6.4 DIVISION OF RETIREMENT BENEFITS
6.401 Retirement Plans: What Laws Govern?
A. Virginia Law Versus Federal Law.
3649 In addition to a monetary award, section 20-107.3(G) permits the court to assign a portion of one spouse's retirement benefits/assets to the other spouse.
The provisions of federal law that govern the division of retirement benefits in divorce preempt state law with a few exceptions, for example, the Virginia Retirement System and municipal plans. For the division of the federal retirement plans that are listed below, the federal statutes control the divisions of these plans. Virginia law plays a very small part in the conveyance of a federally-controlled retirement plan.
B. Retirement Plans Governed by Federal Law.
Federal law governs the retirement plans listed below and the division of a party's retirement fund in divorce under those plans. The footnotes for each of the plans contain contact information for the agency that controls the plan, the primary statutes and Code of Federal Regulations, and references to applicable publications issued by the appropriate agency. The following are the federal retirement plans that govern the division of retirement plans in divorce:
1. Employee Retirement Income Security Act (ERISA); 3650
2. Federal Employees Retirement System (FERS); 3651
3. Civil Service Employees Retirement System (CSRS); 3652
4. Military—Active Duty and Retired; 3653
5. Thrift Savings Plan (TSP); 3654
6. Railroad Retirement Act of 1974; 3655
7. Pension Benefit Guaranty Corporation; 3656
8. Central Intelligence Agency Retirement and Disability system (CIARDS); 3657 and
9. Foreign Service Retirement & Disability System (FSRDS)/?Foreign Service Pension System (FSPS). 3658
6.402 Role of Virginia Law in Division of Deferred Compensation.
A. Applicability.
Most, if not all, of the terms and provisions in this paragraph deal with the Employee Retirement Income Security Act (ERISA). Plans controlled by ERISA are the most common plans because they are the retirement plans for private employer-sponsored retirement plans.
B. Terms of Section 20-107.3(G).
The terms and provisions of section 20-107.3(G) of the Virginia Code are as follows:
G. In addition to the monetary award made pursuant to subsection D, and upon consideration of the factors set forth in subsection E:
1. The court may direct payment of a percentage of the marital share of any pension, profit-sharing or deferred compensation plan or retirement benefits, whether vested or nonvested, 3659 which constitutes marital property and whether payable in a lump sum or over a period of time. The court may order direct payment of such percentage of the marital share by direct assignment to a party from the employer trustee, plan administrator or other holder of the benefits. However, the court shall only direct that payment be made as such benefits are payable. No such payment shall exceed 50 percent of the marital share of the cash benefits actually received by the party against whom such award is made. "Marital share" means that portion of the total interest, the right to which was earned during the marriage and before the last separation of the parties, if at such time or thereafter at least one of the parties intended that the separation be permanent. 3660 Any determination of military retirement benefits shall be in accordance with the federal Uniformed Services Former Spouses' Protection Act (10 U.S.C. § 1408 et seq.).
2. To the extent permitted by federal or other applicable law, the court may order a party to designate a spouse or former spouse as irrevocable beneficiary during the lifetime of the beneficiary of all or a portion of any survivor benefit or annuity plan of whatsoever nature, but not to include a life insurance policy except to the extent permitted by § 20-107.1:1. The court, in its discretion, shall determine as between the parties, who shall bear the costs of maintaining such plan.
C. Amount That Can Be Awarded.
Under Virginia law, no payment may exceed 50 percent of the marital share of the cash benefits actually received by the party against whom the award is made. 3661
