By Barbara A. DiFranza\1/

Footnote 1. Barbara A. DiFranza, of Salinas CA (408) 663-1800, is a Certified Family Law Specialist whose practice emphasizes pensions, retirement, and deferred compensation plans in the context of marital dissolutions.

Reprinted with permission of the author.

SUMMARY: Courts should routinely trade the Alternate Payee's preretirement "terminable interest" for the Participant's half interest in Alternate Payee's survivor benefits. Although this discussion is framed in terms of ERISA benefits, its principles apply as well to government plans.

1. WHAT'S A QPSA (QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY)

Defined benefit plans must offer a benefit equivalent to that which the surviving spouse would have had if:

• P\2/ separated from service on the date of death,
• P lived to early retirement age (n/a if past that age),
• P then retired with a 50 % Qualified Joint and Survivor Annuity (QJSA) at the earliest retirement age, and
• P died the day thereafter.

Footnote 2: In this discussion: P = Participant AP = Alternate Payee.

Example: Paul has 25 years under a plan paying 2% per year of final compensation at earliest retirement age 55. Paul dies at age 53 when his final compensation is $4000 per month. Under the plan, if Paul quit now he'd be entitled to $2000 per month for his life starting at age 55. If he selected a QJSA, he'd get something less\3/ than $2000 for his life and his wife Alta would get something less than $1000 if she survived him. Thus Alta's QPSA benefit is $1000 actuarially adjusted for the hypothetical QJSA.

Footnote 3: The amount of reduction depends on the tables the plan uses and the ages of the parties.

2. WHAT ARE THE PROPERTY INTERESTS TO BE TRADED?\4/.

Footnote 4: This discussion assumes that the plan has funded the QPSA. Where the QPSA is not paid by the employer, the benefit is merely an insurance offering at cost. There is no property value to it (unless P is uninsurable because of bad health). AP should be offered the opportunity to purchase it. The court may order P to purchase it as a form of spousal support. (Civil Code §4801.4)

a. Property interest in QPSA.

The QPSA is community property, and is intended to insure AP's interest in the retirement benefit. However, just like the family auto, P owns half of the QPSA, unless it is valued and awarded to AP (purchased by AP or traded for some asset of comparable value).

b. Property interest in Terminable Interest.

Just like P, AP is entitled to refrain from choosing the method of payment for her interest until the date when retirement elections are to be made under the plan.\5/ If AP dies before electing a life annuity on AP's life, AP's estate will have a claim against P--or AP can leave AP's interest to children of the Participant.\6/

Footnote 5: If AP could "lock in" AP's interest under a QDRO so that the death of the employee could not defeat it prior to AP's annuity starting date would not defeat AP's interest at early retirement age, this discussion would be moot. However, under the Retirement Equity Act the only way AP can secure AP's expected benefit is to take the 50% QPSA for the entire community portion.

Footnote 6: Boggs v. Boggs (1997) ____ U.S. ____, 117 S. Ct. 1754, 138 L. Ed. 2d 45.--stresses that ERISA benefits are intended for a limited class of persons including participants and beneficiaries. A California case which had allowed Contingent Alternate Payees has been remanded by the California Supreme Court to the appellate court to be reconsidered in light of Boggs. In re Marriage of Shelstead, ___ Cal. 3rd ___, 948 P.2d 411, 69 Cal. Rptr. 2d 899. Although the Department of Labor had been willing to go along with the notion of a Contingent Alternate Payee in Shelstead in the previously reported appellate case, it is doubtful that this fictional creature will survive.

c. May a division be equal but silly?

The case of In re Marriage of Powers (1990) 218 CA3 626 came to the irritating but correct conclusion that Mrs. Powers's children, in order to fulfill their mother's right to equal division under the Powers's divorce, could take mother's share of the retirement payments. Mr. Powers would now agree that such a trade would make sense.

d. Why the trade of the two benefits makes sense.

(1) Actuarial equivalency -- or close enough.

Let's assume a P, male, age 50 and AP, female, age 47.

AP can agree that, if AP dies before perfecting AP's right to AP's "own" benefit, AP's portion of the pension benefit reverts to P. Value $1100.

P can agree that, in exchange AP will receive the entire community portion of the QPSA. Value $690.\7/

Footnote 7: In most cases, the cost of the actuarial appraisal would exceed the equalizing payment called for. An exception would occur where P or AP were in bad health or where P is the Wife. Sex is an allowable consideration in marital valuation. In re Marriage of Verlinde (1987) 189 CA3 918.

(2) Benefits to Parties, Not Heirs.

Why should the parties be forced to defer enjoyment of their assets beyond their own lives?

Why should an Alternate Payee, frequently female and without alternate retirement sources of substance, be relegated to a half retirement?

3. ILLUSTRATION

This illustration depicts the distribution of the community share of a benefit. A typical Participant would have additional separate property interest by the time of retirement. A represents the trade, B no trade.

If Situation I is the norm, does it prejudice Participant (P) if II B and III B are given up for II A and IIIA?

	PARTICIPANT	ALTERNATE PAYEE
I. If Both Parties Live to Take Retirement
P makes it to Ret. Date @ 55	$1000	$1000
II. If Alternate Payee Doesn't Make it to Retirement How is Alternate Payee's "Terminable Interest" Distributed?
A. AP Dies; Traded Terminable Interest	$2000	0
B. AP Dies: Heirs Profit	$1000	$1000 to Heirs
III. If Participant Doesn't Make it To Retirement How are QPSA Benefits Distributed?
A. P Dies; AP has all Community QPSA, or	0	$1000\8/
B. P Dies; AP has half Community QPSA	$0 or $500 to W2\9/	$500

Footnote 8: If there is no Wife two, Alternate Payee should receive all of the QPSA; otherwise the benefit will be forfeited.

Footnote 9: In the event P has remarried, the QPSA would not be forfeited, but go instead to Wife Two (who would receive the separate portion in any event). Wife two has no standing to claim benefits from the community portion.

In re Marriage of Connolly (1979) 23 CA3 590, 603 aptly points out that the equal division of an asset must be avoided when the result is to place risk upon a party ill able to afford it. Conclusion: an Alternate Payee should not be placed at risk to lose half her community retirement simply to obtain a technically exact division of one item of property.

4. REMINDER TO BIFURCATORS

Once a marriage is terminated, there is no QPSA protection to a former spouse without a QDRO. If there's no current spouse and no QDRO when an employee dies, the QPSA benefit disappears. Attorneys should enter into a stipulated temporary QDRO incorporating the QPSA trade pending the entry of the final QDRO.

Revised 2/10/98