Dividing pension property after Boyett.

• Author: Reiss, Jerry
• Position: Part 1 - Florida

Defined benefit pension plans are very complex retirement plans. Obtaining a fair division of property for either divorcing spouse was never a simple matter. This task has been made more difficult and more complex following the Florida Supreme Court ruling of Boyett v. Boyett, 703 So. 2d 451 (Fla. 1998). This is especially unwelcome news in these days because great efforts are made to settle cases and avoid the costly valuation process. Yet, many mistakes will be made, and either side could suffer an unjust division unless an inquiry is made of all the benefits that will be provided, and the conditions that attach to the receipt of those benefits. An actual valuation that determines the value of each benefit may be necessary for the parties to evaluate whether the division of special benefits warrant further inquiry or litigation.

Part I of this article will examine the principal problems that this ruling creates by the court's use of a nonstandard definition of benefit earnings. It will also show that a coverture (or service) fraction may no longer be used to determine marital and nonmarital portions even if it is applied to the earned benefit on the cutoff date. Part II, which will appear in the March issue of The Florida Bar Journal, will examine why other states came to a conclusion opposite that of Boyett, as well as the little-known consequences of the ruling. One such consequence is that an employee can easily change a 50/50 court ordered division of property to a 75/25 split by merely delaying retirement for five years.

Defined benefit plans define and guarantee the employee a specific benefit at retirement. Most defined benefit plans define monthly benefits at some age, called retirement. The practitioner should be warned that not all defined benefit plans provide monthly benefits, and that certain defined contribution plans provide monthly benefits. The key to a defined benefit plan is that the benefit is guaranteed. With uncertainty surrounding whether the Social Security Administration will be able to meet its future obligation without additional cutbacks,(1) errors in the division of benefits under the only other plans to provide commitments may not be tolerated by future clients.

Defined benefit plans serve many retirement plan purposes. As a guarantee of what will be provided at retirement, it offers the employee security that is simply not available under any defined contribution plan.(2) It also guarantees employees who continue in the employ of the sponsor of the plan that their benefit earnings will be tied to the rising cost of living.(3) This is accomplished by defining average earnings either as a career average or as the highest average over a three- or five-year period.(4) As W-2 earnings will increase with any given employee over his or her working lifetime, the benefit earnings are tied to the rising cost of living.

Before the mid-seventies, many employers would pay retirement benefits only to employees who worked for the company their entire lifetime.(5) This was often accomplished with capricious methods for measuring benefit earnings, lengthy cliff-vesting schedules,(6) and bad boy clauses. The Employer Retirement Income Security Act of 1974 (ERISA) dramatically changed this by setting new standards that plans had to follow. The purpose of these changes was to make certain that the employer understood that promised benefits were equivalent to promised pay for work that the employee already performed. These rules were required to be observed if the employer intended to deduct (from corporate taxes) the cost of funding the plan as a necessary business expense.(7) Among these rules was the requirement that benefits vest quickly. The employer could satisfy this requirement if the plan's vesting conditions matched or exceeded any one of several different proposed formats.(8) ERISA also prescribed several different methods under which benefits could be earned.(9) Competition over employees forced many municipal, state, and federal employers to strengthen their plans to match ERISA features.

The Boyett ruling equates the plan's accrued benefit with the amount of retirement benefit that is earned on the cutoff date. People who have no experience with benefit administration matters fail to understand that accrued benefits are only a measure of what would be paid if the employees quit on the date of measurement. It is not a measure of what portion of the retirement benefits have been earned on that date if they continue to...