Diffenderfer Revisited: Is the Double-dipping Quagmire Still Alive?
In December 2005, the entire New York City transportation system was shut down as a result of a strike by transit workers. One of the key issues of that strike was an attempt by workers to protect their entitlement to retirement benefits. The New York transit workers’ strike, as well as other recent labor disputes, exemplify the high emotions associated with these benefits. Family law attorneys know all too well the attachment that participants have to their retirement plans. This emotional attachment, as well as a lack of understanding of the nature of retirement plans, has led to confusion as to how retirement benefits are to be treated with respect to equitable distribution and alimony. The confusion is demonstrated by Diffenderfer v. Diffenderfer, 491 So. 2d 265 (Fla. 1986) , and what I have called the “ Diffenderfer double-dipping quagmire.”
Types of Retirement Plans
An analysis of the Diffenderfer quagmire must begin with a general knowledge of the three main types of retirement plans.
Defined Contribution Plans. A defined contribution plan does not provide any guaranteed benefits to the participants. Instead of a guaranteed benefit, the plan establishes individual accounts for the participants based solely on what has been contributed along with any interest and investment earnings or losses attributable thereon, as well as forfeitures from the accounts of other participants which have been allocated to the account.1 Examples of defined contribution plans are profit sharing plans, money purchase pension plans, §401(k) plans, and employee stock ownership plans. Defined contribution plans are analogous to savings accounts because participants’ rights to benefits are limited to the balance in their accounts. As the employees of Enron sadly discovered, if the account is worthless, then the participant will receive nothing.
Defined Benefit Plans. A defined benefit plan “promises” the participant a specific benefit at the time of retirement. The amount of the benefit is usually determined by the use of a formula that includes years of service, date of retirement, and salary. There are no separate accounts maintained for participants. In order to ensure that there are sufficient assets to pay retirement benefits, defined benefit plans are actuarially funded on an aggregated basis utilizing various assumptions. In other words, contributions are not made on behalf of individual participants.2
Individual Retirement Accounts. Individual retirement accounts (IRAs) are trusts created and organized in the United States for the exclusive benefit of an individual or his/her beneficiaries and are governed by §408 of the Internal Revenue Code. IRAs are similar to defined contribution plan accounts.
The History of the Quagmire
Once upon a time, when there was no equitable distribution statute, a question existed whether retirement benefits should be considered a marital asset, or whether they should be treated as a source of income for purposes of determining support. In 1986 (approximately two years before the passage of the equitable distribution statute), the Florida Supreme Court in Diffenderfer held “that a spouse’s entitlement to pension or retirement benefits must be considered a marital asset for purposes of equitably distributing marital property.”3 The Diffenderfer court also held that retirement benefits could be considered as a source of income for the payment of support. The court, in dicta, explained “[o]bviously, however, injustice would result if the trial court were to consider the same asset in calculating both property distribution and support obligations. If the wife, for example, has received through equitable distribution or lump sum alimony, one-half of the husband’s retirement pension, her interest in his pension should not be considered as an asset reflecting his ability to pay.”4 This statement appears clear on its face and is consistent with the concept that courts should equitably divide the marital estate and then determine the need and ability to pay support.
A problem arose, however, as Diffenderfer was disseminated throughout Florida. That problem was in the form of the Westlaw/CD-Rom versions of the reported case. There was a discrepancy between the official reported version of the case and the Westlaw/CD-Rom version. In the Westlaw version, instead of the language reflected above that the court should not consider the wife’s interest in the husband’s pension when considering the husband’s ability to pay, it stated the following: “If the wife, for example, has received through equitable distribution or lump sum alimony, one-half of the husband’s retirement pension, his interest in his pension should not be considered as an asset reflecting his ability to pay.” That little mistake resulted in a line of cases that held that once retirement benefits were divided, they could never be considered again for the purpose of determining support. It was as if the pension benefit went into a lockbox, never to be touched again. It did not matter if you were dealing with defined benefit or defined contribution plans; if you were dealing with parties who were already receiving benefits, or if you were dealing with initial or modification actions. The answer was always the same. Once the retirement benefits were divided, they could not be considered as a factor when dealing with support.
