Retaining Local Counsel When Dividing Retirement Assets

Cautionary Tales

Without local counsel, who are well versed in these unique rules and circumstances, it is likely that a pension will be improperly divided, and costly post-judgment litigation to address the issue will ensue.

Utilizing New Jersey law as an example, two cautionary tales come to mind. These cases illustrate that retaining local counsel on these issues can only be in the best interests of the clients. The first instance involved the post-judgment distribution of a deferred distribution pension stemming from a New Jersey divorce proceeding. The distribution of the pension had essentially been a long-forgotten issue, which often occurs because parties are eager to move on with their lives (and lawyers are exhausted at the end of the case and fail to fully “wrap” it up). One party, who had since moved to another state, retained a lawyer practicing in that other state to prepare a QDRO to effectuate distribution of the pension.

As an aside, being statutorily and regulatory based (as opposed to case law with which all matrimonial attorneys deal in the main), the preparation of a QDRO involving a qualified plan is complex. The Department of Labor (DOL) provides the following:

When a plan receives a domestic relations order purporting to divide pension benefits, it must first determine whether the order is a qualified domestic relations order (QDRO). The order must relate to child support, alimony, or marital property rights and be made under state domestic relations law. To be qualified, the order should clearly specify your name and last known mailing address and the name and last address of each alternate payee. It also must state the name of your plan; the amount or percentage ' or the method of determining the amount or percentage ' of the benefit to be paid to the alternate payee; and the number of payments or time period to which the order applies. The order cannot provide a type or form of benefit not otherwise provided under the plan and cannot require the plan to provide an actuarially increased benefit. And if an earlier QDRO applies to your benefit, the earlier QDRO takes precedence over a later one.

QDRO-Preparation Services

It is due to this additional layer of complexity that a majority of practitioners prudently engage the services of a QDRO-preparation service that possesses expertise in the drafting process. The cost for such a third-party service is generally minimal compared with the worth of the assets at issue, and the value of such expertise is almost immeasurable. Unfortunately, in the first case under discussion, neither the party nor the attorney thought anything of the task at hand, neglecting the potential impact on distribution of New Jersey pension distribution jurisprudence. As a result, the proposed form of Order failed to include language and/or direction as to the distribution of post-Judgment salary increases and a cost-of-living adjustment.

More specifically in the story related above, the proposed form failed to incorporate the “Marx formula” to effectuate distribution of the marital share of a deferred distribution pension where the non-employee spouse would not receive any benefit until the benefit was actually paid to the employee spouse. (The name of the formula is attributed to the matter of Marx v. Marx, 265 N.J. Super. 418, 627 A.2d 691 (Ch. Div. 1993).) Under the Marx formula, the actual pension benefit of a deferred distribution plan cannot be determined until the time of retirement, due to several factors involved (i.e., years worked, age at retirement, salary, etc.) inasmuch as (generally) it uses the final benefit at retirement limited by a coverture fraction as opposed to calculating the amount which the employed spouse would receive at retirement based on service through the divorce only.

Neither being admitted to practice in New Jersey nor having an awareness of the Marx case, the attorney simply went about preparing a general proposed form of QDRO that failed to account for the various state-based nuances impacting distribution. As a result, the parties later found themselves in a New Jersey court litigating over this issue, with the party residing outside of New Jersey ultimately conceding that his lawyer had erred in preparing a QDRO that did not include the Marx formula. Ultimately, and unfortunately, it took costly motion practice for the erring attorney to realize what had occurred.

The other example worthy of discussion ultimately resulted in the published decision of Barr v. Barr, 418 N.J. Super. 18, 11 A.3d 875 (App. Div. 2011). In Barr, the husband appealed a trial court order confirming the wife's percentage interest in his military pension, arguing that post-Judgment increases resulting from his pre-retirement promotion should have been excluded from equitable distribution. The decision is noteworthy here because the trial court erroneously based its decision on a matter from the Supreme Court of Colorado, In re Marriage of Hunt, 909 P.2d 525 (Colo. 1995), which again highlights the state-by-state differences in the law, and emphasizes the need for local counsel to handle these complex issues.

