More on Pension Valuation & Division in Tennessee Divorce
More on Pension Valuation & Division in Tennessee Divorce
Retirement benefits may be divided by courts as marital property during a divorce. This is true even when the employee spouse retires long after the divorce. To reach an equitable division of property in the divorce, Tennessee courts sometimes compensate the non-employee spouse for the number of years the employee spouse was married and paying into the pension plan. Courts compare the number of married years to the total number of years the employee spouse paid into the pension plan. If a pension is held divisible by the court, a qualified domestic relation order (QDRO) will be drafted by the attorney for one of the parties. The QDRO is generally entered as an order of the court within one to two months following the final decree of divorce. The following cases explain the rules used by Tennessee courts to value pensions.
In Cohen v. Cohen, 937 S.W.2d 823 (Tenn. 1996), Mr. Cohen was employed by the Nashville Fire Department as a paramedic. The department made contributions into a pension plan for Mr. Cohen for six years while Mr. Cohen was married to Mrs. Cohen. At the time the parties divorced, Mr. Cohen was not retired, and he was not collecting any of the benefits from his pension plan. Mrs. Cohen was not awarded any interest in Mr. Cohen’s pension plan by the trial court. The Tennessee Court of Appeals reversed the holding of the trial court and found that Mrs. Cohen was entitled to a portion of the pension benefits that accrued during the marriage. The Tennessee Supreme Court granted further review on the issue of whether Mr. Cohen’s pension plan should be considered marital property.
The Tennessee Supreme Court held the portion of Mr. Cohen’s plan that accumulated during the marriage was marital property subject to division between the parties. Noting that homemaker spouses would be “seriously disadvantaged” if denied the ability to claim a portion of a pension plan, the Court determined that both vested and unvested pension plans were divisible as marital property. In its opinion, the Court listed a number of rules that govern pension valuation in Tennessee. The portion of the pension plan that accrues during the marriage is the only portion of the plan that is considered marital property. Even if the non-employee spouse did not contribute financially to the pension plan, the plan is still considered marital property subject to division between the parties. Courts should base valuations on a date as near as possible to the date of the divorce.
After stating some general rules governing pension plan valuation in Tennessee, the Court set forth two possible methods of pension plan valuation. The first method of valuation presented by the Court was the “present cash value” method. This method requires the trial court to calculate the value of the pension plan on the date of the final divorce decree. Once the value of the plan is calculated, the trial court may award the non-employee spouse interest in the pension plan by distributing some portion of the marital estate that is equivalent to the non-employee’s projected share. This is referred to as an “offset.” The Court found that this method is preferable if the “[pension plan] can be accurately valued, if retirement is likely to occur in the near future, and if the marital estate includes sufficient assets to offset the award.” The second method of valuation outlined by the Court was the “deferred distribution” or “retained jurisdiction” method. Like the present cash value method, the deferred distribution method calls for the trial court to calculate the value of the pension plan at the time of the divorce decree. The deferred distribution method, however, delays the actual distribution of the benefits until the date on which the pension plan becomes payable. Because this method does not require a present payment of benefits, it has distinct advantages when there is a possibility that the benefits may never be realized by the employee spouse. After reviewing the two methods of pension plan valuation, the Supreme Court of Tennessee held that the method of valuation was at the discretion of the trial court. The Court noted that the trial court should not be burdened by mathematical precision, but should decide which method to use in light of fairness to the parties.
The next case, Crowley v. Tiede, No. M1999-00649-COA-R3-CV, 2000 WL 1473854 (Tenn. Ct. App. Oct. 5, 2000) utilizes the deferred distribution method from the Cohen opinion but also elaborates on valuation concepts that were not fully addressed in Cohen. Mr. Tiede was employed with the Army and Air Force Exchange Service for over 28 years before his retirement. Four years prior to his retirement, Mr. Tiede and his wife divorced. The marital dissolution agreement entered by the trial court called for Mr. Tiede to pay his wife 50% of the retirement benefits that accumulated during the 23 years he was married and contributing to his pension plan. The parties agreed to use the deferred distribution method described in Cohen and postponed payments from Mr. Tiede to his ex-wife until his actual retirement, which occurred four years after the divorce. The agreement divided the number of years the parties were married by the number of total years Mr. Tiede earned retirement benefits and enumerated that Mrs. Tiede would be awarded 39.84% of Mr. Tiede’s pension plan. When Mr. Tiede retired, the payments drawn from his pension plan were based on the highest three years’ salary before his retirement, all of which happened to occur after his divorce. Mrs. Tiede claimed that she was entitled to 39.84% of the amount of money actually drawn by Mr. Tiede from the pension plan, based on an annual post-divorce salary of $80,010.00. Mr. Tiede claimed that his ex-wife was only entitled to 39.84% of what his benefit would be based on his average salary for the last three years of the marriage, which was $57,799.00. The trial court awarded Mrs. Tiede 39.84% of the amount of the money actually drawn by Mr. Tiede from his pension plan. Mr. Tiede appealed.
The Tennessee Court of Appeals granted review to address the issue of whether a non-employee spouse may receive a portion of a pension plan based on an increased salary the employee spouse received after the divorce. The court held that post-divorce increases in pension plans may be used to calculate the benefits payable to the non-employee spouse. This rule, however, only applies when the deferred distribution or retained jurisdiction method is used and retirement funds are not allocated until after both the divorce and retirement. Post-divorce increases cannot be applied when a present cash value method is used to distribute retirement funds. The court reasoned that the employee spouse’s pension often builds upon a foundation started during the marriage. The pension continues as an economic partnership after the divorce unless the non-employee spouse is paid the value of his or her share at the time of the divorce under a present cash value distribution. The court further found that the Cohen opinion implicitly adopted a “time rule formula” that requires a division of the number of years the parties were married by the number of total years the employee earned retirement benefits. The Tennessee Court of Appeals concluded that the original agreement approved by the trial court correctly applied the time rule formula. Accordingly, the court affirmed the trial court’s decision to award Mrs. Tiede 39.84% of the amount of money actually drawn by Mr. Tiede from the pension plan, based on an annual post-divorce salary of $80,010.00.
Each retirement plan is unique, and the valuation of retirement benefits is not a standardized process. Skilled forensic accountants and economists can assist parties before trial by performing an initial comprehensive and detailed analysis of retirement benefits and determining whether a pension plan can be divided. A forensic accountant may also greatly benefit a party by providing expert testimony at trial or assisting during the settlement process.
For more information about pension division and valuation, see Division and Valuation of Pension Interests in Tennessee Divorces.