement was then incorporated into the final Divorce Decree. 

Wife had a QDRO drafted that calculated the marital portion of the Husband’s pension by using a coverture fraction “the numerator of which [was] the number of years of the marriage, and the denominator of which [was] the number of years of continuous service” since the date of divorce.  The trial court pointed out the formula proposed by the QDRO differed from the division agreed to in the Separation Agreement.  As Hoyt v. Hoyt, 53 Ohio St.3d 177 (1990) and its progeny have established, in Ohio, the marital portion of the pension is generally determined by using the traditional coverture fraction (years of service during the marriage divided by the participant’s total years of service).  As numerous courts have determined, when parties agree to divide the marital portion of a pension, they are agreeing to use the traditional coverture fraction unless otherwise agreed (except for certain pensions such as Taft-Hartley plans).  As the parties in this case agreed to divide the marital portion of Husband’s pension, they agreed to implement the coverture fraction set forth in Hoyt.  By changing the denominator in the fraction to exclude the years of service the parties were married, the trial court found Wife “significantly changed the ratio” in a manner that would benefit her.

In her defense, Wife claimed the parties agreed to employ the new ratio through negotiations.  However, the trial court rejected this argument because the alleged agreement was not reflected in the Separation Agreement, which was incorporated into the final Decree.  As indicated, the Twelfth District affirmed.

Observations: (1) Any agreement regarding the division of a retirement benefit must be included in the Separation Agreement and/or the Divorce Decree.  A QDRO cannot modify the Separation Agreement/Decree. (2) Dividing pension benefits can be perilous to those who are unfamiliar.  How and when a pension is divided makes a drastic difference to the parties.

How we can help: We have noticed an increasing issue with how and when pensions are divided.  As discussed above, pursuant to Hoyt, the default is to divide pensions using the traditional coverture fraction.  However, we have seen multiple cases where the pension was divided on a frozen basis, depriving the alternate payee over 50% of the value of his/her benefit.  We believe the issues with dividing pensions is simple – they are becoming more and more rare so people are unaware of the pitfalls pensions present.  Because of this, we are working on a new package to help attorneys properly divide pension benefits.  This defined benefit package will help attorneys throughout the entire process from recognizing the most beneficial way to divide the pension, to offering testimony at a reduced rate, and a reduction on the price of drafting a QDRO.  We intend to announce this new product in the next few months.  Please stay tuned and be sure to subscribe to stay up-to-date.

Divorce Decrees are Final; Make Sure all Retirement Benefits are Addressed

Divorce Decrees are Final; Make Sure all Retirement Benefits are Addressed

Schaad v. Schaad, 5th Dist. Morgan No. CV05-098, 2019-Ohio-2553 (Decided June 19, 2019).

Issue: Can a court redistribute property/order spousal support at the time of retirement, in a manner that differs from the divorce decree, to make the division “equitable?”

Decision: The Fifth District Court of Appeals determined the trial court did not have the ability to order a division of retirement benefits/spousal support, which were inconsistent with the divorce decree.  The Wife in this case had a pension from the State Teachers Retirement System of Ohio (“STRS”).  The parties divorced in 2007.  At the time of divorce, the decree stated that Husband would receive half of Wife’s STRS pension offset by his social security benefit (this is common in State of Ohio plans such as STRS because the Participant’s social security benefit is reduced by virtue of participating in the plan).  With the social security offset, Husband’s portion of Wife’s STRS was calculated to be 43.27%.

In 2010, Wife retired so both her and Husband began receiving their respective portions of the STRS benefit.  After her retirement, Wife became aware that Husband was receiving veterans benefits, which, when combined with his portion of Wife’s STRS benefit, resulted in Husband receiving a higher monthly income than Wife.  In 2018, Wife filed a motion claiming her STRS benefit was divided improperly, in part, because Husband’s veteran benefits were not addressed in the divorce decree.  Husband argued his veterans benefits were separate property and that is why they were not addressed in the decree.  The trial court granted Wife’s motion and vacated the division of property order dividing Wife’s pension – thereby rescinding Husband’s right to the STRS benefit.  The trial court further ordered Husband to pay Wife spousal support, which was never mentioned in the divorce decree, to “equalize” the parties’ monthly incomes.

