Pensions

April 2016 : HUDSON V. HUDSON, Mich App No. 322257

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

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In a published case, the Court of Appeals rules on availability of a single life annuity for H in W’s teachers’ pension where same is not available to W in H’s federal pension. Hudson v. Hudson, Mich App No. 322257 (1/2/16)

Facts

  • The 2013 divorce judgment provides that (1) W is to receive a 50% interest in H’s accrued Federal Employees Retirement System (FERS) pension and (2) H is to receive 39% of W’s accrued Michigan Public School Employees Retirement System (MPSERS) pension.
  • H presented an EDRO for entry in which he elected to receive his 39% interest in W’s MPSERS pension as a single life annuity (SLA) based on his life–one of the three options offered in the Office of Retirement Services (ORS) model EDRO form.
  • W objected to the EDRO because FERS does not o er an alternate payee the option of a SLA based on the alternate payee’s life.
  • The trial court signed the EDRO, ruling, in part, that MCL 552.101(5) allows an alternate payee such as H to select whatever option is available under MPSERS.
  • MCL 552.101(5) provides, essentially, that, unless specifically excluded, a proportionate share of all component parts associated with a pension are transferred with part of a pension via QDRO or EDRO.
  • The trial court stated that, since the right to elect a SLA on his life was not expressly excluded, H was entitled to do so under MCL 552.101(5).
  • The trial court also ruled that the agreed on judgment provided for division of the pensions and that, under court rule, the parties are bound by what “they put on the record in the courtroom.”
  • W appealed.

Court of Appeals Decision

  • The COA (Court) upheld the trial court’s decision, but not based on MCL 552.101(5).
  • Rather, the Court ruled that the right to elect a form of benefit–such as a SLA on one’s life, or a joint & survivor annuity–is not a “component” of a retirement benefit.
  • Thus, the Court distinguished selection of a form of benefit from “components” such as cost of living adjustments, survivor benefits, early retirement supplements, and death benefits.
  • But, the Court agreed with the trial court that “the parties were bound by the language of the judgment of divorce.”
  • The Court stated that the fact that W could not also elect a SLA based on her life does not “render the resulting division contrary to the parties’ stated intent in the judgment of divorce.”
  • The Court noted that the parties had the opportunity “to fully explore available form of payment options” before agreeing on a settlement and that it was “incumbent on the parties and their counsel to include within the judgment of divorce a determination of all rights of the parties relative to each other’s pension plans.”

Comments on the Case

  • The case illustrates the importance of discovering the pertinent features of each retirement plan involved in a divorce.
  • This is important so that an equitable division of such benefits can be achieved.
  • It is also important so that a divorcing party knows before agreeing to a settlement what income – and the timing thereof – will be available post-divorce.
  • Finally, it is simply good practice to be as specific as possible in the retirement benefits provision of a judgment of divorce or settlement agreement.
  • Doing so minimizes disputes and misunderstandings concerning what a party believed he or she was to receive.
  • Since the COA rarely publishes family law cases, evidently the Court wanted to send a message about the importance of clearly specifying the rights of parties concerning retirement benefits divided in divorce.
View full PDF file below… “Hudson V. Hudson, Mich App No. 322257”
View / Download April 2016 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

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May 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 2

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following is a continuation of the materials presented in the March 2015 Tax Trends column.

III. Defined Contribution (DC) Plans

  1. A DC plan–such as a 401(k) plan – provides for separate account for each participant.
    1. E.g.–W’s account balance under the XYZ 401(k) plan was $50,000 on December 31, 2014.
    2. Other types of DC plans include pro t-sharing plans, money purchase pension plans, and 403(b) annuities.
  2. Division of DC plan accounts is also accomplished either by the o set method or by deferred division using a QDRO/EDRO.
  3. Offset method – Valuation
    1. The present value of the DC plan interest is generally considered its account balance as of the valuation date. See above for an example.
    2. As with the present value of pensions under DB plans, it is typically appropriate to tax affect the value of the account balance.
    3. It is important to specify a valuation date, generally close to when other assets will be divided.
    4. If there is a plan loan, the account is (1) valued net of the loan and (2) responsibility to repay the loan is assigned to the participant.
      Example:

      • The total pre-tax value of W’s 401(k) account is $50,000 – $40,000 of plan investments and (2) a $10,000 loan she drew from the plan.
      • Equal division under the offset method:
        (Table shown in PDF)
  4. Deferred division method – QDROs/EDROs
    …
Continued in PDF file below… “Overview of the Division of Retirement Benefits in Divorce – Part 2”
View / Download May 2015 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “May 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 2”

March 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 1

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Introduction

  1. Under Michigan law, every judgment of divorce (JOD) must provide for the rights of the parties to both vested and unvested pensions, annuities, and retirement benefits. MCL 552.101(4)
    1. Vested benefits must be taken into account in property settlements. MCL 552.18.
    2. Unvested benefits may be considered “where just and equitable.” MCL 552.18
  2. Age of specialization
    1. Certainly applicable to handling retirement benefits in divorce.
    2. Many traps for the unwary
  3. As with taxation, the key is awareness of issues
    1. Obtain necessary knowledge or assistance
    2. Better serves clients and avoids unpleasant surprises down the road

Defined Benefit (DB) Plans

  1. DB Plans – Traditional pensions – Monthly payment for life often based on (1) final average compensation, (2) years of service, and (3) plan formula.
    1. E.g., $3,500 a month for life.
    2. Many units of government and large employers – such as the “Big 3 Automakers” – have DB plans.
    3. But, the trend is definitely to defined contribution (DC) – or, “account balance” plans, such as 401(k) plans.
  2. Division of interests in DB plans is achieved via (1) offset method or (2) deferred division.
    1. Offset method involves (1) determining the present value of the pension and (2) awarding the other party property equal value. E.g., The after-tax, present value of W’s pension is $50,000. H shall receive $50,000 of other property as an offset.
    2. Deferred division refers to actually splitting the marital portion of the pension between the parties pursuant to a Qualified Domestic Relations Order. E.g., H and W will equally share his $4,000/month pension by means of assignment of half of his share to W pursuant to a QDRO.
  3. Offset method – Valuation
    1. Many professionals calculate the present value of a pension by using the discount rates published and updated monthly by the Pension Benefit Guaranty Corporation (PBGC).
      1. The PBGC, a federal government agency, uses the rates for the same purpose–that is, to determine the present value of future pension payments.
      2. The updated monthly rates can be accessed at the PBGC website (www.pbgc.gov) by clicking on “Practitioners.”
    2. Generally, it is appropriate to reduce the present value of the pension by the tax rate to which it will be subject when it becomes payable after retirement.
      1. Rationale – The pension cannot be used in any beneficial way until received, at which time it is taxable.
      2. The federal and state tax rates used to “tax affect” retirement benefits are those projected to apply after retirement.
      3. Because of the certainty of taxation, case law supports valuing retirement interests net of future tax. Nalevayko v Nalevayko, 198 Mich App 163, 497 NW2d 533 (1993)
    3. In some cases, there may not be sufficient other property suitable to award the other party as an offset.
  4. Deferred division method – QDROs/EDROs
    ……
Continued in PDF file below… “Overview of the Division of Retirement Benefits in Divorce – Part 1”
View / Download March 2015 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “March 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 1”