Month: September 2019

How the Certainty of Death Causes Uncertainty in Dividing Retirement Benefits

How the Certainty of Death Causes Uncertainty in Dividing Retirement Benefits

As the oft-quoted line attributed to Benjamin Franklin goes, “In this word nothing can be certain, except death and taxes.”  In dividing retirement benefits at divorce, practically all interested parties are aware of and discuss tax issues.  However, are you properly addressing the issues that can arise if one of the parties dies unexpectedly?  After all, death is inevitable and it can have a significant impact on the benefits, if any, your client receives.

The issue of survivorship is especially important in regard to dividing a defined benefit plan in divorce.  A pension is meant to a benefit for life.  As such, the benefit ends upon death.  If the separation agreement/divorce decree and/or the order dividing the pension does not properly address the issue of survivorship, then your client could receive nothing.

There are two big questions of survivorship that need to be addressed when dividing a defined benefit pension at divorce: What happens if the participant dies prior to commencing the benefit and what occurs if the participant dies after commencing the benefit?  For the first question, that matter is generally addressed by naming the alternate payee as a beneficiary for a Qualified Preretirement Survivor Annuity (QPSA).  The second question is generally addressed by dividing the benefit using a separate interest approach (if the plan allows for such an approach), which adjusts the alternate payee’s benefits to his/her life so the participant’s death has no effect on the payments.  In the alternative, if the benefits are divided on a shared payment basis, then the alternate payee needs to be named as a beneficiary of the Joint and Survivor Annuity (J&S) to continue benefits after the participant’s death.  Each of those solutions then brings on different questions such as can the participant name a subsequent spouse as another beneficiary for QPSA and/or J&S?  If so, how much of a benefit can the subsequent spouse receive? 

Aside from defined benefit plans, there can be issues with 401(k) plans and Individual Retirement Accounts if a party dies unexpectedly.  If the money has not been segregated from the account and the participant dies, you may have to sue the estate to attempt to get the money your client is owed.  Further, if the participant forgets to change his/her beneficiary on the account after divorce, then the former spouse may be getting a windfall that is difficult to claw back.

It is important to consider and properly address issues of survivorship when dividing retirement benefits in divorce.  This is a complicated subject, one entire chapter of the Dividing Pensions in Divorce, the treatise authored, in part, by our own Dave Kelley, is dedicated to the issue of survivorship.  Further Dave Kelley and James Myers from our office wrote an article on how Ohio courts are treating the issue of survivorship titled “Survivorship: Inherent Right or Ancillary Asset in a Pension?” that will be published (or has been published depending on when you read this post) in the September/October issue of the Domestic Relations Journal of Ohio. Although survivorship issues can be complicated, we can help.  Reach out to us and we can point you in the right direction or set you up with a service to aid you.  We’re here to help you through the entire divorce process to help protect your clients’ interests in retirement benefits.

Present Values, Trial Court Discretion, and the Value of Expert Testimony

Present Values, Trial Court Discretion, and the Value of Expert Testimony

Forman v. Forman, 3rd Dist. Marion No. 9-13-367, 2014-Ohio-3545 (August 18, 2014)

Issue:  Did the trial court abuse its discretion by accepting the expert witness’ opinion that using the Pension Benefit Guaranty Corporation (PBGC) market-based approach was the most equitable method to value pension benefits?

Decision:  The Third District Court of Appeals held that the trial court did not abuse its discretion.  In determining the present value of a defined benefit plan, or other benefits that are similar to a defined benefit plan such as social security, there are two commonly accepted methods.  One method is referred to as the “Internal Revenue Code” or “IRC method.”  This method values benefits using the minimum lump sum cash out that a participant can receive, pursuant to the provisions of the Internal Revenue Code, from the plan at the time of divorce. 

The second method of determining the present value of a defined retirement benefit is referred to as the “PBGC method.”  The PBGC, a government entity that oversees and guarantees a certain level of benefits of qualified defined benefit plans, commissions a life insurance council to check for the market values of annuities with dozens of insurance companies.  The purpose of this review is to assess a market value for replacing defined retirement benefits.  Under the PBGC method, the present value of the retirement benefit is determined by using the PBGC data to assess what it would cost to receive a similar benefit through an annuity in the market.

In this case, at the trial court, Dave Kelley from our office testified that the PBGC method should be used to value the defined benefit plan and the social security benefits at issue.  The opposing witness advocated for the IRC method.  As was explained to the trial court, the IRC method always results in a lower present value.  As such, it results in a lower benefit to the alternate payee.  In this case, the difference in the valuation was approximately $220,000.  The trial court accepted Mr. Kelley’s recommendation and used the PBGC method to value the benefits at issue as it found said method was the most equitable method of valuation for the case.

On appeal, it was argued that the trial court abused its discretion in accepting Mr. Kelley’s opinion.  In response, the Third District stated, in part:

We conclude that the trial court did not abuse its discretion in determining that Kelley’s valuation of [Defendant’s and Plaintiff’s] pension and retirement benefits was the most equitable.  The trial court heard the testimony of Kelley and [William] Napoli [the other expert witness] regarding the PBGC and IRC valuation methods used to calculate the present value of [Defendant’s] STRS pension benefits. . . .  The fact that Kelley’s valuation of [the] STRS retirement benefits resulted in a larger amount than Napoli’s valuation does not amount to an abuse of discretion.

Observation:  Be aware of what valuation method is used to determine a present value of a defined benefit retirement plan or a similar benefit.  The difference between the PBGC method and the IRC method can be significant.

How we can help:  We have been calculating the present value of defined benefit plans for over 30 years.  As demonstrated in this case, if our valuations are questioned, we are always willing to back up or valuations in court through expert testimony.

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.