This article deals with the defined benefit plans provided by the California Public Employees' Retirement System (CalPERS), the State Teachers' Retirement System (STRS), the Judges' Retirement System (JRS), and various State, County, City and other public agency plans in California.

Author

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.

An earlier version of this article was published in Family Law News (Summer 1994).

Reprinted with permission of the author.

First: Forget QDROs

"QDRO" is the nickname of the Qualified Domestic Relations Order created by the Retirement Equity Act of 1984 (REA) which amended the Employee Retirement Income Security Act of 1974 (ERISA). REA gives an Alternate Payee the option to start drawing benefits directly from a qualified plan once the Participant is eligible to retire, even if the Participant continues to work. Also, with few exceptions, a QDRO can make an Alternate Payee a "surviving spouse" for survivor benefits under the plan. A QDRO can require the plan to provide an Alternate Payee with almost all the options available to the Participant for receipt of benefits. In fact, in most cases, benefits to the Alternate Payee can be paid over the lifetime of the Alternate Payee. You must forget what you know about QDROs when dealing with California state and local government plans . Even when a state or local government plan calls their favored order a "QDRO", the QDRO-like features of REA don't exist or are severely limited.

Second: Distinguish the Two Types of Survivor Benefits

There are two types of annuity benefits which may continue beyond Member's life under state and local government plans.

1. "Survivor Continuance Benefit"

[Note that in public pensions, "pension" is funded with employer contribs; "annuity" with employee contribs.] One type is usually automatically granted without election and is only available to a widow(er). Often, this benefit requires the widow(er) be married for one year at the date of death and/or retirement. Also, such a benefit may, depending on the terms of the plan, terminate on the remarriage of the surviving spouse. The benefit may be called a "survivor benefit," a "continuance benefit," or--as in CalPERS--a "survivor continuance benefit." We will use the latter term in this article to refer to this kind of benefit. In some plans, such a benefit will be paid to the minor children in the absence of an eligible widow(er).

2. "Named Survivor Benefit"

The other type of benefit is not found in all plans. It is typically described as optional or elective, and can be paid to any beneficiary designated by Member. This will be referred to in this article as a "named survivor benefit."

Third: Review Cases and Family Code

Review the Annotated Table of Cases and reprint of Family Code Section 2610 found in the appendix to this article.

Note that Family Code Section 2610:

1. Requires the court to allocate to Nonmember all of Nonmember's share of all aspects of a pension plan and
2. Provides the court with the authority to carry out its mandate by ordering "a party to elect a survivor benefit annuity or other similar election for the benefit of the other party."

Fourth: Review CANs and CAN'Ts

After reviewing the material in the Annotated Table of Cases and Section 2610, review the following Cans and Can'ts of drafting orders for state and local government plans under Family Law Section 2610:

CANs

1. Have payments made directly to Nonmember. [Taylor, Colvin, Powers]
2. Allow a Nonmember to share a survivor continuance benefit payable to a subsequent spouse.
3. Have a Member elect a named survivor benefit in favor of Nonmember.
4. Allow a party's successor to receive a party's share of benefit payments. [Taylor, Powers]

CAN'Ts

1. Confer the status of surviving spouse or widow(er) upon Nonmember spouse (in order to provide a widows(er)-only benefit such as a survivor continuance benefit. (Carnall, Nice, Cramer) Nonmember may get nothing unless Member gets and stays remarried for the required time period.
2. Provide Nonmember with the same options as Member. (Except under some Separate Accounts schemes.)
3. Commence payments earlier than the plan allows. Nonmember must wait for events that will cause payments to commence under plan terms, typically Member's retirement or death. (Jensen)

Fifth: Discovery

1. Code red. If Member is in imminent danger of death, the case becomes "code red." Treat this as the most important case in your office.
2. Medical condition. If either party's medical condition is abnormal so as to have an effect on their longevity, contact your Actuary, as all decisions will be influenced by this factor. (Bergman, Shattuck)
3. Cashout argument. You have a good argument for a cashout if the interest of Nonmember cannot be paid over the lifetime of Nonmember under plan terms. (Contact Actuary.)
4. Plan contact: Obtain names of contact persons at the plan including names, addresses, phone and fax numbers. If necessary, obtain an information release from Member.
5. Information. Obtain an up-to-date copy of the plan document, plan booklets and any procedures, model orders, and other literature that the plan provides.
6. Member history.

a. Find out if Member has other plan-creditable (e.g. military) service and /or previous service under the plan for which contributions have been withdrawn. This might yield an opportunity to obtain additional marital service or to reinstate service credit by redeposit. (Lucero)

b. Find out if service with a "sister" retirement system might allow a "concurrent retirement" which will yield a benefit for the first system employment period based upon higher salary under the subsequent system. CalPERS, STRS, UCRP (University of California Retirement Plan), and several county plans have concurrent retirement provisions, frequently referred to as "reciprocity".

c. If Member has already retired, determine the form of settlement elected at retirement. Termination of marital status without an appropriate order may allow Member to revoke Nonmember as beneficiary for previously elected named survivor benefits in some plans. And, of course, the termination of the marriage will almost certainly cancel the survivor continuance benefits for Nonmember.

d. If the marriage has not yet been terminated, the practitioner should remember the adage, "Don't terminate the marriage until the survivor benefits are understood and handled."

