Gruber v. PPL Retirement Plan is a Pennsylvania federal district court case and, as such, it might not be on the radar screen of California family law attorneys. Yet, it usefully demonstrates how retirement plan officials might interpret a QDRO in light of transactions that were not contemplated when the QDRO was entered.
In Gruber, a 2005 QDRO awarded the alternate payee (Cheryl) 53% of the participant’s (Bryn) accrued benefit under the PPL Retirement Plan as of December 20, 2004. Cheryl was also awarded 53% of any early retirement benefits subsidized by the employer if Bryn retired before age 65.
In 2009, Bryn terminated employment with PPL under a company-wide workforce reduction program. Under the program, among other benefits that Bryn received, his pension was enhanced in two ways. First, he received an additional benefit from the Retirement Plan calculated solely based on his age and length of employment. Second, Bryn received a separation benefit which included a fully subsidized retirement benefit. Essentially, this meant that Bryn received his age 65 benefit beginning at age 57; he suffered no actuarial reduction to start his pension early. Essentially, that translates to 8 years of free payments.
The Retirement Plan, which already had the QDRO on file, calculated Cheryl’s share of the additional benefit and paid it to her. However, the Retirement Plan determined that Cheryl was not entitled to any portion of the separation benefit because (1) the separation benefit did not accrue until Bryn terminated employment from PPL and satisfied the necessary preconditions under the workforce reduction program, and (2) the separation benefit was a subsidy, but it wasn’t a subsidy for early retirement. Rather, it was a separate benefit because of the company-wide workforce reduction program. The ruling does not specify whether the employer’s separation program was first instituted in 2009, or whether it was a pre-existing program; this might have been a factor that influenced the outcome.
In a Memorandum Opinion (2012 U.S. Dist. LEXIS 42759) the district court focused on the fact that the separation benefit did not accrue over time, and was not expressed as a benefit commencing at normal retirement age. Accordingly, the court held, the separation benefit did constitute the participant’s “accrued benefit as of December 20, 2004” which was the terminology used in the QDRO (as is the case with many QDROs).
Furthermore, the court held that the separation benefits, although correctly characterized as a subsidy to Bryn’s normal retirement benefit, was not a subsidy on account of his early retirement. Instead, it was a subsidy because Bryn satisfied the preconditions under the company’s organizational restructuring. In other words, the employer subsidized Bryn’s retirement benefit not because he retired early but because he agreed to terminate his employment on terms established by PPL.
This case harkens back to Marriage of Gram, Marriage of Frahm and Marriage of Lehman. These three California cases illustrate the complexity of dividing pensions that have been enhanced by the employer in various ways, usually but not necessarily always in conjunction with workforce reduction. The question in these cases is whether a spouse who owns a community property interest in an employee’s retirement benefit under a defined benefit pension plan owns a community property interest in the enhanced benefit. The question is one of characterization of property, not apportionment between the employee and the spouse. In other words, the courts are asked to characterize the enhancement as either community property or separate property. Only if the character of the enhancement is found to be part of the community property benefit will it be apportioned between the employee and the spouse.
The facts are nearly identical in these three cases. The employer offers an early retirement enhancement to eligible employees as an inducement to retire and the employee-spouse accepts it and retires early. He is usually credited with additional fictional years of service and is treated as being several years older than his actual age for purposes of calculating his early retirement benefit. In each case, the non-employee spouse claims a share of the increased pension as part of the community property interest in the Plan.
In Marriage of Gram, 25 Cal. App. 4th 859 (1994), the Court of Appeal held that the enhancement was part of the expected retirement benefit, a form of deferred compensation, and that as part of the community property interest it should be divided based on the time rule. The Court also held that in apportioning the enhanced retirement benefit using the time rule, the fictional years of service that the company added for purposes of calculating the enhancement should be included in the time rule fraction.
Two years later in Marriage of Frahm, 45 Cal. App. 4th 536 (1996), the Court of Appeal held that the employee-spouse’s enhanced benefit was a severance benefit, not part of his retirement benefit. Although the pension was derived from employment and was community property, the severance payment resulted solely from the employer’s implementation of the voluntary separation package. It had not accrued during the marriage but arose well after divorce and, therefore, was the husband’s separate property.
In 1998, the California Supreme Court decided Marriage of Lehman, 18 Cal. 4th 169 (1998). The trial court apportioned the total enhanced retirement benefit using the time rule, but did not include the three fictional years of service credited to the employee-spouse in the denominator of the time rule fraction. The Court of Appeal affirmed, agreeing with the analysis in Frahm and expressly disagreeing with Gram. Upon further appeal, the California Supreme Court affirmed.
At the crux of the Supreme Court’s decision in Lehman is its statement that “[t]he 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.” [quoting from earlier California cases such as Marriage of Brown and Marriage of Gillmore. The Supreme Court pointed out that the stream of income will depend on events that occur after divorce, such as changes in compensation and changes in the benefit formula. When retirement day arrives, the benefit may be less than expected or more than expected. This is the risk that both parties take and the reward that both hope to reap.
These changes, according to the Court, do not affect the character of the benefit as a community asset. Any in-crease is still derived from the underlying pension benefit and if the spouse owns a community property interest in the employee’s retirement benefits, the spouse owns an interest in the employee’s retirement benefits as enhanced, because it is the right to the retirement benefit that under-lies the right to an enhancement of the retirement benefit. Whether greater or lesser than expected, if the right to retirement benefits accrue, in some part, during marriage before separation, then the spouse enjoys the increases and suffers the decreases along with the employee.
So what’s the take-away from Gruber? When you’re dividing a pension plan, it’s important that you don’t rely on standard language from the plan’s model QDRO. Gruber demonstrates that the pension plan may put its own spin on the language of the QDRO, and that doesn’t necessarily capture all the possible benefits, rights and features that may become payable under the plan at a later time. Once the plan identifies an element that doesn’t fit squarely within the QDRO language, interpretation is up for grabs, and you’ve triggered ERISA.