Methods for the Disposition of Retirement Benefits
Retirement benefits earned during a marriage’s community period, whether vested or nonvested, matured or immature, are subject to disposition. The three basic methods of disposition are “never,” “now,” and “later.”
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Never: the Oops Approach
- Formerly Difficult to Remedy or Disastrous
Under this method, the issue of the community interest in retirement benefits is not pursued; however, Smith v. Lewis [1975] and Gorman v. Gorman [1979] are examples of the risk involved. Henn v. Henn [1980] is authority for the use of a separate legal action to enforce division. However, the trial court can refuse relief as to payments that have already been received because the claim for the benefits was delayed. A separate action is the only remedy when there are no grounds to reopen the dissolution action. If the oversight is discovered within six months of judgment and was the result of a “. . . mistake, inadvertence, surprise or excusable neglect . . .,” relief may be under Family Law Code 2556. After six months, judgments may be set aside for lack of jurisdiction or extrinsic fraud. Failure to disclose facts affecting valuation is not extrinsic fraud. However, if the existence of the pension was concealed, the property portions of the dissolution may be set aside. However, Modnick [1983] held if the existence of the pension was concealed, the property portions of the dissolution may be set aside. Note that a separate legal action is in civil, not domestic, court. As such, a direct pay order through a QDRO would be impossible.
- Family Law Code #2556
Family Law Code #2556 allows a simple post-judgment motion to “divide an omitted or unawarded community asset unless the court finds upon “good cause” that the interests of justice require an unequal division of the asset.” The civil partition cases lend guidance concerning “good cause.” Laches (“waited too long”) have been found as to past payments where a non-employee spouse knew but did not act for 13 years — Bowman [1985]. However, time elapsed is not as important as the inequities caused by the delay. Laches was defeated where wife found out only one year before filing after 12 years of payments — Huddleson [1986]. Because an asset was known or mentioned is not a barrier to its division — Miller [1981] and Giovannoni [1981].
- Unvested, Pre-Brown Pensions
Brown [1976] held that an Unvested pension is community property “to the extent that such rights derive from employment during coverture.” Because the pension was not mentioned and not vested prior to Brown [1976] formerly meant that the pension was beyond the reach of a later partition action — Shaver [1980]. However, it is likely that Civil Code #4353 (now Family Law Code #2556) has brought retroactivity to the division of pensions, especially when the fairness of the action can be demonstrated.
- Formerly Difficult to Remedy or Disastrous
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Now: Cash-Out or Actuarial Present Value
Under this method, the court assigns the entire pension to the employed spouse and awards other community assets, equal in value to the community interest in the retirement benefits, to the nonparticipant spouse. Under the actuarial present value method, disposition of retirement benefits is a three step process:
- Valuation:
Determination by an actuary of the actuarial present value of the total retirement benefits;
- Apportionment:
Apportionment of this value between separate and community property interests; and
- Division:
Award of retirement benefits to the participant spouse, and award of other community property, equal in value to the community interest in the retirement benefits, to the nonparticipant spouse. If other community property is insufficient to offset the community’s interest in the retirement benefits, two other options are available:
- Payment by Installments
The offset can be paid in installments out of the participant spouse’s future earnings, or
- Payment by Separate Property
The offset can be paid from the participant spouse’s separate property.
- Payment by Installments
- Valuation:
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Later: Retained Jurisdiction
- Deference to a Future Court – Open Ended Reservation
Under this method of disposition, the court does not determine the extent of the community interest at the time of marriage dissolution; rather, it defers the decision to establish the method of disposition to a later court. A later court can either divide the benefits in kind or assign the entire pension to the participant spouse and award other community assets equal in value to the nonparticipating spouse. However, as a practical matter, the other community assets necessary to award to the nonparticipant spouse generally have been disposed of at the time of the trial. See Carl [1977], approving this method and Bergman [1985] criticizing Carl.
- Descriptive Division Formula
Under this method, the court defines a formula for the future apportionment of the retirement benefits. This formula determines the portion of the retirement benefits earned during the marriage and before separation and awards the nonparticipant spouse a share, generally one-half. However, see Footnote 9 of Waite [1971]. Freiberg [1976] and Fithian [1974] describe the descriptive division formula approach.
