by David A. Thompson and Jerry Reiss
Part I [February] examined the court’s use of a nonstandard definition of benefit earnings in Boyett and why that creates a greater need for a valuation of benefits than existed before the ruling. It also demonstrated why a coverture (or service) fraction may no longer be used to determine marital and nonmarital interests even if it is applied on the cutoff date. Part II looks at many little-known consequences and contradictions of the ruling. It also shows how other states dealt with the same issues raised by the court and came to an opposite conclusion.
The employer creates inducement to retire with retirement benefits. As stated in part I, when the employee reaches retire-ment age, he or she is working for a reduced rate of pay: The difference between what is received as W-2 pay and what could have been received as retired pay. The employer-created induce-ment to retire can be offset by an employer who wishes to keep key employees by simply providing them regular bonuses or a promotion. Otherwise, the inducement will cause most to retire and will allow the employer to replace them with younger, more energetic employees who will work for less pay. When the spouse does not receive his or her share interest of the retirement pay from the employee when that person defers retirement, the for-feited retirement plan interest that results by not retiring is then used to subsidize the employee’s future wages. It also helps the employer maintain the employee at the reduced effective rate of pay.
The spouse’s argument to payment is even enhanced when the employee is eligible for normal retirement benefits and can con-tinue to accrue additional service-related benefits as well as salary accrual increases.1 When these conditions exist, as is typical with government plans, the relationship future increases have to the already earned benefit is identical to the issue next raised with the early retirement subsidized benefit. When the benefit is mature (meaning that it may be received immediately by retiring), and the employee continues to accrue more monthly benefits, the extra monthly benefits are designed to see that the normal retirement benefit maintains its value. The employee could then receive a benefit today or seek a higher monthly benefit payable at a later date, but having the same value as the benefit that could be received now. When the court fails to provide Koelsch2 relief, the court provides the employee with discretionary control that can be used to defeat its percentage award to the other spouse.
In order to demonstrate this proposition, suppose that a male employee could receive a benefit of $2,000 per month if he separates from service immediately on his 60th birthday. Accept the premise that the benefit has a present value on the cutoff date in the amount of $254,207. The husband continues to work five more years, and with extra service accruals and salary increases, the benefit that is payable on his 65th birthday is $3,100 per month. Based upon the same assumptions used to deter-mine the $254,207 amount, the present value of the higher benefit is $257,641, an improved value of about one percent. Yet the frozen value of the $2,000 benefit under Boyett shrinks to $164,004 if the husband retires at age 65. Accordingly, by waiting five years, the employee changed a 50 percent awarded interest of the marital prop-erty to a 32 percent share. Likewise, if the employee continues to work to age 70, and retires with a $4,000 per month benefit, the 50 percent awarded interest shrinks further to 21 percent.
Early Retirement Subsidies
Early retirement subsidies were defined in part I as bene-fits payable at an earlier than normal retirement date, and had a greater present value than the benefit at normal retirement. One of the problems that some courts have in identifying early re-tirement subsidy benefits as marital property is the failure to distinguish the early retirement subsidized benefit from other early retirement incentive benefits.
An early retirement incentive is any benefit that creates an incentive for the employee to retire. Some incentives are earned while others are not. The early retirement subsidy is earned when certain age and service requirements have been met. Once earned, it cannot be eliminated by plan amendment. 26 U.S.C. §411(d)(6)(B)(i). The earned incentives can be divided as mari-tal property even though their receipt requires the participant to retire. Other incentive benefits are earned only when the employee elects them and retires. If the employee fails to elect the incentive benefits during the narrow election period, the benefit disappears. In contrast, early retirement subsidized benefits are coordinated with other retirement benefits to offer a level floor monthly benefit amount at the same time that it keeps the value of the retirement benefit fairly constant follow-ing the date that the subsidy could be elected.
The earned retirement benefit increases each year for higher salary and one more year of service. This higher benefit is offset by the loss of one year of subsidized benefit. Together, the two benefits equal or exceed the floor amount of monthly benefit and generally maintain their value throughout the period. Therefore, the employee receives substantially the same benefit value by an immediate retirement that will be received at a later retirement date with additional work effort. Both types of incentives can and do appear in government as well as private plans.
