Berrington v. Berrington

633 A.2d 589, 534 Pa. 393, 17 Employee Benefits Cas. (BNA) 2394, 1993 Pa. LEXIS 233

• Court: Supreme Court of Pennsylvania
• Decided: November 12, 1993
• Docket: 20 W.D. Appeal Docket 1992
• Status: Published

Opinions

OPINION OF THE COURT

FLAHERTY, Justice.

This is a divorce case involving equitable distribution of a defined benefit pension fund. The issue presented is whether the non-employee spouse’s share in a deferred distribution of a pension should be based upon the salary which the employee-spouse earned at the date of separation or upon the amount earned at some post-separation retirement date. The trial court determined that the marital share should be based on the employee’s pension to be received at the time the pension plan enters pay status. Superior Court reversed, holding that the amount to be awarded the non-employee spouse should be based on the employee’s salary at the date of separation, but augmented by growth in the pension fund based on factors other than the employer’s or employee’s contributions to the fund after the date of separation. 409 Pa.Super. 355, 372, 598 A.2d 31, 40 (1991). We affirm.

The parties were married on May 7, 1955. From marriage until husband left the marital home on July 15, 1984, he was a participant in the retirement plan of the Westinghouse Electric Corporation, his employer. After separation, husband continued to work for Westinghouse and to participate in the retirement plan. On January 9, 1985, husband filed a complaint in divorce. Divorce was granted on July 27, 1987 and the trial court retained jurisdiction over unresolved claims.

Among the marital assets at issue in the equitable distribution was husband’s Westinghouse pension plan. This plan is a defined benefit plan consisting of a basic and a supplemental portion.¹ Husband participates in both. Under the supplemental plan, the employer’s contributions are based on the employee’s contributions. If the employee makes no contributions, the employer makes none. Between the date of separation and February 28,1990, husband contributed $14,770.16 to the basic and supplemental portions of the plan.

Husband also participated in the Westinghouse executive benefit plan, which is available only to .employees in an executive position for five continuous years preceding retirement. Pursuant to this plan, the pension benefit per month is determined by multiplying an executive pension multiplier (the employee’s years of service at retirement multiplied by 1.47%) by the average of the highest five months’ salaries for each year of the ten years immediately preceding retirement.

The parties reached a settlement agreement concerning equitable distribution which provided that wife was to receive non-modifiable alimony in the amount of fifteen hundred dollars per month until wife cohabited or remarried, husband became 65, husband retired from Westinghouse at age 62, 63, or 64, or the death of either party. Wife was awarded 60% of marital property, including husband’s pension, pursuant to this agreement.

Difficulty arose, however, when the parties attempted to prepare orders which embody the agreement. Because the Westinghouse plan is a qualified plan under the Retirement Equity Act of 1984,² but the executive plan is not, the parties submitted two proposed orders, a Qualified Domestic Relations Order (QDRO)³ and a Domestic Relations Order.⁴ Husband’s proposed orders calculated his pension benefit by using his annual salary on the date of separation. Wife’s proposed orders calculated the amount of the pension benefit as of the deferred date, i.e., husband’s retirement, husband’s death, or the date wife begins receiving her portion of the benefit. 409 Pa.Super. at 358, 598 A.2d at 33.

The trial court entered an order based on wife’s proposal and husband appealed. Superior Court reversed and this court granted allocatur.

The trial court’s rationale was that LaBuda v. LaBuda, 349 Pa.Super. 524, 503 A.2d 971 (1986), controls and compels its result. In that case, the court determined that the marital share of husband’s pension was calculated by creating a fraction representing the number of years husband was in the pension plan as of the date of marital separation divided by the total number of years in the plan (“the coverture fraction”) ⁵, multiplied by the monthly pension to be received by husband at his normal retirement, multiplied by wife’s marital share as awarded at equitable distribution. This is the same method the trial court used in the present case. The trial court in this case expressed the belief that if wife were not paid in dollars calculated at the time of husband’s retirement, her share of the pension accumulated during marriage would be reduced in value by inflation. In the trial court’s words, wife would “be paid in the year 1994 with 1984 dollars even though his salary and thus his pension have been adjusted for inflation.” Common Pleas Slip Op. at 9.

Superior Court reversed based on the following: (1) LaBuda was decided as it was because husband did not propose to the court another method of calculating the benefit owing to wife; (2) using husband’s retirement benefits at the date of retirement as the base on which to calculate wife’s marital share improperly uses husband’s non-marital contributions, i.e., those made after separation, to determine marital property; (3) husband in this case has proposed a method of calculating wife’s marital share of the pension which allows her to benefit from increases accruing from the date of separation until the date of payout without utilizing contributions made by husband after the date of separation.

The pivotal questions are (1) whether the trial court’s method of calculating wife’s share of husband’s pension requires husband to pay, in part, with non-marital property acquired after separation; and (2) whether wife is unfairly penalized if her marital share of husband’s pension is calculated by utilizing husband’s salary as of the date of marital separation, even though she will not collect her share, possibly, for years after separation.