Specifically, the N.J. Appellate Division rejected application of Hunt's “all in” version of the “marital foundation” theory, which treats all post-judgment promotions in employment like an ordinary cost-of-living increase subject to distribution. The Appellate Division also found inapposite to New Jersey law Hunt's holding that a pension qualifies for separate property treatment of post-judgment increases only if the trial court can award the pension under the net present value theory at the time of dissolution. Instead, the Appellate Division reiterated New Jersey jurisprudence that assets acquired by work performed during the marriage, or as a reward for such work, are subject to distribution, while assets acquired post-Judgment due solely to the employee-spouse's post-marital work efforts are that spouse's separate property, excluded from distribution. The Appellate Division went so far as to comment that, while New Jersey's rules of distribution on this issue are potentially more complicated than Colorado's “all in” rule, a better advancement of equity and fairness in New Jersey was achieved between divorcing spouses. Thus, Barr only further emphasized how each state handles these issues differently.

Conclusion

Returning to the overlying premise of this cautionary article, the equitable distribution of a retirement asset is undoubtedly one of the most, if not the most, legally complex and nuanced areas of matrimonial law. Knowing the law of the state in which you practice can be quite difficult. Knowing the law of the state where the plan is to be equitably distributed simply adds another layer of complexity to the distribution puzzle, frought with unknown pitfalls. Retaining the services of or consulting with a local practitioner in the state of distribution will not only serve to protect our clients, but, more importantly, it is simply good practice.

Laurence J. Cutler, a member of this newsletter's Board of Editors, is an equity partner with Fox Rothschild, LLP. Robert Epstein is a member of the firm's Family Law Practice and represents clients in all stages of family law litigation.

Dividing retirement assets in equitable distribution is well known among matrimonial practitioners as one of the most confounding, and potentially complex, areas of our practice. Understanding the nuances in different types of plan benefits, valuation methodologies, survivorship components, and pension-related terminology is merely the tip of the proverbial iceberg. Dealing with an ERISA-qualified plan, detailed below, is difficult enough. Dealing with individual state laws and regulations that apply in effectuating property division of ERISA-qualified, non'ERISA-qualified, federal pensions, state pensions, and other types of retirement assets, can be overwhelming. Retaining local counsel in the state at issue with expertise in this area is of utmost importance in not only understanding the type of retirement asset at issue, but the specific methodology by which that asset is to be divided under state law.

Types of Plans

There are several different types of plans including, but not limited to:

• a qualified plan under the Employee Retirement and Income Security Act (ERISA), which includes defined benefit plans and defined contribution plans (i.e., a 401(k), money-purchase pension plan, and profit-sharing plans), provides certain tax benefits by meeting detailed requirements under the Internal Revenue Code, and division is implemented by a Qualified Domestic Relations Order (QDRO);
• a non-qualified plan, which does not meet with those previously referenced Internal Revenue Code requirements (generally including certain types of deferred compensation plans, executive bonus plans, group “carve-out” plans and split-dollar life insurance plans), and, thus, often does not require a QDRO to effectuate division but rather a modified form of Order (but nonetheless might (actually incorrectly) be called a QDRO);
• a state retirement plan, which is typically divided through use of a form of Order similar to a QDRO but described by a different name depending on the state and plan at issue; and
• numerous federal government plans including, but not limited to, a military plan, civil service retirement plan, etc., each of which requires a specific type and form of Order to effectuate distribution.

Further, while most states treat both vested (a non-forfeitable right) and non-vested (not yet eligible for a non-forfeitable right) components of a pension as an asset subject to equitable distribution, there are a handful of states that only consider the vested portion of a pension as distributable. To add additional confusion, several states, including, but not limited to, Alaska, Ohio, and Maryland, employ a modified point-based version of what is known as the “coverture fraction” in effectuating the equitable distribution of a military pension.

Cautionary Tales

Without local counsel, who are well versed in these unique rules and circumstances, it is likely that a pension will be improperly divided, and costly post-judgment litigation to address the issue will ensue.

Utilizing New Jersey law as an example, two cautionary tales come to mind. These cases illustrate that retaining local counsel on these issues can only be in the best interests of the clients. The first instance involved the post-judgment distribution of a deferred distribution pension stemming from a New Jersey divorce proceeding. The distribution of the pension had essentially been a long-forgotten issue, which often occurs because parties are eager to move on with their lives (and lawyers are exhausted at the end of the case and fail to fully “wrap” it up). One party, who had since moved to another state, retained a lawyer practicing in that other state to prepare a QDRO to effectuate distribution of the pension.