D. Marital Share of a Defined Benefit Plan.
Under ERISA, there are two types of plans. One type of plan is a defined benefit plan, 3662 and the other is known as a defined contribution plan. 3663 Both types of plans are defined by ERISA and both are known as "pensions" under ERISA. The marital share of defined benefit plans was determined in Primm v. Primm 3664 not to be a present-value calculation unless the value of the retirement plan is being offset by another marital asset being divided in the divorce. Rather, a coverture formula 3665 is used to determine the amount of an alternate payee's benefits in defined benefit plans. In Mann v. Mann, 3666 the Virginia Court of Appeals defined the coverture formula for defined benefit plans as follows:
Under Virginia law, it is well established that the marital portion of a defined benefit plan is distinguished from the separate portion by the application of a fraction, the numerator of which represents the total time the pensioner is employed during the parties' marriage, and the denominator of which represents the total time the pensioner is employed through the date of retirement. The fraction diminishes the marital share in relation to the number of years that pre- and post-marital contributions are made. Thus, as applied, the fraction effectively excludes from the marital share the income earned by pre- and post-marital contributions to the pension. 3667
E. Coverture Formula for Defined Benefit Plans.
The coverture formula allows an alternate payee to have some protection from inflation since, in most cases, there is a significant amount of time between when an award is made and when benefits are actually received. For example, the parties were married on January 1, 1975 and were separated on January 1, 2005. The husband was employed on January 1, 1976 and was covered by his employer's defined benefit plan. At the time of the parties' separation, the husband had not retired. Therefore, the coverture equation would be as follows:
348 months
(1/1/76 through 1/1/05) ´ _____% = _____% (marital share)
Denominator Not Determined Until Retirement
However, using the same facts from the above example, except that the husband retired on January 1, 2003, the coverture formula would be as follows:
324 months
(1/1/76 through 1/1/03) ´ _____% = _____% (marital share)
324 months
(1/1/76 through 1/1/03)
F. Formula Not Applicable to Defined Contribution Plans.
The coverture formula, however, is not applicable to defined contribution plans. In Moran v. Moran, 3668 the Virginia Court of Appeals defined the method of the calculation of a separate interest in a defined contribution plan as follows:
In Mann, we were not called upon to review the method the trial court used to calculate the income or interest earned on a defined contribution pension plan. However, in Mann, we noted that the formula employed by the expert witness to determine the income earned on the separate and marital shares comported with methods used and accepted in other jurisdictions. In Thielenhaus, a case we cited with approval in Mann, the Oklahoma Supreme Court affirmed use of the following method to calculate the marital share of a defined contribution pension plan:
(1) multiply the fund's beginning balance . . . at the date of marriage . . . (2) times the average earning of the pension account [during the marriage] and . . . (3) compound annually the interest until the date of separation . . . (4) subtract that amount from . . . the value of the fund . . . [on the date of separation] to arrive at a divisible marital asset. In doing so, steps (1) through (3) yield the value of the pre-marital separate investment as of the date of separation. 3669
An equitable distribution award of a defined contribution plan refers to either a percentage or a specific dollar amount of a total account balance. If all of the defined contribution plan was acquired during the marriage, a percentage can be used, but if there is a separate interest acquired before marriage, a monetary amount must be used. This is one of the most common mistakes made by attorneys when dealing with the division of defined contribution plans in divorce. Counsel should retain a forensic accountant to determine the amounts that are attributed to a separate interest in defined contribution plans.
G. Designation as Irrevocable Beneficiary.
In addition, the court may order a party to designate a spouse or former spouse as irrevocable beneficiary during the beneficiary's lifetime of all or a portion of any survivor benefit or annuity plan but not to include a life insurance policy. The court, in its discretion, determines who will pay the costs of maintaining that plan. 3670 It is imperative for both settlement and trial that counsel obtain statements for all retirement plans as of the date of separation and also as of the date of the evidentiary hearing. Summary plan descriptions, as well as any instructions for preparing qualified domestic relations orders, are helpful to ascertain the available benefits under any given plan.
6.403 National Defense Authorization Act of 2017 (NDAA-17).
A. Enactment of the National Defense Authorization Act of 2017.
Effective December 23, 2016, Congress enacted the National Defense Authorization Act of 2017 (NDAA 17). 3671 An article published by the American Bar Association entitled "Fixing the Frozen Benefit Award" 3672 stated that "[t]he NDAA 17 rewrite makes no exceptions for the parties' agreement to vary from the new federal rule. Everyone must do it one way, regardless of what the husband and wife decide they want the settlement to say." 3673 In the same article, it was noted that "[t]here was no 'breathing room' allowed, no decent interval set out to let the majority of the states write...