On appeal, the Fifth District Court of Appeals found the trial court exceeded its authority in altering the divorce decree by revoking Husband’s right to the STRS benefit and requiring Husband to pay spousal support.  The Fifth District held the trial court was without authority to modify the decree after it had been ordered.  Courts are permitted to clarify divorce decrees; however, they cannot not alter them after they are final.

Observation: Divorce decrees, like executed settlement agreements, are final and binding.  It is vitally important that the language in decrees/settlement agreements are correct and cover all retirement assets.  The post-divorce litigation in this matter could have been avoided by simply addressing the Husband’s veterans benefits in the divorce decree.  If the benefits were addressed, even if simply to state they were separate property, there would have been no grounds for Wife to bring her motion.  Although Husband was eventually successful in this action, he incurred additional costs.

How we can help: We can help you with all stages of litigation to ensure that your client receives his/her correct share of the marital retirement benefit.  We provide assistance in discovery of assets, we provide advice on the most advantageous division of the benefits for your client, we help draft/review division language, we help in negotiating settlements, and we can be your expert witness at trial.

Incorrect Dollar Amount in a Separation Agreement

Incorrect Dollar Amount in a Separation Agreement

Kmet v. Kmet, 8th Dist. Cuyahoga No. 107759, 2019-Ohio-2443 (June 20, 2019).

Issue: Can the trial court alter the premarital portion of a retirement account listed in a final Separation Agreement after it has been discovered said amount is incorrect?

Decision: The Eighth District Court of Appeals determined that the parties were bound by the dollar amount listed in the Separation Agreement as the premarital portion and the trial court could not amend said amount—even after it was discovered that the amount was inaccurate. In this case, Husband and Wife entered into a Separation Agreement that listed the parties’ date of marriage as September 26, 1996. Based upon that date, it was determined that the premarital portion of the Husband’s Thrift Savings Plan or “TSP” (a retirement savings and investment plan for federal employees and members of the uniformed services that is similar to a 401(k) plan) was $28,328.29. During the hearing, the Magistrate specifically asked if the $28,328.29 was the premarital portion of the TSP and the rest of the funds were marital property that were to be divided 50/50. The Wife’s attorney answered in the affirmative.

It was later discovered that the parties had used the wrong marriage date. The Husband and Wife were actually married on September 26, 1995—not 1996. As such, the parties amended the original Separation Agreement to reflect the correct marriage date. However, in the amended Separation Agreement, the parties still had the premarital portion of the Husband’s TSP listed as $28,328.29. After the Separation Agreement was revised and incorporated into a decree, the Wife had an amended QDRO drafted to reflect the correct date of marriage. When the QDRO was prepared, it was discovered that the premarital portion of the TSP account was less than $28,328.29. The Husband refused to sign the QDRO that reflected less premarital property. The parties litigated the matter and the Magistrate held that the amount of $28,328.29 was incorrect as it was based on the incorrect date of marriage and the parties should not be held to that amount. The trial court adopted the Magistrate’s decision.

The Husband appealed, claiming that through the original Separation Agreement, the amended Separation Agreement, and the Wife’s attorney’s representations before the Magistrate, the parties had clearly agreed that the premarital portion of his TSP account was $28,328.29. As such, it was improper for the trial court to alter this agreement. The Eighth District agreed with the Husband and reversed the trial court. It recognized that language in a divorce decree is to be interpreted just like any other contract and words in a contract should be given their “ordinary meaning.” Because the original and amended Separation Agreements explicitly listed the premarital portion of the Husband’s TSP as $28,328.29, the parties were bound by that amount. The trial court could not amend the premarital portion—even if that amount was wrong.