Throughout Florida, plan participants were jumping for joy having been armed with a new ending to the Diffenderfer saga. One of those happy participants was Jerome Rogers. In Rogers v. Rogers, 622 So. 2d 96 (Fla. 2d DCA 1993)(Rogers I), the court distributed Rogers’ pension to him and offset the value of that pension by awarding the wife the marital residence. At the time of the divorce, Rogers was not receiving any pension income. Several years later, at age 56, Rogers decided that it was time to retire, particularly since he was receiving the income from the pension that was awarded to him. He then filed a petition for termination of his alimony obligation.5 The trial court granted Rogers’ petition to terminate alimony, but the appellate court in Rogers v. Rogers, 746 So. 2d 1176 (Fla. 2d DCA 1999)(Rogers II), reversed the trial court’s decision and held that the husband’s retirement was unreasonable under the circumstances.6 The court was now faced with a dilemma. On one hand, it had held that termination of alimony was improper and on the other hand, it had interpreted Diffenderfer to mean that you could not consider Rogers’ pension income as a source of alimony. The court, in order to arrive at some equitable result, simply held that a court can look at all assets and income (including pension income), when determining the former husband’s ability to pay an arrearage. The court, in carving out this exception to the lockbox, stated “[a]lthough Mr. Rogers may shield his retirement benefits as a source of payment of current alimony, he cannot shield these payments concerning the arrearage. The pension income may thus be considered income available for enforcement of the alimony, should no other source be found.”7
Rogers II illustrates and foreshadows difficulties the courts would encounter, after 1999, when trying to apply a bright-line rule in determining whether previously awarded retirement benefits should be considered in an action for modification of alimony.
In March 2000, the Fourth DCA decided Lauro v. Lauro, 757 So. 2d 523 (Fla. 4th DCA 2000). In Lauro, the husband, at the time of the parties’ divorce, was receiving pension income. The wife received 50 percent of the pension and as a result was entitled to the immediate receipt of $1,000 per month. The trial court applied Diffenderfer the same way that Rogers II applied Diffenderfer and stated that in determining the wife’s needs in connection with an award of permanent alimony, it could not consider the pension that she was receiving. The district court reversed the trial court and focused its analysis on F.S. §61.08(2)(d), which requires the courts to consider the financial resources of each party, including the nonmarital and marital assets and liabilities distributed to each, as well as F.S. §61.08(2)(g), which requires courts to consider all resources of income available to either party. Moreover, the court correctly interpretedthedicta in Diffenderfer regarding the consideration of the same asset in calculating both property distribution and support as nothing more than what is reflected in F.S. §61.075(8): The determination of need and ability to pay with respect to support should be made after equitable distribution. It was clear that after Lauro, the lockbox was becoming unlatched. This became even more evident when the Third DCA reviewed a case with facts that were almost identical to Rogers II.
Mr. Acker in Acker v. Acker, 821 So. 2d 1088 (Fla. 3d DCA 2002), was a pilot for Delta Airlines when the parties divorced in 1993. At the time of their divorce, the husband received his interest in his pension and the wife received, as an offset, substantial assets which included the husband’s 401(k) plan and individual retirement accounts. In addition, the parties agreed that the wife would receive $3,000 per month in permanent periodic alimony and that they would revisit the issue of alimony when the husband retired. Three years later, Mr. Acker accepted early retirement and received a lump sum of $1,000,000 and $7,803 per month with respect to his pension. Acker, like Rogers before him, moved to terminate his alimony obligation. The trial court denied Mr. Acker’s petition which resulted in the appeal.
The Third DCA affirmed the trial judge’s decision by utilizing a two-part analysis. First, the court pointed out the error in the Westlaw/CD-Rom version of Diffenderfer and how that error might have impacted subsequent decisions that held a court could not consider pension benefits when determining support once the benefit had been equitably divided. Second, the court pointed out that after Diffenderfer, the legislature enacted the equitable distribution statute and substantially amended the alimony statute. The equitable distribution statute states in unambiguous terms that marital assets include benefits accrued during the marriage in pension plans. Nowhere in the equitable distribution statute is there an indication that the court has an option to treat the benefits as property or as a source of support. The legislature, by passing F.S. §61.075, requires that the benefits be treated as property. The Acker court, like the Lauro court, also emphasized that the statute mandates a consideration of alimony after equitable distribution and that the alimony statute calls for a consideration of the financial resource of the parties, which includes the marital and nonmarital assets distributed to them.
