Determining the nonmarital portion of pensions and retirement benefits.

• Author: Reiss, Jerry

An earlier article bearing a similar title (1) examined the operating principles needed to determine the nonmarital portion of real estate property, securities, and closely held businesses, and it touched upon retirement plans. This article will deal with some of the more complex issues affecting retirement plans. Due to the intricacies and complex nature of many retirement plans, they are often misunderstood, leading to misapplication of statutes and case law interpreting them.

Defined Contribution Plans

A defined contribution plan delineates the amount of contribution made in any given year or during any given period in which the contribution is made. These plans include 401(k) plans, profit sharing plans, 403(b) annuities and other money purchase pension plans, target benefit plans, thrift and other savings plans, and ESOPs. While these are not inclusive of all such plans, they do cover the vast majority.

The most important issue in determining the nonmarital portion of a defined contribution plan is to understand how this should be accomplished. Nonmarital portions are often apportioned on the basis of tracing investments when the participants have some control over them, such as with 401(k) plans; and when they do not, the portions are often determined with service fractions. Each scenario merits discussion because both methods violate Florida Statutes.

When tracing investments is used as a method of nonmarital asset valuation, the reasoning is often that unless the investments can be traced, a nonmarital portion cannot be established because it is the participant's burden to establish a nonmarital portion. (2) This reasoning confuses the usual burden to show a nonmarital portion of an asset from the burden of overcoming a presumptive gift under F.S. [section]61.075(7), where tracing investments demonstrate intent. The participant never owns investments of a retirement plan; the plan trust does. The participant only has rights to perquisites under the trust agreement. As such, the interest that any one employee has in these perquisites is a specific right to benefits earned under this one single trust. As the securities are owned by the trust, each employee derives a right to a specific amount of money from a single fungible composite trust fund.

Mutual funds have been determining interests under this mechanism for decades, and thousands of shareholder interests are accurately determined to the penny even though all investors collectively share interests in one composite fungible fund. Tracing investments is unrelated to whether a nonmarital portion can be established. It is only needed when a presumptive gift is raised in connection with titling the asset where both spouses can exercise equal control over that asset.

The difficulty with using a service fraction to determine the nonmarital portion is that its use divides nonmarital and marital periods into equal yearly accruals. These accruals are often based upon salaries that are earned each year and are almost always based upon circumstances unique to that year. ESOPs, 401(k) plans, and other profit sharing plans involve employer (and employee) discretion on the amount of contribution additions. In some years, plan contributions will be made; in others, they will not. Contributions for some years will be higher than others, and the amount of salary paid need not have anything to do with the contribution amount. Finally, even when all of the criteria for determining the yearly contribution amount previously mentioned are conspicuously absent, investment returns improving the annual contributions vary widely from year to year. Use of a service fraction credits certain years following 1999 with a very high rate of return even though the earnings for many of those years may have been negative. This is also why service fractions should not be used.

Only one method can be properly used to determine the nonmarital interest: the participant's account balance on the date of marriage, improved by investment earnings to the cutoff date. The correct method is seldom used because it is tedious, complicated, and often expensive to perform. But doing the calculation incorrectly can produce huge errors. The nonmarital portion is commingled with marital contributions and investment earnings, which are a composite of earnings on nonmarital and marital investments. As discussed earlier, this is only a technical issue and is easily overcome. While there may be numerous ways to determine a commingled rate of return, they do not include tracing investments or a service fraction. The earlier Bar Journal article bearing a similar title suggested the dollar-weighted method as perhaps the most accurate way to determine the rate of return. It is also the most widely used method by economists and investment firms.

Defined Benefit Plans/Boyett Concerns

This section begins with revisiting one of the issues addressed in our February 2001 article, "Dividing Pension Property After Boyett,"(3) because the Boyett v. Boyett, 703 So. 2d 451 (Fla. 1998), ruling continues to be misinterpreted. That article addressed two theories invariably used throughout the country in determining a marital interest: a) the bright line theory; and b) the marital foundation theory.

Under the bright line theory, the measurement of what was earned during the marriage first calculates what was earned on the date of marriage utilizing service and salary through that date. This...