Observation: The language in a Separation Agreement is critical. The wrong language can cost your client hundreds, thousands, or even hundreds of thousands of dollars over a lifetime. In such circumstances, aside from the damage to your client, it is possible you could be on the hook for malpractice or, in the very least, your reputation could be harmed.

How we can help: Our team has decades of experience in dividing retirement assets at divorce. We can help you to correctly value the retirement assets, negotiate a settlement, draft the Separation Agreement, and/or draft the QDRO.

10 Years Means 10 Years—Not 9 years, 364 Days, and 6 Hours

10 Years Means 10 Years—Not 9 years, 364 Days, and 6 Hours

Moon v. Shalala, ND New York No. 93-CV-1267 (October 4, 1994).

Issues: How is the length of a marriage calculated for purposes of determining whether one is considered a “surviving divorced wife” under 42 U.S.C. §416(d)(2)? Does an individual who is just one day short of being married for 10 years count as a “surviving divorced wife” entitled to the Social Security benefits of her former spouse?

Decision: The Federal District Court of the Northern District of New York determined that the length of marriage for purposes of 42 U.S.C. §416(d)(2) excludes the first day of marriage but includes the final day of marriage. The court further determined that for the purposes of being considered a “surviving divorced wife” under 42 U.S.C. §416(d)(2), the parties must have been married for exactly 10 years or longer—even being short one day of 10 years will make the spouse ineligible for benefits.

Pursuant to federal law, to be eligible to receive survivor Social Security benefits of her deceased former spouse, a woman must be married to her spouse for “a period of 10 years immediately before the date the divorce becomes effective.” 42 U.S.C. §402(e); 42 U.S.C. §416(d) (please note, this benefit is not solely for women, there are separate provisions related to a “surviving divorced husband”). In this case, the Husband and Wife were married on December 13, 1969. On December 12, 1979, the court filed the final, granted divorce decree. The Husband died on May 14, 1992. Subsequently, the Wife filed for divorced surviving wife benefits under Social Security. The administrative law judge granted the Wife’s application. He determined that, as a practical matter, the Wife and Husband had been married for 10 years thereby entitling her to a survivor benefit. However, the Appeals Council reviewed the case and determined that the Wife was married one day less than 10 years. According to the Council, when calculating the length of marriage, the first day of marriage is not counted and the last day is counted. As such, the Wife needed to be married to the Husband until at least December 13, 1979 to be eligible for surviving divorced wife benefits. The Appeals Council determined because the Wife was married for one day less than 10 years, she should not receive any benefits related to her former Husband’s Social Security.

The Wife appealed the decision to the Federal District Court of the Northern District of New York claiming that the first day of marriage should be considered toward the 10-year requirement. In the alternative, even if the first day of marriage is not considered, it is inequitable, inapposite to good conscience, and inapposite to the meaning of the Social Security Act to deny her benefits as she was only short of the 10-year requirement by less than a full day (the final decree was filed only 18 hours before the start of December 13, 1979). The District Court rejected the Wife’s arguments and agreed with the Appeals Council, that the federal law is clear—one must be married at least 10 years to receive Social Security benefits from their former spouse. There is no consideration of equity; either the parties were married for 10 years or they weren’t.  

Observation: This case is indicative of how other courts have treated Social Security’s 10-year rule. For the purposes of receiving either survivor benefits or retirement benefits based upon a former spouse, the marriage must have lasted at least 10 years—no exceptions. See James V. Astrue, 519 F. Supp. 2d 193 (D.Mass., 2007). As a DR attorney, you must be aware of the length of the parties’ marriage. Because, as demonstrated by this case, even a few hours can make a huge impact on the benefits your client will receive.

How we can help: We have been in the business of advising DR attorneys on how retirement assets are treated in divorce for over 30 years. We are aware of how DB plans, DC plans, military pensions, state pensions, and even Social Security benefits are treated in a divorce. We are able to advise you on the best course of action for you and your client when it comes to retirement benefits.