On Monday the California Supreme Court published its opinion in Marriage of Sonne. The case involved a pension buy-out of a PERS retirement in a first marriage and the division of repurchased credits during a subsequent, second marriage. Here is a link to the opinion on the court’s website. Marriage of Sonne 2010 WL 597225; 2010 Cal. LEXIS 1299.
The Supremes acknowledged ACFLS member Barbara DiFranza’s amicus curiae brief in their introductory recital of the facts:
Husband contends that [an apportionment based on the fact that the funds used to repurchase Husband's service credits were community property of the second marriage] vastly overstated the community’s interest, in that it accorded no weight or value to Husband’s service as a deputy sheriff during that earlier period, which had supplied the consideration for the service credit. Amicus curiae Barbara A. DiFranza, Certified Family Law Specialist, contends further that since community funds contributed only to the annuity component of the retirement allowance, the community was entitled only to a pro tanto share of the annuity—and not to a share of the much larger pension component, which was funded by employer contributions.
We agree with amicus curiae. We therefore reverse the judgment of the Court of Appeal and remand the matter for reconsideration of the apportionment of the service credit arising from the Husband-Dalia marriage.
The case summary from Lexis:
In a dissolution proceeding arising from a husband’s second marriage, the parties disputed the character of redeposited member contributions and a service credit arising from the husband’s first marriage. As a member of the California Public Employees’ Retirement System, the husband had transferred to his first wife 8.677 years of service credit, which represented her one-half interest in the service credit he had earned during their marriage. The first wife subsequently exercised her right to a refund of the accumulated contributions in the account, thereby permanently waiving her rights to any further claim on the husband’s retirement benefits, including any service credit. The trial court concluded that the community was entitled to 70.83 percent of the service credit because the community had redeposited 70.83 percent of the member contributions for that period of service. (Superior Court of Monterey County, No. DR41290, Robert A. O’Farrell, Judge.) The Court of Appeal, Sixth Dist., No. H030110, affirmed, but on different grounds. The Court of Appeal concluded that the husband had commingled community property with his separate property when he used community funds to redeposit member contributions in order to recoup the premarital service credit and that he did not indisputably establish or unequivocally trace what proportion of the service credit was attributable to his separate property and what proportion to the community so as to overcome the presumption that the service credit became community property.
The Supreme Court reversed the judgment of the Court of Appeal to the extent it affirmed the trial court’s apportionment of the service credit arising from the husband’s first marriage, but otherwise affirmed the judgment, and remanded the matter to the Court of Appeal for further proceedings. The court concluded that because community funds contributed only to the annuity component of the retirement allowance, the community was entitled only to a pro tanto share of the annuity—and not to a share of the much larger pension component, which was funded by employer contributions. The service credit earned during the husband’s first marriage was his separate property at the time he invoked his right to redeposit his member contributions plus interest. The trial court’s apportionment failed to consider that the right to the 8.677 years of service credit was the husband’s separate property, which preexisted the husband’s second marriage, inasmuch as the service credit was offered in consideration for that prior 8.677 years of service. The Court of Appeal’s commingling analysis rested on the erroneous legal assumption that the husband’s retirement benefit was a unitary and indivisible asset. It was not. The obligation of the public employer to contribute to the pension component derived from the husband’s service during his first marriage. Accordingly, the community had a claim only on the annuity component relating to the time period of the husband’s first marriage and was entitled only to a pro tanto share of that portion of the husband’s retirement allowance.
Coincidentally, an article appeared in the Wall Street Journal the previous Saturday, discussing how difficult the issue of pensions can be for family law practitioners. Splitting Up Nest Eggs: Battles over retirement assets increasingly are the most contentious—and error-filled—part of divorce gives an overview over some of the complexities involved in deferred compensation plans, and I thought this quotation was particularly important:
WSJ: What are the biggest mistakes attorneys make with QDROs?
MS. MCBURNEY*: First, people don’t differentiate, or even understand, what kind of retirement plan they’re dealing with. There are defined-contribution plans—a 401(k) is the best example—and defined-benefit plans, which people usually think of as a pension. Each has its own issues and traps.
For example, I see a lot of agreements that say: “The parties will equally divide the husband’s pension. The wife shall receive 50%, plus or minus earnings and losses from the date of the divorce forward.”
Well, a pension doesn’t have earnings or losses; there’s no account with your name on it that’s invested in the markets. So, while the attorney is putting all this irrelevant information in the QDRO about earnings and losses, they’ve taken their eye off the ball. They haven’t asked: “What kind of surviving-spouse benefit is the wife going to receive?” If the QDRO doesn’t say anything about that—and if the husband dies before pension payments begin—the wife might not get anything.
Another huge mistake is failing to understand the difference between qualified and nonqualified retirement plans. Qualified plans, like 401(k)s and traditional pensions, fall under federal regulations and can be divided between spouses by means of a QDRO. But nonqualified plans—which typically are reserved for upper-level employees and go by names like “supplemental executive retirement plan” or “excess benefit” plan—as well as stock options, restricted stock, [and] deferred compensation aren’t subject to the same federal regulations and aren’t subject to QDRO rules.
So lots of people make arrangements to divide up retirement benefits, and then they find that they have a nonqualified plan that is not allowed to make payments to anyone other than the employee.
*Emily Widmann McBurney, lawyer with the Atlanta firm of Davis, Matthews & Quigley and expert in QDRO law