Judge Gersten, in a very strong dissent, focused on precedents and what he believed was Diffenderfer’s proscription of considering retirement benefits in calculating property distribution and support obligations (prohibited double-dipping).8 Judge Gersten also attempted to distinguish initial dissolution proceedings from modification proceedings. Although the judge correctly stated that the treatment of pension benefits depends on the type of benefit and the method of division, he did not clearly state why the statutory framework of F.S. §61.075 and §61.08 should be applied differently in initial and modification actions. In addition, although he emphasized that the wife had received substantial assets at the time of the dissolution that had greatly appreciated, Judge Gersten did not explain why this should not be considered in the modification action along with the husband’s pension income.
The Third DCA certified conflict between the Acker decision and the other decisions that had applied Diffenderfer. The legal community, for almost three years, waited in anticipation of how the Florida Supreme Court would resolve the 19-year-old “quagmire.”
On April 14, 2005, we received our answer in Acker v. Acker, 904 So. 2d 384 (Fla. 2005). The Acker court framed the issue before it as “[w]hether pension benefits equitably distributed to a party may be considered in determining the proper amount of alimony.”9 The court then stated that pension benefits can be so considered. The analysis utilized by the Florida Supreme Court in its very succinct opinion is the same as that utilized by the Third and Fourth DCAs in Lauro.
Justice Bell’s concurring opinion in Acker addressed the double-dipping quagmire head-on. The concurring opinion contains the following salient points:
The Florida equitable distribution statute’s enumeration of marital assets includes pension benefits accrued during the marriage. A court cannot treat this asset as property or income. If a court treated the accrued benefit as merely a factor in determining support, it would effectively convert the pension benefit into a nonmarital asset.
Diffenderfer’s “precise” holding was that retirement benefits must be considered as a marital asset. The interpretation of Diffenderfer that a court has an option to treat the retirement benefit as income or property would make the Diffenderfer decision internally inconsistent.
The factors utilized in determining the amount of and entitlement to alimony (F.S. §61.08(2)) are the same in an initial action and a modification action.
The double-dipping concern is not applicable when alimony is determined on the basis of need and ability to pay.
Concerns regarding double-dipping are more appropriately addressed by the legislature than the courts. The concurring opinion noted that New Jersey passed a statute to preclude the consideration of income generated by a retirement benefit when determining alimony if that benefit was treated as an asset for equitable distribution purposes.
A bright-line rule that prevents consideration of the pension benefits that are being received ignores the fact that some of the benefits might have accrued after the time the benefits were equitably divided. Justice Bell, in addressing the dissent’s concern that consideration of the benefits in a postjudgment modification action is equivalent to a redistribution of property, correctly stated, “Allowing a court to look at Mr. Acker’s pension benefits when determining his ability to pay will in no way ‘redistribute’ the rights to the pension plan. Consider, for instance, if Mr. Acker also had a pension plan that had accrued entirely in the years after the parties’ marriage was dissolved. Would allowing a court to look to the benefits received from that pension, in determining Mr. Acker’s ability to pay alimony somehow transfer the right to that pension to Ms. Acker?”10
Is the Quagmire Still Alive?
Has the double-dipping quagmire been resolved now that the Florida Supreme Court has reexamined Diffenderfer by way of Acker? The answer to that question, in the author’s opinion, is no. Although the Florida Supreme Court has correctly held that a court can consider equitably divided pension benefits when determining the amount of alimony, the court did not provide any meaningful guidance as to how those benefits are to be considered. The same confusion regarding retirement benefits still exists today as when Diffenderfer was decided. For example, attorneys and courts have little difficulty in dealing with bank accounts or securities that have been equitably divided when determining the amount of alimony. The court will look at the income that flows from these assets. Similarly, attorneys and courts have little difficulty in dealing with parties’ interests in defined contribution plans, such as 401(k) plans, because separate accounts are maintained for each participant.
The confusion often arises when dealing with defined benefit plans, such as pensions. The traditional method of valuing pensions in Florida when a participant is not presently receiving benefits is based on a legal fiction. It assumes that the participant terminates employment at the time of divorce and defers receipt of the pension benefits until normal retirement age. Those benefits are then discounted to present value based on assumed interest rates and actuarial assumptions.11 However, the value of the benefit that the participant receives at the time of retirement will be different from the value at the time of divorce. The value could be greater as a result of postdissolution years of service and/or early retirement subsidies.12 The value could be less because of postdissolution reductions or termination of benefits. Courts and attorneys need to be cognizant of these factors when considering support after equitably dividing defined benefit plans.
