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Classification of Post-Divorce Appreciation of Retirement Benefits
© 2004 National Legal Research Group, Inc.
NEW JERSEY: Panetta v. Panetta, 370 N.J. Super. 486, 851 A.2d 720 (App. Div. 2004).
A defined benefit plan is properly divided as of the date of actual retirement and not the date of classification in the divorce case. When one spouse participates in the Social Security system and the other does not, the court should reduce the amount to be paid by the spouse who does not participate. The amount of the reduction is the first spouse's actual Social Security benefits, and not the hypothetical benefits which the second spouse would have earned if he or she had participated in the Social Security system. No reduction was made upon the facts, however, because the husband, who would otherwise have benefited from the reduction, had wrongfully failed to name the wife as beneficiary of his survivor benefits.
After a marriage begun in 1958, the parties were divorced in 1994. The husband had been employed in the private sector from 1953 until 1977. From 1977 until his retirement in 2000, he had been employed by the federal government. The wife began her employment with a private employer in 1982 and had not retired as of the date of this post-judgment matrimonial proceeding.
A preliminary order was issued in 1998 regarding each spouse's interest in the other's marital property pension benefits. An amended order and judgment was issued in 2000. With regard to the husband's federal pension, an order designated a "court order approved for processing" (COAP), the civil service equivalent to a qualified domestic relations order (QDRO), delineated the share of the pension that the wife would receive. The amended order and judgment also provided for the execution of a QDRO for the husband's share of the wife's pension benefits. In addition, the husband was ordered to designate the wife as the recipient of survivor benefits under the federal pension. Thereafter, the parties filed numerous motions and cross-motions regarding the valuation and distribution of the pensions. The husband retired in 2000. In September 2002, the trial judge entered a final order as to the distributions of the pensions and the entry of the COAP. The husband appealed.
The husband first argued that the lower court had erred in changing the valuation date of his federal pension. In the original pension appraiser's report of 1994, which was incorporated into the original decree of divorce, the husband's pension was valued as of the date the complaint for divorce was filed, October 1, 2003. This was error, as was recognized by the trial court after considering the expert testimony of witnesses for both parties at subsequent hearings. In applying the formula which calculated the wife's share of that pension, the court relied upon the rule laid down in Marx v. Marx, 265 N.J. Super. 418, 627 A.2d 691 (Ch. Div. 1993), in which the valuation date becomes that of the pensioner's retirement. The appellate court recognized, therefore, that the husband was correct in his assertion that the date had been changed, but it also concluded that he was incorrect in contending that this change would give the wife a disproportionate share of his pension. This is so, determined the court, because a federal pension is a deferred distribution plan. Deferred distribution is utilized when the non-employee spouse does not receive any money until the benefits are actually paid to the employee spouse. The actual pension benefit of a deferred distribution plan cannot be calculated until the time of retirement because it is based upon the multiple factors of years of service, mortality, future interest rates, and the form in which it is paid. Under the Marx formula, the actual retirement benefit is multiplied by the coverture fraction and divided by two to produce the marital share, assuming that the non-employee spouse is receiving one-half of the pension earned during coverture. The court rejected the husband's argument that the change in the valuation date gave the wife a greater share of the pension than she was entitled to receive. It is the application of the coverture fraction that adjusts the actual pension benefit to the marital share.
The husband next argued that the trial court erred in denying him the Social Security offset which was in the original decree of divorce until later modified by the trial court. The pension appraiser had deducted from the wife's share of the husband's federal pension the imputed Social Security benefit the husband would have acquired during his years of federal employment The appellate court first addressed the issue of an offset in general. It indicated that the offset issue arose because federal civil service employees do not participate in Social Security, i.e., they neither make contributions during the course of their employment, nor do they collect Social Security benefits upon retirement. While federal pensions are distributable, Social Security benefits are not.
In responding to the husband's claim of error, the court of appeals looked to prior New Jersey law and acknowledged that an offset can be appropriate as the federal employee's non-participation in Social Security enables the parties to enjoy a greater disposable income during the marriage and that on retirement the federal employee will receive a substantially greater pension benefit as compensation for the lack of Social Security benefits. In calculating the amount of the offset, the Marx formula is applied to the private employee's actual Social Security benefit based upon lifetime earnings. The amount is then deducted from that employee's share of the federal employee's pension. The offset, however, does not commence until the private employee spouse actually begins collecting Social Security, just as in the case of any deferred distribution. Here, the court found that the pension appraiser's report was erroneous in that it was the wife's Social Security benefit, subject to the Marx coverture formula, that should be offset against her share of the husband's federal pension, rather than an imputed Social Security benefit the husband would have acquired. In other words, a federal employee may be entitled to an offset against a private employee's share of the federal pension because only the private employee would benefit from the Social Security benefits earned during the marriage. The purpose of an offset, stated the court, was to balance the retirement benefits accrued to each of the parties during the marriage.
In seeking to apply these principles to the case before it, however, difficulties arose due to some of the given peculiar circumstances of the case. First, unlike other instances in which the offset has been addressed in prior case law, here, the husband, who had been a federal employee since 1977, had been privately employed for the 14 years before 1977 and, thus, was also entitled to a Social Security benefit as well as his federal pension. Since his retirement in 2000, he was actually receiving monthly $530 in Social Security. In seeking to balance the benefits earned by a spouse who participated in Social Security all of her working life with those of the spouse who participated for only a portion of his working life, the court found that the fairest and most equitable means was to deduct the husband's actual Social Security benefit from the wife's actual Social Security benefit when she begins to collect it upon her retirement, and then offset the remainder, subject to the Marx coverture formula, against the wife's share of the husband's pension. In other words, the partial participant's actual Social Security benefit is deducted from the full participant's benefit, and the remainder, subject to the Marx coverture formula, is offset against the full participant's share of the partial participant's pension. The second peculiar circumstance of the case, however, rendered this solution inappropriate in the eyes of the court. The husband had been ordered to designate the wife as the recipient of survivor benefits under his federal pension. He failed to make such a designation. In fact, upon his subsequent remarriage, he designated his new wife as the survivor beneficiary, irrevocably precluding the first wife from being named as such. Because the husband's decision naming his new wife as survivor beneficiary deprived the first wife of the value of an asset to which she was entitled, it was equitable to deny any offset of Social Security benefits to the husband.
The husband next argued that the trial court in approving the COAP submitted by the wife had erred in granting to the wife a share in his pension cost-of-living increases (COLAs). It is well settled, stated the court, that post-retirement COLAs are subject to equitable distribution to the extent that they are attributable to the portion of the pension that was earned during the marriage. However, here, the divorce judgment was silent on the issue of the COLAs. In one subsequent order, however, the trial judge, in balancing the equities, determined that since the husband would not receive a share of the wife's COLAs, the wife was not entitled to COLAs on her portion of the husband's pension. The COAP, therefore, entered later by the court was erroneous to the extent that it included COLAs.
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