- Deference to a Future Court – Open Ended Reservation
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Selecting the Approach
- Cash-Out – Consider Feasibility
In Skaden [1977], the California Supreme Court noted that a trial court will of necessity be called upon to make an assessment of the relative feasibility of present valuation before choosing between that approach and the expediency of reserving jurisdiction.
- Cash-Out Preferred
Phillipson v. Board of Administration [1970] held that the preferable mode of division would be to award the pension rights to the participant and property rights of equal value to the [nonparticipant] spouse. In Gillmore [1981], the court stated “In the past, this court has encouraged trial courts, if feasible, to award all pension rights to an employee spouse, compensating the non-employee spouse with other community property of equal value.” In Hatch [1985] Justice King held that in short marriages, it may be preferable to cash-out the non-employee spouse.
- Cash-Out to Keep Children in House
Cash-out method supported in Marx [1979] and Emmett [1980] to allow the non-employee spouse to remain in house with children.
- Cash-Out a Recognized Alternative
Kasper [1978] held that the cash-out method is a proper method of disposition.
- Cash-Out Uncertainties Limited to Vesting or Maturation
Brown [1976] held that if the court concludes that because of uncertainties affecting the vesting or maturation of the pension that it should not attempt to divide the present value of pension rights, it can instead award each spouse an appropriate portion of each pension payment as it is paid. If the court can satisfy itself concerning the vesting or maturation of the pension, it should attempt to dispose of the pension benefits using the actuarial present value method and award all pension rights to the participant spouse, compensating the nonparticipant spouse with other community property of equal value. Only when the court cannot satisfy itself concerning the uncertainties of vesting or maturation of the benefits should it employ the retained jurisdiction approach to disposition.
- Double Counting or “two bites of the apple”
White [1972] held that pension income is available for support even if pension is received in exchange for other assets. A stipulation that income from retirement not be considered in future spousal support modifications might be binding pursuant to FC #3590.
- Court Discretion
The trial court has discretion in which approach to use. The appellate courts generally uphold the trial court’s choice and are loath to find abuse of discretion by the trial court.
- Plan Should be Valued
Generally, the pension plan asset should be valued, regardless of the approach to disposition ultimately selected, Bergman [1985]. Immediate payments (matured benefits) will be actuarially determined, Shattuck [1982].
- Objections to Retained Jurisdiction
Many objections can be made to the court’s retaining jurisdiction over a pension. Joinder requires substantial legal services for protection from later events (including selection of benefit-reducing options, notification on retirement, blocking withdrawal of funds, insuring direct payment of the proper percentage amounts, allowing for later disability, etc.). Also, today’s reserved jurisdiction may be tomorrow’s Gillmore [1981]. Gillmore held that when the benefits mature, the participant spouse may continue to work, but the nonparticipant spouse has an immediate right to his/her share. While the nonparticipant spouse may want an immediate disposition when the participant spouse is eligible to retire, the participant spouse may not have the funds to pay although the funds would have been available in the form of other community property at the time of the marriage dissolution. Note: Castle [1986] held non-employee spouse can elect to receive benefits based on a hypothetical retirement date as of the date of the hearing dividing the pension, not a date between hearing and actual retirement.
- Cash-Out – Consider Feasibility
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Hybrid Approaches
- Cash-Out Part and Reserve Part
The cash-out and retained jurisdiction approaches for the disposition of pension benefits are not mutually exclusive. They can be used in combination. Part of the disposition can be by cash-out and part by retained jurisdiction. Under the cash-out approach, the community interest is expressed in dollars. Under the retained jurisdiction approach, the community interest is expressed in years. Under the time rule method of apportionment, each year of community interest is of equal value. For example, if a community period of 12 years develops a community interest in pension benefits of $120,000, then each year of community interest is worth $10,000. If other community assets, for example, the community home, are valued at $80,000, then eight years of community interest in the pension benefits can be traded (‘cashed out’) for the community interest in the home and jurisdiction retained over the remaining four years of community interest in the pension benefits.
- Reserve on One Plan Cash-Out Another
Bergman [1985] indicated that the trial court may reserve jurisdiction over one plan and cash-out the other plan.
- Cash-Out Both
However, Shattuck [1982] held that the actuarial present value of the community interest in wife’s plan which was not mature would be used as an offset to the actuarial present value of the community interest in husband’s matured plan.
- Cash-Out Part and Reserve Part