Example: An employee-wife is salaried and earns benefits under the GTE salaried pension plan. She is 55 years old with 26 years of service on the cutoff date. Her accrued benefit is $3,100 per month, beginning at age 65. But, as she satisfies the conditions for early retirement, and the conditions for a plan-sponsored early retirement subsidy, she could retire immediately and begin receiving the $3,100 per month benefit.
The present value of her benefit on the cutoff date is $502,795. The trial court does not provide Koelsch relief. The employee-wife works to age 65 and retires with $6,400 per month. The monthly benefit increased on account of additional service and salary increases. But the present value of the benefit, as measured on the cutoff date, decreased to $492,791. The husband was awarded 50 percent of the earned benefit, which under Boyett was the frozen amount of $1,550 per month, 10 years later. Regardless of when the husband elects to re-ceive his share interest, under these facts he would suffer a substantial reduction in benefit because the subsidized benefit is only paid if the wife retires. Accordingly, he receives only $116,904 value of the $502,795 present value marital benefit, or 23 percent.
Facts similar to these were utilized to make one of the six separate arguments to the Supreme Court supporting the DeLoach and Kirkland applications. Under the OUC plan in Boyett, Mr. Boyett was eligible to retire and receive an early retirement subsidized benefit. He satisfied the age and service require-ments necessary for its receipt. It was subsidized because an equivalent benefit amount, which is paid earlier than the normal retirement date, should be reduced by about seven percent for each year by which the actual retirement date precedes the normal retirement date, whereas, the OUC plan reduces that amount by one percent per year (it was two percent at the time of the appeal, but had been liberalized to one percent when the appellant’s brief was written for the Supreme Court).
As a benefit that was almost fully subsidized, its value was substantially greater than the normal retirement benefit. Unlike the GTE example, there was no possibility that the husband could earn service increases in monthly amount because he had passed the maximum number of years that the benefit formula would con-sider. Accordingly, the only way that the monthly amount of benefit increased would be if Mr. Boyett’s salary increased.
In any year, there was a risk that by delaying retirement, Mr. Boyett would die and Mrs. Boyett would receive no retirement benefit. The plan does not pay survivor rights to former spous-es. This risk increased as Mr. Boyett advanced in age. There-fore the husband placed a great risk on the shoulders of the wife and he controlled that risk. The benefit would not increase in value even with salary increases unless Mr. Boyett tracked future average increases exceeding six percent (seven percent minus one percent, plus the risk of mortal-ity). It was likely that the benefit decreased in value as Mr. Boyett defers retirement, and unlikely that it increased.
Mrs. Boyett argued that what the 5th DCA ruled was unfair because, by keeping her monthly amount frozen past the cutoff date, she was penalized by the fiction that Mr. Boyett separates from service on that date, when an actual separation provided her a much more valuable benefit than what the 5th DCA provided. She argued further that in the unlikely event that the share provided under DeLoach improved the benefit’s value, that she is never-theless entitled to share it on account of the risk that she is forced to bear that she might receive nothing if he dies before he retires (citing one of the main arguments of DeLoach).
Boyett and COLAs
The control that the employee is provided under Boyett is further enhanced when the plan offers an automatic cost of living adjustment following retirement, as can be found with most gov-ernment plans, including the State of Florida retirement system. Under the example provided above, the mere delay of retirement by five years can transform a 50 percent award of marital property into an effective award of 32 percent. If the benefit of the example provided above offers a three percent post-retirement COLA increase, the marital benefit that is lost is $2000 per month in the first year, $2,060 per month in the second year, increasing to $2,318.55 per month in the fifth year, and increasing by three percent every year thereafter. Every year following the fifth year, the marital benefit is 15.927percent higher than the benefit that will be paid to the spouse under a QDRO-like order, even though the benefits that the em-ployee receives will include the three percent increase once the employee retires. The 50 percent share of marital benefit drops to an effective 25 percent share after retirement is deferred for only five years.
