Defined Benefit Plan

A true "pension plan" usually calculated by multiplying years of service times "final average compensation" times a defined percentage, usually between 1.5 to 2.5 percent. For an extensive discussion of defined pension plans click on the "tools" listing at the top of the program and then the pink "About These Models" button. Support 2004 contains a monograph about defined pension plans and two calculators for use in the present valuation of these plans.

Most of the time ‘DB’ plans are divided by QDRO. It is often thought that QDROs "solve" valuation issues and, in some sense, they do. But the use of a QDRO also raises many issues, sometimes difficult ones. And I believe these issues will be more common litigation/negotiation matters over the next few years. A few are--

1.Should the non-holding spouse receive the benefit of increasing "years of service" by the holder? The standard rule is "no" but the law appears to allow such a calculation. See Boonstra v. Boonstra, 209 Mich App 558 (1995) and other cases cited in the "tools" monograph. My guess is it would take a pretty powerful case to allow such a calculation.

2. What about advances in "final average compensation" or other gains in the monthly plan amount post divorce? Can/should these be divided, either equally or in relation to a (declining) "coverture" percentage? Colorado and other states are moving to a rule that that uses FAC gains post divorce as a matter of routine, but applied against a declining coverture fraction. See In re Marriage of Hunt, 909 P 2d 525 (Colo 1995) a truly scholarly and thoughtful opinion. Michigan seems to be moving in this direction. Or, at least, it is certain that it is within the court’s discretion to fashion such a result. See Vanderveen v. Vanderveen, 229 Mich App 108 (1998); Skora v. Skora, No. 224765 (December 7, 2001)and Joe Cunningham’s discussion at 31 Family Law Journal No 5 page 7 (May 2002).

3. Form of the payment? This may be sui generis, depending both upon both the plan and the equities of the case. Expert help here is key but my suggestion is, as a default, that the payment be made as a single life annuity as measured by the non-holding spouse’s life with the non-holding spouse having the option of electing payment at the earliest possible retirement date. The former issue may/is likely to impact the value of the pension to the holding spouse. The latter is likely not to.

4. Subsidized Benefits? With any marriage of consequence (more than a short period and children being born) and/or significant duration I would suggest that if there is an early or subsidized benefit that the non-holder share in the benefit in some percentage.

5. Death of Holder? Again, assuming there is a powerful case for sharing (not a short marriage, children being born) it is my bias that if the holder dies before retirement that the non-holding spouse retain the pre-retirement survivorship on the entire plan value.

There is no litigation known to me that examines issues #1-#5 and it is highly recommended that expert help be employed in the process of evaluating these issues, the relative cost/benefits. See Joe Cunningham’s Tax Column in the August/September 1998 MFLJ for a listing of and information concerning these issues vis a vis General Motors QDRO and his article in the 2001 MFLJ "Special Issue" at p. 32. As a broad overview, Joe notes his "defaults" that (a) the alternate payee be designated as a beneficiary of pre and post retirement survivor benefits with respect to the interest divided between the parties, (b) the alternate payee be allowed to draw his or her benefit at the earliest time permitted by law under the plan, (c) that there should be a JOD provision that allows the alternate payee to share proportionately in early retirement subsidies, supplements and plan enhancements such as COLA and (d) that the alternate payee be designated as the beneficiary of any death benefit provided by the plan to the extent necessary to preserve the alternate payee’s interest.

In Hunt the Colorado Supreme Court makes a persuasive argument that advancing FAC (post divorce) should be a routine part of the calculation of an alternative payee’s share. Hunt argues for a "time rule" theory based upon a "marital foundation" that recognizes the post-divorce ebbs and flows in pension value to have a predicate in the marriage, that "the employee spouse’s ability to enhance the future benefits after marriage frequently builds on foundation work and efforts undertaken during the marriage." Id at 534.

Moreover, as pointed out by the Colorado court, there are plans that are front or back loaded, making a "time of the divorce" final average compensation (FAC) problematic from an equitable view. Moreover, Hunt argues the JOD FAC may bear unfavorably upon the employee spouse, if a demotion or salary decline accrues. It is important to note that the coverture fraction declines in the Colorado vision. Assume the parties were married for 15 years and the pension in question accumulated for five years pre- marriage and five years post marriage. Assume the pension value was $ 2000 per month at division (JOD) and $ 2500 per month at the time it could be drawn. As I understand it, using ordinary coverture, the alternate payee would receive $ 750 per month. This is $ 2,000 times 15/20 times .5. In Colorado it would be $ 2,500 times 15/25 times .5 or $ 750 per month. No difference on such numbers. My sense is that the Colorado theory makes more sense. But what makes the most sense to me is that courts have the ability to fashion a relief that comports with equity on the facts presented.

I would suggest that the method to be applied depends upon the facts of the case---the length of the marriage, the parties roles in the marriage, the number of children born, the parties financial prognoses, etc. There are down sides to this result, but there is always a down side when one trusts the judgments of others. This said, this is why the job of judge is very tough. But that doesn’t mean that decisions should be handed down by a very defined set of rules that make it difficult for a court "to do the right thing". And, it is why appellate courts exist---to make certain the party does not go out of bounds.