Defined benefit pension plans are complex retirement plans, and the division of these benefits in a divorce can be difficult. A Florida Supreme Court ruling in 1998 made this even more complex. The ruling changed the way benefits are defined, making it harder to determine a fair division of property. This means that both spouses could suffer unless a thorough investigation is done to understand all the benefits and conditions attached to them. The ruling also has consequences, like allowing an employee to change a 50/50 division of property to a 75/25 split just by delaying retirement for five years. This is important because with uncertainties around Social Security, errors in dividing benefits from other plans may not be tolerated in the future. Defined benefit plans provide employees with a guaranteed retirement benefit, tied to the cost of living, based on their average earnings over their career. Before the 1970s, retirement benefits were often only paid to employees who worked for the company their whole career, and the rules for earning these benefits were not fair. The Employer Retirement Income Security Act of 1974 changed this by setting new standards to ensure that employees received the benefits they were promised. This meant that benefits had to vest quickly, and employers had to follow specific rules for earning benefits. This also led to competition between employers to improve their retirement plans to meet these new standards. The Boyett ruling says that accrued benefits in a retirement plan are only the minimum amount an employer has to pay if an employee quits on a certain date. It doesn’t reflect how much of the retirement benefits have been earned if the employee keeps working. Accrued benefits are termination benefits, which are paid if the employee doesn’t meet the conditions for retirement when they leave the job. Actuaries, who are responsible for funding the plans, need to understand this distinction to make sure employees get the benefits they were promised.
Retirement benefits are different from termination benefits because they can be received at an earlier date if the employee meets certain requirements. The amount of the benefit may be reduced or subsidized for early retirement, making it more valuable. There are also other benefits that may be paid, but only if the employee retires, such as full spousal survivor rights and health benefits from the retirement plan. When it comes to retirement benefits and termination benefits, the main difference is that retirement benefits are guaranteed once you meet the age and service requirements, while termination benefits may not be vested yet. This means retirement benefits are protected against inflation, but termination benefits are not. Additionally, termination benefits don’t include certain additional benefits like early retirement subsidies or health payments. So, when dealing with these benefits in a divorce, it’s important to be careful and address any additional benefits before making any agreements. Retirement benefits are earned based on the amount and date specified in the plan, and they cannot be changed by the employer. When it comes to alimony, the amount of retirement benefits that can be considered as income or property is important. If the full share of retirement benefits was not paid to the ex-spouse, then it was not divided properly. This can be a problem with government plans, where the ex-spouse has to wait until the employee retires to receive their share. When a couple gets divorced and one of them has a retirement benefit, the court may freeze the amount of the benefit that the other spouse can receive. This can cause problems if the employee later wants to retire and the frozen amount is not enough. To avoid this issue, the court can divide the benefit at the time of the divorce, so the other spouse gets their fair share while the employee is still working. This doesn’t force the employee to retire, it just means they are working for a lower salary because part of it is going to their ex-spouse. This method might be unpopular with the employee, but it’s fair for both parties. The Boyett court had to decide if a coverture fraction could be used to figure out how much of a retirement benefit belonged to each spouse. The court said that using the fraction violated the law, because it included money earned after the cutoff date for dividing property. The court in New York had a similar case and said that the fraction should only include the time when the couple was married. So, the Boyett decision means that money earned after the cutoff date doesn’t count as part of the marriage’s property. In simple terms, if something is not considered separate property in a divorce, then it’s considered as part of the shared marital property. The “cutoff rule” in the law about divorce property division doesn’t only apply to deciding what part of the property belongs to each person. When a certain way of figuring out the value of the property makes one part seem too big, it also makes the other part seem too small. So, it’s not fair. And when calculating how much of a retirement benefit belongs to the marriage, the way the law says to do it doesn’t make sense if the person hasn’t actually retired yet. To illustrate this, let’s consider the example of Mr. and Mrs. Smith getting divorced after 20 years of marriage. The court gives Mrs. Smith half of Mr. Smith’s retirement benefit, which is $600 per month. This benefit was earned under a plan that adds 2% of the average salary for each year of work. Mr. Smith’s average salary at the time of their divorce was $3,000 per month. After Mr. and Mrs. Smith divorced and got back together, Mr. Smith worked for 20 more years and retired with a monthly benefit of $8,000. When they divorced again, Mrs. Smith received $2,575 per month from Mr. Smith’s pension, while he kept the rest. This big difference happened because the court made a mistake in calculating the amounts. The court used the wrong method to figure out how much each person should get, and it didn’t consider inflation. This means Mrs. Smith ended up with more money than she should have. The immediate offset method means the spouse gets their share of the pension right away, without having to wait for retirement. They get the money on the cutoff date, which is when the value of the pension is calculated. This is fair because the spouse gets the money without any risk. Applying the coverture fraction to the present value amount is the same as applying it to the retirement benefit, but it assumes the employee stops working on the cutoff date. If the court had known about a previous ruling, they might have come to a different decision about how to calculate the marital portion of the pension. This passage discusses private pensions and the rules around them. It talks about how benefits can be cut, cost of living adjustments, and when benefits vest. It also mentions different legal cases related to pension benefits. Jerry Reiss and David Thompson are experts in their fields, with Jerry being certified in actuarial science and David having a law degree and a master’s in taxation. Jerry has written articles for The Florida Bar Journal and David works in the insurance industry. This column is submitted on behalf of the Family Law Section.
Source: https://www.floridabar.org/the-florida-bar-journal/dividing-pension-property-after-boyett-part-i/
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