The Furia Concern
The nonemployee wife argues In Furia v. Furia, 638 A.2d 548 (R.I. 1994), that state law divided the Rhode Island state re-tirement plan unfairly, because an identical awarded percentage applied to an identical benefit paid by a private corporation results in a heftier portion. Does this raise a constitutional question on application of Boyett case law under the Equal Pro-tection of Law Clause of the U.S. Constitution? Without the Koelsch relief, the spouse of every single government worker receives a smaller portion of the same awarded percentage than would be provided had that identical percentage been applied to an identical benefit, except paid by a private corporation. The Rhode Island Supreme Court ruled in Furia that it did not have to address this concern because the problem could be resolved with Koelsch relief.
The court ruled in Boyett that a deferred benefit that increases in monthly amount over what could have been provided on the cutoff date results in a nonmarital contribution reflected in the marital period. But this simply is not true for a benefit that is provided automatic post-retirement COLA increases when the employee retires. Of course, the ruling does not dictate that these increases could not be paid as marital property if the employee actually retires. That doesn’t answer the obvious question as to whether the post-retirement COLA portion of each year’s increase should be divided as marital property when the employee fails to retires.
In the early eighties, many Boyett-like rulings failed to distinguish benefit increases that were the result of cost of living (salary) increases from benefit increases that were the result of promotion.3 That paved the way for 90’s appellate review of that precise distinction wherein many appellate courts later ruled that their state supreme court decisions were not meant to exclude benefit increases that resulted from (salaried) cost of living raises.4 This will not be possible with Boyett because the Supreme Court specifically dealt with each by ruling against DeLoach v. Deloach, and Kirkland v. Kirkland, 618 So. 2d 295 (Fla.1st DCA 1993). DeLoach only permits cost of living benefit increases, whereas Kirkland expands them to deal with the increases that result from promotions.
Argument Presented to Boyett Court
The main issue before the Boyett court was whether precise retirement benefit earnings could be determined on the cutoff date when the benefit would be deferred until some later date. The Boyett court viewed only one component of the retirement benefit, the termination benefit, and ruled that it alone was an accurate measure of what was earned. This narrow view of retire-ment benefits has been popularized as the “bright line theory.” The opposite theory, popularly known as the “marital foundation theory,” disputes that such earnings can be accurately measured, except when the employee retires. It contends that the reason that benefit earnings cannot be accurately measured before re-tirement is because the benefits themselves are built on a foun-dation of efforts. Nothing validates the theory better than the following example which shows the typical way retirement benefits accrue:
Example: A retirement plan provides a retirement benefit of two percent of average salary, multiplied by years of service. At the time of the divorce, the husband/employee achieved an average salary of $3,000 per month, and worked 20 years, all of which occurred during the marriage. The benefit that is divided as marital property under Boyett is $1,200/month, beginning 20 years henceforth (20 x .02 x $3,000/mo). The employee works another 20 years and improves his average salary to $8,000/mo, and retires with $6,400/month (40 x .02 x $8,000/month).
Boyett concludes that the $5,200/month ($6,400/month - $1,200/month) increase was the result of post-marital effort. This is undeniably true! The more important question raised by the marital foundation theory is whether the employee could have achieved the same benefit amount during the 20-year post-marital period that followed, with the same $8,000 average sal-ary, but without the benefit of the 20-year foundation that the marriage laid. The answer to this question is undeniably no! The 20-year period alone produces a $3,200 per month benefit and not a $5,200/month benefit (20 x .02 x $8,000).
It was shown in part I of this article that retirement benefits may consist of many different benefits: 1) The termina-tion benefit, which is a minimum amount that must be provided at termination, and which is the only benefit subject to vesting; 2) early retirement benefits; 3) normal retirement benefits; 4) early retirement subsidies; 5) post-retirement subsidized survivor benefits; 6) post-retirement health benefits; and 7) every optional form of benefit offered by the plan. Every bene-fit except (1) and (7) have special requirements for their re-ceipt, including that a combination of attainment of some age and substantial service be met. These requirements could often not be met without counting the marital years. Yet that is precisely what the “bright line theory” rejects.
Many rulings that endorse the “bright line theory” reject the proposition that the endorsement necessarily means that benefit increases that result from cost of living salary increas-es violate the cutoff rule.5 The courts issuing these rulings believe that the issue is whether such increases should be con-sidered if they result from pay increases connected to promotions that were largely the result of post-marital effort.6 The marital foundation theory deals with that issue, as well, by theorizing that every pay increase is the result of the founda-tional years that preceded it.7 Even a change in career can be seen as resulting from the accumulation of knowledge and the benefit of mistakes made in the earlier years.