As to the first question, the Divorce Code defines “marital property” as all property acquired during the marriage, with enumerated exceptions:

(e) For purposes of this chapter only, “marital property” means all property acquired by either party during the marriage, including the increase in value prior to the date of final separation of any nonmarital property acquired pursuant to paragraphs (1) and (3) except:

s|s # S-Í ‡ & ❖

(4) Property acquired after final separation until the date of divorce, except for property acquired in exchange for marital assets.

The Divorce Code of April 2, 1980, P.L. 63, No. 26, 23 P.S. § 401(e), as amended 1988, February 12, P.L. 66, No. 13. This provision is substantially reenacted at 23 Pa.C.S. § 3501(a), Act of Dec. 19, 1990, P.L. 1240, No. 206, § 2.

Thus, the Divorce Code excludes property acquired after the date of separation from consideration as marital property. The trial court’s order, however, relies on increased contributions made after separation⁶ as well as contributions made during the marriage.

It may seem at first consideration that the trial court’s application of the coverture fraction (see note 5) to these increased contributions would prevent the post-separation (i.e., non-marital) increases from being distributed to wife. This, however, is not correct, for although the pension benefit would be reduced by the coverture fraction, the reduction would be applied to a pension that was partially produced by increased post-separation contributions. This is prohibited by section 401(e), for property contributed to the retirement plan after separation is not marital property. We conclude, therefore, that the trial court’s method of calculating wife’s share of husband’s pension benefits was in error.

The evil which the trial court was trying to avoid, of course, was awarding wife a marital share of the pension which she would not receive for years⁷ and which would be dramatically diminished in value when she received it because of the time interval between being awarded a share of the pension and actually being paid that share.

Husband’s proposal addresses this problem. Under his proposal wife receives 60% (her share of the marital property, including the pension) times the coverture fraction times the benefit at the determination date⁸ of the retirement plan on the basis of husband’s annual salary on July 31, 1984, the date of marital separation. Husband’s benefit statement, dated December 31, 1984, provides in pertinent part:

YOUR CONTRIBUTIONS TO THE PLAN

DURING 1984 - — TOTAL-----

WITH INTEREST WITHOUT INTEREST

$ 256.50 BASIC $ 840.60 $ 777.96

$1,796.25 SUPPLEMENTAL $26,283.43 $18,250.75

' $2,052.75 TOTAL $27,124.03 $19,028.71

Assuming that you continue at your present benefit rate of pay and have no breaks in Credited Service up to your normal Retirement Date of July 1, 1997, your monthly pension will be

$ 826.02 UNDER THE BASIC PORTION AND

$2,773.22 UNDER THE SUPPLEMENTAL PORTION

$3,599.24 MAKING YOUR TOTAL PENSION EACH MONTH

Thus, husband’s employee benefit statement indicates that his monthly pension if he were to retire at the end of 1984, was $2,052.75; should he continue on until the age of 65 at the same rate of pay, his monthly retirement benefit would be $3,599.24, payable beginning July 1, 1997.

Under husband’s proposal, if he were to work until age 65 and wife were to receive her share when husband retired,⁹ wife’s benefit would be calculated as follows: 350 months divided by 509 months (number of months husband contributed to the plan during marriage over total number of months husband was in the pension plan) times 60% (wife’s marital share) times the accrued pension payable based on husband’s July 31, 1984 salary, at age 65, subject to actuarial adjustments which may be necessary based on wife’s age when she begins to receive her portion of husband’s pension.

We cannot complete the math in this example because we do not know what husband’s retirement benefit will be, even if it is based on his July, 1984 salary, since the plan’s formula may change or there may be other non-employee factors affecting its value. If we assume, however, that there were no other increases in benefits payable under the plan from sources other than husband’s non-marital contributions, wife’s benefits would be calculated as follows:

1. The coverture fraction would be 350/509, or .68762.

2. Wife’s marital share is 60%.

3. Husband’s benefits payable at age 65, based on contributions based on his 1984 salary, paid until he reached 65, are $3,599.24/month.

4. Wife’s benefits would be 350/509 (.68762) X .60 X $3,599.24, or $l,484.95/month, subject to actuarial adjustment.

Although wife may benefit from calculating the final pension based on the fiction that husband will continue to make the same post-separation contributions that he made at the time of separation, this does not award wife non-marital property, since her share is reduced by the coverture fraction multiplied by the same salary husband made at separation, but paid over years until he actually retires. The only purpose in creating the fiction that husband will make the same salary and pay the same contributions into the fund until normal retirement is that it gives wife the benefit of favorable changes in the benefits payable, if there are any, owing to factors not based on husband’s increased contributions or efforts.

Thus, husband’s proposal not only avoids awarding wife a share of non-marital property, but also allows wife to receive a marital share that is increased in value proportionate to the increase in value enjoyed by husband based on factors which have nothing to do with his increased contributions or effort. As husband puts it, his proposed orders

which do not even limit her to a share of $3,599.24, give the wife a share of all increases except increases which are based on post-separation pay raises and post-separation contributions.

