Just PENSIONS

Post-Retirement: Intact Marriage v. Dissolved Marriage

The basic idea of a pension plan is to provide retirement over a worker’s retired lifetime. A pension benefit will be paid each month subject to the condition that the retired worker is alive. If the marriage is intact and both the retired worker and spouse are alive they will receive and, in theory, share the pension payment. If the retired worker dies, no more pension payments are made and the spouse is left with nothing. On the other hand, if the spouse dies the entire pension continues to be paid until the retired worker dies. In other words, the spouse’s share ends on death and reverts to the retired worker. This is the basic idea of the “terminable interest concept.”However, pension benefits paid to retired workers often include continuance or survivor benefits. Under the “terminable interest rule” the retired worker would never have an interest in survivor benefits because his/her interest in such benefits would end as a result of his/her death just before the survivor benefits started. However, as a result of #4800.8 (now Family Code #2610), it is no longer required that the court terminate an interest in pension payments at death. The interest of a retired worker in survivor benefits can continue to his/her estate. The interest of the spouse of a retired worker in the basic benefits payable while the retired worker is alive can continue to be paid to her/his estate.

This gives the retired worker an interest in survivor benefits that did not exist prior to #4800.8 (now Family Code #2610).

Example. Assume $1,200 per month is paid while (H) is alive and $600 per month is paid while (W) is alive after the death of (H). Two contingent benefit streams are payable. The first stream of $1,200 is paid subject to the condition (contingency) that (H) is alive. The second stream of $600 is paid subject to the joint-condition that (H) is dead and (W) is alive (the survivor benefit stream). Assume the benefits were earned over a 20 year period during which the parties were married 12 years. The community interest in the first benefit stream is 60% of $1,200 or $720. The community interest in the second benefit stream is 60% of $600 or $360. Thus, (W)’s interest is $360 in the first benefit stream and $180 in the second benefit stream. However, the entire second benefit of $600 will be paid to (W) after (H)’s death, not just (W)’s $180 share.

1. Post-Retirement Optional Forms of Settlement

2. Continuance v. Survivor Benefits

Some plans, particularly public sector plans for safety (police/fire) members provide a survivor-type benefit known as a continuance benefit (widow’s continuance). It is typical for such benefits to be payable to a spouse to whom the member was married for at least a year before to retirement and is still married at the time of death. Sometimes such benefits are terminated if remarriage occurs.

See Carnall [1989], the trial court ordered the retirement plan to designate (W) as “surviving spouse” under (H)’s county retirement plan. Carnall held that #4800.8 (now Family Code #2610) should be read as guaranteeing a spouse’s existing rights in employee’s retirement plan, not creating new rights which are inconsistent with provisions of the plan. Note that Carnall does not apply to ERISA plans.

How Retirement Benefits are Paid

(1) Division of Basic Benefit (Payable During Husband’s Lifetime) Paid:

Three combinations the same. In three of the four possible combinations of status — both alive, wife only alive, and both dead the benefit payment is the same.

One Different:

In the husband only alive case, husband gets the entire benefit (100%) under the “if married” scenario, but if divorced, the wife has an equal interest in all benefits and retains this interest even after her death. With respect to the basic benefit, wife has a larger interest in the “if divorced” scenario than in the “if married” scenario.

(2) Division of Survivor Benefit

(For example, husband retired and selected survivor benefits for wife before marriage separation)

Three Combinations the Same. The treatment in the “if married” and “if divorced” situation is the same in three of the four possible combinations.

(3) Wife Only Alive Case is Different

In the “if married” case wife gets it all. In the “if divorced,” the interest of the ex-husband does not terminate on his death but continues to his estate. Ex-wife is limited to 50% of the community interest.

(4) Ex-Wife Could be Worse Off

In reality, ex-wife will get less than 50% in the typical case, as husband will have a separate property interest besides a one-half community property interest.Where retirement has already occurred, ex-wife is worse off concerning survivor benefits now that #4800.8 (now Family Code #2610) has been added. In the past, no case had asserted that husband had an interest in survivor benefits since husband had to die before the survivor benefits would start. Wife got it all.

Benefits to be Paid Over an Alternate Payee’s Lifetime

The area under the dashed line represents the actuarial present value of benefits of $1,000 per month, payable over the lifetime of a male now age 65. The area under the dotted line represents an equivalent actuarial present value, payable over the lifetime of a female now age 55. The area under both curves is the same. The younger female receives less now in return for more later.

1. Joint and 50% Survivor Benefit

   This optional form of settlement provides that after the death of the Payee, the Alternate Payee will receive 50% of the monthly allowance that was being paid while the Payee was alive.The following chart illustrates the two required forms of benefit under the Retirement Equity Act (REA)

2. Single Life Annuity

3. Qualified Joint and Survivor Annuity

   

   The area under the dashed line shows the actuarial present value of a benefit of $1,000 per month payable over the remainder of the lifetime of a male now age 65.

   The area under the dotted line represents a reduced benefit, with the same actuarial present value, but payable over the remaining lifetime of a male age 65 with 50% of this reduced benefit payable over the then remaining lifetime of a female, now age 55.

   The area under the solid line represents a reduced benefit payable over the remaining lifetime of a male age 65 with 50% of this reduced benefit payable over the then remaining lifetime of a female now age 55. The area between the dotted and solid lines represents the actuarial present value of the subsidy provided for by a hypothetical plan, making the joint and survivor annuity more valuable than the single life annuity. The amount of this subsidy, if any, will vary from plan to plan.

4. Benefits to Start Early

   To allow payment of benefits of the same actuarial present value starting at an earlier age the size of such payments is reduced.

   For example, the actuarial present value at age 55 to provide $1,000 per month starting at age 65 is the same as the actuarial present value at age 55 to provide $420 per month starting at age 55.