7.  Benefit estimates. Get the most current retirement estimate available for Member with Nonmember selected as the beneficiary under each of the optional forms of settlements. Start early; some plans take 60-90 days to provide this information. If Member has a new spouse, obtain the same retirement estimates with the new spouse selected as the beneficiary under each of the optional forms of settlements.

Sixth: Join Plan

Join the plan because:

1. Many government plans (e.g. CalPERS and STRS) require joinder before they will honor an order per Family Code Section 2060(b).
2. Joinder serves to notify the plan of Nonmember's interest under Family Code Section 755.
3. Information can be onbtained through formal discovery if necessary.

Seventh: Spot the Issues; Make Decisions

1. What Happens if Either Party Dies Prior to Retirement.

a. Pre-retirement lump-sum death benefits. Prior to retirement, some plans, such as CalPERS, provide a death benefit, in the event of Member's death prior to retirement, in an amount equal to some lump sum plus the return of Member contributions and interest.

However, if Member dies before retirement with a current spouse, the current spouse may elect to receive a survivor-type benefit over his/her lifetime in lieu of the death benefit.

b. Pre-retirement Survivor Continuance Benefits (subsequent spouse). Inform your client that the termination of the marriage will make Nonmember ineligible for such benefits. Determine whether or not Member's remarriage would cause a lump sum death benefit to be converted into a benefit for the subsequent/surviving spouse's lifetime (as in occurred in Becker) or could turn into a minor child allowance.

c. Pre-retirement Named Survivor Benefit. Determine if there are pre-retirement options available to protect Nonmember in the event Member dies prior to retirement. For example, STRS will allow a Member to elect a preretirement named survivor benefit when eligible to retire.

d. Get half community interest. Provide that Nonmember (or successors) obtain at least half the value of the community portion of each benefit and benefit stream which might arise on Member's pre-retirement death.

e. Consider getting more than the community interest. Nonmember might claim more than half of the community share of pre- or post-retirement named survivor benefits citing Ziegler and Family Code Section 4360.

f. Deal with Powers rights, i.e., the benefits Nonmember may leave to successors on Nonmember's death which occurs before all retirement payments have been paid or otherwise awarded. Member may consider trading to get Nonmember's Powers rights in exchange for giving Nonmember more than 50 percent of the community portion of the pre-retirement named survivor benefit.

g. Separate Accounts. A Separate Accounts scheme may "vest" Nonmember with a right to benefits that cannot be lost by Member's death.

2.  Should Nonmember Make a "Gillmore" Demand--to Commence Monthly Benefits At or After Earliest Retirement Date?

Member will want to get Nonmember to waive rights provided under Gillmore. Nonmember will need both legal and actuarial analysis to determine whether, when, and why to "Gillmore" the retirement. Waiting may produce a loss to Nonmember of a plan's early retirement subsidies, but making the "Gillmore" demand may open the door for spousal support modification.

Note that heirs may also have "Gillmore" rights.

3. What Should be Done on Member's Retirement? Analyze pension plan for the following:

a. Separate Accounts advisability (contact Actuary if uncertain). Plans known to have Separate Account schemes include CalPERS, STRS, UCRP and the City of San Francisco plans. Check to see if the system is considering a Separate Accounts arrangement in the near future and the nature of same. All of these plans have different schemes for Separate Accounts. Don't jump into Separate Accounts if you are not absolutely sure about its effects. Also, note that Separate Accounts are probably not mandatory (Colvin).

b. Availability and nature of named survivor benefits.

i. CalPERS and STRS have these, but there are none in many of the municipal and county plans.

ii. Balance the rights of Wife One and Wife Two.