Brief at 12. We believe that husband’s assessment of his proposal is correct.

Accordingly, we hold that in a deferred distribution of a defined benefit pension, the spouse not participating may not be awarded any portion of the participant-spouse’s retirement benefits which are based on post-separation salary increases, incentive awards or years of service. Any retirement benefits awarded to the non-participant spouse must be based only on the participant-spouse’s salary at the date of separation. However, should there be increases in retirement benefits payable to the employee spouse between the date of marital separation and the date the non-participant spouse begins receiving benefits which are not attributable to the efforts or contributions of the participant-spouse, any such increased benefits may be shared by the non-participant spouse based upon his or her proportionate share of the marital estate.

Affirmed. Remanded to the trial court for entry of a QDRO and Domestic Relations Order consistent with this opinion.

LARSEN, J., did not participate in the decision of this case. CAPPY, J., files a dissenting opinion. MONTEMURO, J., files a dissenting opinion.

1 . A defined benefit plan is one in which the employer promises a certain benefit; a defined contribution plan is one in which the employer promises a certain contribution.

In a defined benefit plan, the benefit which is promised is calculated by a formula defined in the pension plan provisions. The employer pays a specified benefit at retirement. In some defined benefit plans, the employee contributes nothing; in others, the benefits are based, in part, on what the employee contributes. The employer’s contribution to the plan, however, varies from year to year based on the amount which is needed at any particular time to pay the benefits which are due. Individual accounts of each employee’s contribution, if any, are maintained, but these accounts do not specify an employer contribution.

In a defined contribution plan, however, individual accounts specify not only the employee’s contribution, but the employer’s as well. The benefits to be paid in the defined contribution plan, however, unlike those in the defined benefit plan, are not fixed, for they depend upon the performance of investments which are made with the contributions.

2 . The Retirement Equity Act of 1984 (REA) amended the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. and the Internal Revenue Code, 26 U.S.C. § 1 et seq., providing, inter alia, for the allocation and distribution of pension benefits at divorce:

ERISA requires, as a condition of plan qualification, the inclusion of a spendthrift provision which prevents the assignment or alienation of pension benefits. This has sometimes presented a conflict to the plan administrator, whose duty extends not only to the plan and the plan participant, but also to the beneficiaries. The Retirement Equity Act eliminates this conflict by expressly providing for the allocation of pension benefits in matrimonial litigation. This allocation is achieved by means of a "qualified domestic relations order” (QDRO). The Act specifically exempts qualified domestic relations orders from the peremption provisions of ERISA.

Wilder, Mahood, and Greenblatt, Pa. Family Law Prac. and Proc. Handbook (2d ed), § 14-10.

3 . A QDRO:

is a domestic relations order which creates or recognizes the rights of an alternate payee to receive all or a portion of the benefits payable to a participant under the plan. To be "qualified,” the order must contain certain required information and may not alter the amount or form of plan benefits.

Wilder, Mahood and Greenblatt, Id.

4 . A domestic relations order:

is a judgment, decree or order, including approval of a property settlement agreement by the court, which relates to the provision of child support, alimony payments or marital property rights of a spouse, former spouse, child or other dependent of a plan participant and is made pursuant to a state domestic relations law.

Wilder, Mahood, and Greenblatt, Id.

5 . The coverture fraction is defined as:

that portion of the value of the pension that is attributable to the marriage. The numerator of the fraction is the total period of time the employee spouse was a participant in the plan from date of marriage until date of separation, and the denominator is the total period of participation in the pension plan.

LaBuda v. LaBuda, 349 Pa.Super. 524, 536 n. 9, 503 A.2d 971, citing King v. King, 332 Pa.Super. 526, 533, 481 A.2d 913, 916 (1984).

6 . Every year from 1984 — 1990 husband increased his contribution to the pension plan. Thus, in the years after separation (1984), he contributed more on an annual basis than he did during 1984. R. Rec. 268a.

7 . The parties do not dispute that the trial court properly employed the deferred distribution method, rather than the immediate offset method of dividing marital property, for there were insufficient assets in the estate to permit the husband to offset his interest in his pension by relinquishing a present interest in other marital property.

8 . Under the husband’s proposed QDRO, the wife’s benefit determination date shall be the earliest of

a. the Participant’s separation from service;

b. the Participant’s death; or

c. the date the Alternate Payee [wife] begins receiving her portion of the Benefit awarded to her hereunder.

R. Rec. 272 a.

9 . Under the husband’s proposed QDRO, wife's benefits begin:

9. Payments to the Alternate Payee will begin on the date selected by the Alternate Payee [see footnote 8] provided that such date cannot be earlier than the earliest date under the Plan that the Participant could have begun to receive benefits had he retired even if the Participant has not actually retired or separated from service with Westinghouse at that time or dies before then.

R. Rec. 276a.