I have spoken to many attorneys who still feel, after Acker, that considering previously divided retirement benefits when determining alimony constitutes impermissible double-dipping. These attorneys believe that, since the value of the defined benefit plan is based, in part, on discounted future cash flow, that you cannot consider the cash flow when the participant starts to receive it. There are several weaknesses with this argument. First, a defined benefit plan is not the only asset which is valued, to some degree, on future cash flow. For example, the valuation of commercial and residential rental property is based on discounted cash flow. Does that mean that the rental income should not be considered when determining support? The answer is obviously no. Second, F.S. §61.30(2)(a) requires that pension income be included in gross income when computing child support. It would be contradictory to consider pension income when computing child support and not consider it when determining alimony.
It would be a mistake to amend F.S. §61.075 and §61.08 in order to establish a bright-line rule that would prohibit consideration of equitably divided retirement benefits when determining alimony. Well reasoned decisions can be reached without the use of these bright-line rules. Judge Gersten, in his dissent in Acker, pointed out that the assets Ms. Acker had received at the time of the divorce were substantial and had more than doubled. The trial court could have reached a conclusion that Ms. Acker was not entitled to alimony by simply considering the assets that were distributed to her (her financial resources) and determining that there was no need for continued support.
Attorneys and courts also need to be aware that not all assets are created equally. For example, attorneys often counsel their clients to accept less than 50 percent of the marital estate if the client receives more than 50 percent of the liquid assets because “cash is king.” Inherent in this advice is that liquid assets are different from nonliquid assets. The party who is receiving the marital home in exchange for the value of a pension which is presently being paid out to the other party is not really receiving “equal value” because of the difference in liquidity. F.S. §61.08(2)(d) recognizes that one of the factors in determining alimony is the consideration of the marital and nonmarital assets distributed to each of the parties. That factor should be read broadly in order to consider the nature of the assets distributed, e.g., liquid or nonliquid, when ascertaining need and ability to pay.
In summary, attorneys and courts should not be handcuffed by restrictive rules that prohibit careful and creative analysis and consideration of distributed retirement benefits when deciding issues pertaining to alimony. We should not forget the statement found in Diffenderfer that “we decline to impose any rigid rules and leave the doing of equity to the trial court.”13 Equity can be accomplished by utilizing the existing framework which is found in F.S. §61.075 and §61.08.
1 29 U.S.C. 1002(34).
2 Failure to distinguish between funding defined benefit plans and defined contribution plans has resulted in problems when courts have dealt with division of benefits by way of a deferred distribution, e.g., QDRO. See Richardson v. Richardson, 900 So. 2d 656 (Fla. 2d D.C.A. 2005), citing Boyett v. Boyett, 703 So. 2d 451 (Fla. 1997), in which the court held that it could not consider postdissolution contributions when dividing a defined benefit plan by way of a QDRO. This holding fails to recognize that there are no specific contributions made on behalf of individual participants when dealing with defined benefit plans.
3 Diffenderfer, 491 So. 2dat 270 (Fla. 1986) (emphasis added).
4 Id. at 267-268.
5 Mr. Rogersinitially believed that the termination of alimony was automatic.
6 See Pimm v. Pimm, 601 So. 2d 534 (Fla. 1992).
7 Rogers, 746 So. 2d. at 1180 (Fla. 2d D.C.A. 1999).
8 Diffenderfer’s language is actually very broad and is not limited to retirement benefits (“Obviously, however, injustice would result if the trial court would consider the same asset in calculating both property distribution and support obligations.” 491 So. 2d. at267).
9 Acker, 904 So. 2d at 388 (Fla. 2005).
10 Id. at 393.
11 See Boyett v. Boyett, 703 So. 2d 451 (Fla. 1998).
12 The value of what Mr. Acker received at the time of retirement was substantially greater than the value of his pension benefits at the time of the divorce.
13 Diffenderfer, 491 So. 2dat 270 (Fla. 1986).
Robert M. Schwartz practices with the law firm of Miller, Schwartz & Miller, P.A., in Hollywood. He is board certified in marital and family law, and is also a certified public accountant. Mr. Schwartz has lectured on issues with respect to division of retirement plans in dissolution of marriage actions.
This column is submitted on behalf of the Family Law Section, Jorge M. Cestero, chair, and Charles Fox Miller, editor.