As an aside, being statutorily and regulatory based (as opposed to case law with which all matrimonial attorneys deal in the main), the preparation of a QDRO involving a qualified plan is complex. The Department of Labor (DOL) provides the following:

When a plan receives a domestic relations order purporting to divide pension benefits, it must first determine whether the order is a qualified domestic relations order (QDRO). The order must relate to child support, alimony, or marital property rights and be made under state domestic relations law. To be qualified, the order should clearly specify your name and last known mailing address and the name and last address of each alternate payee. It also must state the name of your plan; the amount or percentage ' or the method of determining the amount or percentage ' of the benefit to be paid to the alternate payee; and the number of payments or time period to which the order applies. The order cannot provide a type or form of benefit not otherwise provided under the plan and cannot require the plan to provide an actuarially increased benefit. And if an earlier QDRO applies to your benefit, the earlier QDRO takes precedence over a later one.

QDRO-Preparation Services

It is due to this additional layer of complexity that a majority of practitioners prudently engage the services of a QDRO-preparation service that possesses expertise in the drafting process. The cost for such a third-party service is generally minimal compared with the worth of the assets at issue, and the value of such expertise is almost immeasurable. Unfortunately, in the first case under discussion, neither the party nor the attorney thought anything of the task at hand, neglecting the potential impact on distribution of New Jersey pension distribution jurisprudence. As a result, the proposed form of Order failed to include language and/or direction as to the distribution of post-Judgment salary increases and a cost-of-living adjustment.

More specifically in the story related above, the proposed form failed to incorporate the “ Marx formula” to effectuate distribution of the marital share of a deferred distribution pension where the non-employee spouse would not receive any benefit until the benefit was actually paid to the employee spouse. (The name of the formula is attributed to the matter of Marx v. Marx , 265 N.J. Super. 418, 627 A.2d 691 (Ch. Div. 1993).) Under the Marx formula, the actual pension benefit of a deferred distribution plan cannot be determined until the time of retirement, due to several factors involved (i.e., years worked, age at retirement, salary, etc.) inasmuch as (generally) it uses the final benefit at retirement limited by a coverture fraction as opposed to calculating the amount which the employed spouse would receive at retirement based on service through the divorce only.

Neither being admitted to practice in New Jersey nor having an awareness of the Marx case, the attorney simply went about preparing a general proposed form of QDRO that failed to account for the various state-based nuances impacting distribution. As a result, the parties later found themselves in a New Jersey court litigating over this issue, with the party residing outside of New Jersey ultimately conceding that his lawyer had erred in preparing a QDRO that did not include the Marx formula. Ultimately, and unfortunately, it took costly motion practice for the erring attorney to realize what had occurred.

The other example worthy of discussion ultimately resulted in the published decision of Barr v. Barr , 418 N.J. Super. 18, 11 A.3d 875 (App. Div. 2011). In Barr, the husband appealed a trial court order confirming the wife's percentage interest in his military pension, arguing that post-Judgment increases resulting from his pre-retirement promotion should have been excluded from equitable distribution. The decision is noteworthy here because the trial court erroneously based its decision on a matter from the Supreme Court of Colorado, In re Marriage of Hunt, 909 P.2d 525 (Colo. 1995), which again highlights the state-by-state differences in the law, and emphasizes the need for local counsel to handle these complex issues.

Specifically, the N.J. Appellate Division rejected application of Hunt's “all in” version of the “marital foundation” theory, which treats all post-judgment promotions in employment like an ordinary cost-of-living increase subject to distribution. The Appellate Division also found inapposite to New Jersey law Hunt's holding that a pension qualifies for separate property treatment of post-judgment increases only if the trial court can award the pension under the net present value theory at the time of dissolution. Instead, the Appellate Division reiterated New Jersey jurisprudence that assets acquired by work performed during the marriage, or as a reward for such work, are subject to distribution, while assets acquired post-Judgment due solely to the employee-spouse's post-marital work efforts are that spouse's separate property, excluded from distribution. The Appellate Division went so far as to comment that, while New Jersey's rules of distribution on this issue are potentially more complicated than Colorado's “all in” rule, a better advancement of equity and fairness in New Jersey was achieved between divorcing spouses. Thus, Barr only further emphasized how each state handles these issues differently.

Conclusion

Returning to the overlying premise of this cautionary article, the equitable distribution of a retirement asset is undoubtedly one of the most, if not the most, legally complex and nuanced areas of matrimonial law. Knowing the law of the state in which you practice can be quite difficult. Knowing the law of the state where the plan is to be equitably distributed simply adds another layer of complexity to the distribution puzzle, frought with unknown pitfalls. Retaining the services of or consulting with a local practitioner in the state of distribution will not only serve to protect our clients, but, more importantly, it is simply good practice.

Laurence J. Cutler, a member of this newsletter's Board of Editors, is an equity partner with Fox Rothschild, LLP. Robert Epstein is a member of the firm's Family Law Practice and represents clients in all stages of family law litigation.