Family Code Section 2610 implies that a court must award named survivor benefits to Nonmember. If Wife One is before the court from a marriage which accrued less than half of the credited service, should the court not consider Wife Two's claim and possible joinder to the proceeding? Is it relevant that only Wife Two is eligible for a survivor continuance benefit? Are the pension benefits otherwise payable to the two wives relevant?

iii. Have your order direct that Member make the indicated election. It may help that your order states that Member is deemed to have made such an election if Member fails to comply.

iv. Make your order clear as to who pays for the option. Is the reduction taken from his share, her share or both?

c. Postretirement survivor continuance benefits.

i. The usual approach where Member has remarried is to award the whole of this benefit to Member (for the benefit of his subsequent spouse) with offset to Nonmember elsewhere in the benefit distribution, e.g., more of the benefit while Member and Nonmember are both alive. Query whether a court should apply a discount or reserve jurisdiction for the contingency of the failure of Member's subsequent marriage.

ii. Where Member is unmarried and retirement has not yet occurred, award Nonmember a prorata time-rule interest in the survivor continuance benefit in the event that such benefit becomes payable.

4.  Consider Impact on Spousal support.

a. Many Members assume spousal support will disappear when Nonmember commences retirement benefits; we know better.

b. Both parties should be aware of and plan for support modification or termination motion occurring prior to retirement.

c. Consider increasing Nonmember's percentage of pension now in exchange for an agreement to terminate support now or in the future.

5.  Consider Life Insurance. If there is no way to provide Nonmember with a benefit stream for Nonmember's lifetime, or if competition for beneficiary designation develops between Nonmember and subsequent spouse, consider life insurance as a solution. Review the previous judgment to deal with the continuation or cessation of coverage provided to insure Nonmembers receipt of the pension. But then,

a. Keep in mind enforceability, insurability, renewability and future premium increases. Note that insurance of two lives ("second-to-die policy ) costs less than a policy on one individual.

b. Weigh the estate planning and tax effects of ownership, and premium payment.

c. Beware of miracle policies with hidden future adverse tax and other consequences.

6.  Consider Judgment of Separation. Where no named survivor benefit available for nonmember, consider negotiating for a Judgment of Separation to preserve marital status and avoid loss of valuable survivor benefits under a plan. This may be a preferred alternative to an expensive life insurance requirement.

Eighth: Draft Order, Another Checklist

1. Death before retirement. Deal with distribution of the benefits if a party dies before retirement.

a. What if Member dies?

b. What if Nonmember dies? (Powers)

2. Handle optional settlement. Direct Member to name Nonmember as beneficiary on Member's death if such designation is available and appropriate.

3. Dispose of all benefit streams and lump sums:

a. Retirement allowance during Member's life.

b. Named survivor benefits.

c. Survivor continuance benefits.

d. Lump sum benefits.

4.  Deal with "Gillmore" rights--of Nonmember--or of Nonmember's successors. Remember, if not clearly waived, the right is retained. (Crook)

5.  Remember the COLA. Nearly all state and local government plans provide post-retirement cost-of-living increases. Your order should specify that Nonmember receive a percentage of the benefit payable to Member rather than an absolute dollar amount so that the amount received by Nonmember is automatically adjusted when each cost-of-living increase is paid. A "Gillmore" recipient should receive cost-of-living increases from Member until benefit payment is taken over by the plan in the same amount as if Member had retired at the date of the "Gillmore" demand.

6.  Provide for Nonmember's successors, in the case where Nonmember dies before Member or before a surviving spouse with whom Nonmember is sharing a benefit.

7.  Achieve Actuarially Equal division. For example, the reduction to Member's lifetime benefit imposed for a survivor continuance benefit may be less than the current actuarial cost of providing such a benefit. The plan subsidy resulting from such reduced cost should be fairly allocated. If an order simply provides that Nonmember pays for the cost (the ongoing monthly reduction resulting from the election of the optional named survivor benefit) from her/his share, then Nonmember gets all of the benefit subsidy--including Member's half community and separate share of the subsidy.

8.  Preserve Flexibility. Don't take away the flexibility needed to deal with benefits based on the facts as they might be developed at retirement age. For example, you would not want to saddle Nonmember with a lifetime benefit and then be without remedy if Nonmember subsequently discovers that life is all too short due to terminal illness. For cases where retirement is several years off, the parties may well be advised to provide for preretirement protection and reserve jurisdiction over the remainder of benefits until a date closer to retirement and/or provide for an approach (with appointment of Special Master to implement the approach) which will accommodate future fact patterns that may develop.

Conclusion

In the author's experience, Nonmember spouses have been the primary victims of poorly drafted orders. However, she has seen Members and their subsequent spouses similarly abused. The author hopes that this article will encourage family law attorneys to develop a knowledge of the plans involved, to use a systematic approach in the development of orders and the counseling of their clients on the nature of the plans and the choices presented to these clients. She urges practitioners to seek guidance from a forensic actuary familiar with the plans in order to properly perform these duties.