1998 Case of the Year re Disposition of Pensions:
In re Marriage of Lehman
By Barbara DiFranza, CFLS

In re Marriage of Lehman (1998) 18 Cal.4th 169, 74 Cal.Rptr.2d 825, 955 P.2d 451 is the big community property pension case of 1998. Lehman tells us that employer intent is irrelevant in characterizing a benefit as community or separate. And it tells us that a non-employee spouse's time rule fraction should be applied to benefit enhancements and should not be diluted by adding to the denominator "imputed service" given by an employer who intended that the extra years induce employee retirement. Lehman clarifies that the benefit stream to be divided is defined on retirement. Thus the community partakes—usually based upon the time rule—of post-separation improvements to the benefits.

Lehman should remind us that in negotiating and drafting agreements and domestic relations orders involving defined benefit plans, we are called upon to anticipate and, if possible, provide for, what may happen in the future to these plans. To illustrate these requirements, contemplate the following series of events:

1. During the marriage, A Corp sponsors the "A1 Pension Plan" which gives Willie Worker 1.5% of his final three years average compensation ("FAC") at age 65 for each year of service.

2. On the day after Willie's separation from Wanda, A Corp, having found that its plan is overfunded, terminates the A1 plan in order to get some money back for other uses. Willie will retain his benefits under the A1 plan, but his final average compensation used to calculate those benefits will be "frozen" as of the plan termination date. Then A Corp immediately starts up the "A2 Pension Plan" which has the same formula but will only give credit for future years of service. Lehman says that "if the right to retirement benefits accrues, in some part, during marriage before separation," then the community must have a share of the benefits. Under this scenario, upon retirement Willie will receive benefits from both plans, Figure 1, but Wanda would only share in the benefits from A1. This is because there is no (direct at least) relationship between the marital years and the credited service under the A2 Corp Pension Plan and so there would probably be no community interest in the A2 plan. Thus, the community would own all of A1's $6,000, but none of A2's $12,000.

Employees who continue to work for A Corp would not be happy with the above scenario, since for workers whose FAC is higher under A2 than under A1—which will nearly always be true—it makes the A1 plan years worth less than they would have been had the A1 plan continued. For this reason A's plan change is more likely to resemble the variation below.

3. Variation: Facts same as 1 and 2, but let's say that the A2 plan gives credit for all of the A1 plan service years and then offsets the frozen A1 benefit. Figure 2 shows what would happen if Willie's "final average compensation" doubled in the second ten years of his employment.

Result: Since "the rights under the A2 plan accrue[d], in some part, during marriage before separation" the community interest in A2 Plan must be acknowledged and shared. The community owns all of A1's $6000 and half of A2's $24,000 less all of the community benefit offset, for a total of $12,000.

4. Variation: Same as 3 above, but with this difference: Let's say that A Corp is an airline whose business and employees are absorbed by B Corp at the end of Willie's marriage. When B Corp terminates the A1 plan, Willie's benefits are frozen under Plan A1 as above. However, B Corp amends its B Pension Plan so that employees of A corp who continue in employment with B corp receive service credit in the B Pension Plan in the same manner as the A2 plan above; and B Corp provides that the A1 plan benefits will be offset in the final calculation of the B Pension Plan.

Result: Consider Lehman's statement that: "To the extent—and only to the extent—that an employee spouse accrues a right to property during marriage before separation, the property in question is a community asset." Applying that statement in a literal sense, the community accrued no rights in the B plan during the parties' marriage. However, a community asset (notably community service credit which was acquired during the marriage) is being utilized to acquire rights in the B plan. Just because it is a successor employer that is sponsoring the plan under which the community's service is being utilized to provide retirement benefits is no reason to prevent the community from sharing in the post-separation plan in the same manner as under Scenario 3. Allowing Willie's wife to share in the B Pension Plan benefits, after all, satisfies the Lehman precept that "The right to retirement benefits is a right to 'draw[ ] from [a] stream of income that...begins to flow' on retirement, as that stream is then defined." Willie's community waters have gone from stream A to river B and Willie's spouse is entitled to follow the benefits into the new plan.

The above scenarios are becoming more common all the time. The "plan termination followed by new plan" pattern occurs frequently. The "Company A to Company B shift of service credit" has occurred numerous times in the transportation industry, notably in airline acquisitions. Family lawyers must assume that there are other plans looming on the horizon or hiding in the background which may pick up and use the community service in the future. Moreover, most large corporations have unfunded nonqualified plans, such as "excess benefit plans" and "supplemental employee retirement plans" or SERPs, which pay the portion of a qualified pension plan benefit which cannot be funded and paid out of the qualified plan due to tax limitations. [IRC 415; IRC 401(a)(17)] Such plans should not be overlooked because they do not yet exist or because the employee spouse has not yet met the requirements to receive an existing plan's benefits.

So What Should the Practitioner Do?

Drafting a QDRO for A1's plan was easy. However, Lehman has instructed us to analyze the retirement benefits that have accumulated at retirement time and not simply to handle the particular plan that may exist at the date of separation. Therefore, somewhere in that initial QDRO or in some other stipulation or agreement drawn up at the time of the dissolution, Wanda Worker's attorney must provide a mechanism so that Wanda can find out about those new plans. For example:

"Participant shall provide Alternate Payee with copies of documentation of any changes in or additions to retirement benefits with A1 Corp or its successors and provide Alternate Payee disclosure as to how such benefits may apply to Participant. The court shall reserve jurisdiction to make a further Order with respect to whether and to what extent the Alternate Payee may have an interest in such a plan feature or in additional retirement plans and over the terms of the allocation thereof."

When the other side complains about the continuing discovery demanded, cite the Lehman case above plus the other Lehman case, Lehman v. Super. Ct. (1986) 179 Cal.App.3d 558, 224 Cal.Rptr. 572, in which a writ was granted to Wife so that she might have discovery of Husband's post-separation business assets in order to determine whether they contained a community component. Point to the disclosure statutes that provide a continuing duty to disclose all information until a particular asset is completely divided:

Each spouse shall act with respect to the other spouse in the management and control of the community assets and liabilities in accordance with the general rules governing fiduciary relationships which control the actions of persons having relationships of personal confidence as specified in [Family Code] Section 721, until such time as the assets and liabilities have been divided by the parties or by a court. This duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable, and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request. (Family Code Section 1100(e).)

Postscript

The above article is not intended to completely cover the 1998 Lehman case, which contains lots of other potential traps and opportunities, such as the interpretation of several statements which hint that an employee could choose an alternative that would be detrimental to the community:

The employee spouse is "free[ ] to change or terminate...employment, to agree to a modification of the terms of...employment (including retirement benefits), or to elect between alternative retirement programs"—in a word, he or she is "free[ ]" to "define...the nature of the retirement benefits owned by the community." (Lehman, supra, 18 Cal. 4th at p. 179, quoting In re Marriage of Brown (1976) 15 Cal. 3d 838, 849-850.)

What if your client is faced with such a choice? Is disclosure required? Can the non-employee spouse demand Gillmore compensation if the choice is detrimental? You ought to read Lehman if you want to be in a position to advise your clients based on the latest California Supreme Court reasoning with respect to pensions.