Salary-linked retirement benefits are different than salary-linked termination benefits in many ways. Retirement benefits can and often do include many different benefits earned in addi-tion to the termination benefit. Salary-linked retirement bene-fits replace a fixed percentage of an employee’s wages. A termi-nation benefit does not. The Boyett court only divided termina-tion benefits.
The ruling has many consequences. This article addressed but a few. One of these consequences is that a service fraction no longer may be used to determine a marital portion of benefit. This can pose a special problem when the information necessary to determine exact accrued benefits is not available. Employers often do not keep records that are more than 15 years old.
When the employee has control over when the other spouse receives the awarded property, that control can now only be checked with Koelsch relief, which requires the employee to pay the benefit as if that person retired. Unless the trial court imposes this relief, the spouse of a government worker always will receive a smaller portion of an identical benefit with the same percentage applied than the spouse who receives that interest from an ERISA plan. The controlling spouse is then permitted to profit by that control by shifting the court-awarded percentage of property to a much smaller percentage received, with the controlling spouse retaining the other spouse’s loss. The em-ployee also has control over whether the other spouse receives early retirement subsidized property. This is a problem that can be found in private as well as public plans.
Boyett defined the nonemployee spouse’s property interest as a fixed monthly amount without specifying when that interest should be paid. This is not a property right according to the U.S. Supreme Court ruling of Flemming v. Nestor, 363 U.S. 603 (1960), which held that if a portion of a benefit may be reduced or otherwise cancelled, that portion is not a property right. This standard was held to apply to retirement benefits in His-quierto v. Hisquierto, 439 U.S. 572 (1979), issued 19 years later.
Contrasting, the employee has a property right which can be asserted against the employer by simply retiring. If the spou-se’s right to property is controlled by the employee, and can be reduced or cancelled by that control, then the spouse is not provided a property right by the court’s award. The only way that right can be preserved for the spouse is for the court to recognize and award Koelsch relief.
1 See Part I of this article published in the February 2001 issue of the Bar Journal for a discussion of the topic.
2 Koelsch v. Koelsch, 713 P.2d 1234 (Ariz. 1986).
3 Berry v. Berry, 647 S.W.2d 945 (TX 1983); and Koelsch v. Koelsch, 713 P.2d 1234 (Ariz. 1986).
4 See Cooper v. Cooper, 808 P.2d 1235 (Ariz.Ct.App. 1990), among other appellate rulings in that state that came to the same conclusion, and Sutherland v. Cobern, 843 S.W.2d 127 (TX.Ct.App. 1992) among other appellate rulings in that state that came to the same conclusion.
6 Id. Also see Berry v. Berry, 647 S.W.2d 945 (TX 1983); Koelsch v. Koelsch, 713 P.2d 1234 (Ariz. 1986); Gemma v Gemma, 778 Nev 429 (Nev. 1989), which takes the intermediate position that there are exceptional circumstances when the marital foundation theory does not work and places the burden on the employee to offer proof when it does not.
7 See Hunt v. Hunt, 909 P.2d 525 (Colo. 1995); In re Marriage of Adams, 134 Cal.Rptr. 298 (2dDist.Ct.App. 1976); Majauskas v. Majauskas, 463 N.E.2d 15 (N.Y. 1984); Rothbart v. Rothbart, 677 A.2d 151 (NH 1996); Jerry L.C. v. Lucille L.C., 448 A.2d 223 (Del. 1982); and Wis-niewski v. Wisniewski, 675 N.E.2d 1362 (Ill. App. 4th. Dist 1997), among many other foreign appellate rulings.
With offices in DeLand and Clearwater, Jerry Reiss is certified by the Society of Actuaries and licensed by the DOL and IRS. He is a nationally recognized author on the subject of valua-tions. Previously articles appeared in columns sponsored by the Trial Lawyers Section and Family Law Section in The Florida Bar Journal.
David Thompson received his law degree from Syracuse University and received a master of laws, taxation, degree from Temple University and works in the life and health insurance industry.
This column is submitted on behalf of the Family Law Section, Jeffrey P. Wasserman, chair, and David L. Manz and Susan Chopin, editors.