Latest Legal Changes Affecting Retirement Division in Family Law
The Right to Retire
The Court of Appeals, in February 2017, affirmed a spouse’s right to retire at age 65. In the case, IRMO McLain, the Court cited to a 1998 case,IRMO Reynolds, which held that no one can be compelled to work after age 65 in order to pay spousal support at a level commensurate with when the obligor was still regularly employed. In McLain, the Court was considering an inverse of this argument- i.e. whether Wife could be compelled to work after age 65, even though, previously, she had not been substantially employed, in consideration of California’s strong public policy in favor of spouses becoming self-supporting. The Court held that retirement was a part of the marital standard of living (as the parties were already living on retirement income) and thus, Wife could not be compelled to work after age 65.
In IRMO Shimkus (2016) the Court of Appeals held that a firefighter who retired at 61 (after being employed for 31 years as a firefighter before achieving the rank of Fire Captain) did not retire early, citing to California Code of Regulations (which cites to the Government Code) which deems age 55 as the normal retirement for firemen.
Social Security is not Divisible – Even in the Face of Inequity
In 2016, the Court of Appeals affirmed the protection and non-divisibility of Social Security Retired pay. In IRMO Peterson, the parties entered into a Marital Settlement Agreement. Husband’s Social Security benefits (valued at $228,000) were affirmed as his separate property. However, Wife’s Los Angeles County Employees Retirement Association (LACERA) benefits (valued at $215,000) were considered community property, because they were earned during employment that took place during the marriage. What resulted was that Husband was allowed to keep 100% of his Social Security Benefits, in addition to one-half of Wife’s LACERA benefits. This inequitable result left Husband with $335,500 in retirement benefits, and Wife with only $107,500 in retirement benefits.
Upon learning of this result, Wife asked the court to modify the parties’ prior agreement. She proposed that the court either: 1) divide the couple’s property in a way that accounted for this disparity, by either requiring Husband to reimburse the community for the Social Security contributions and then divide them equally, or, 2) allocate all of the LACERA benefits to her as an equalization of the the retirement assets. The trial judge declined, finding that, under preemption principles, federal law prevented the court from considering Husband’s Social Security benefits in dividing the couple’s property. Despite expressing sympathy for the inequity suffered by Wife, the Court of Appeals affirmed the decision.
Disability Pay is Non-Divisible
Non-divisibility of disability pay is not a new concept. In 1981, the U.S. Supreme Court held that the Supremacy Clause precluded California (or any other state, for that matter) from dividing military retired pay pursuant to community property laws. McCarty v. McCarty. In response to the McCarty precedent, the Federal Uniformed Services Former Spouse Protection Act was enacted, which allowed state courts to divide “disposable retired pay” in accordance with state law. Then, in 1989, the U.S. Supreme Court decided Mansell v. Mansell, which held that Title 38 disability benefits are, by definition, not divisible community property assets.
IRMO Gillmore and IRMO Stenquist which, taken together, hold that it is a “settled principle that one spouse cannot, by invoking a condition wholly within his control, defeat the community interest of the other spouse.” In other words, an employee spouse cannot defeat the nonemployee spouse’s expected community benefit by unilateral election (or even inaction). Afterwards, a line of California cases came down which supported the principle laid down in IRMO Gillmore and IRMO Stenquist, which reiterated the retirement plan’s responsibility to make due on a non-employee spouse’s election to receive his or her benefit, even when the employed spouse, who has reached retirement age, elects to continue working.
Historically, California required the military spouse to indemnify and/or reimburse the non-military spouse for losses incurred in the event that the military spouse unilaterally elected to take non-divisible disability pay in lieu of divisible retirement pay- even after judgment had been entered. This was reaffirmed as recently as 2016 in IRMO Chapman and IRMO Cassinelli.
In In re Marriage of Chapman (2016), the Court of Appeals held that a husband’s post-judgment election to take combat-related special compensation benefits in lieu of the military retirement benefits specified in the judgment could not defeat Wife’s right to receive her community property share of the benefits he voluntarily relinquished. The Court determined it was error to impose a constructive trust on such benefits, since he had not acquired them wrongfully. However, it ordered that the wife was entitled to receive her benefits from the husband’s other assets.
Similarly, in In re Marriage of Cassinelli (2016), the Fourth District Court of Appeals held that it is error for a court to order the military spouse to pay monthly spousal support as compensation to the nonmember spouse for the loss of monthly military retirement benefits. In this case, she stopped receiving monthly retirement payments when Husband made a post-judgment election to receive disability benefits in lieu of divisible retirement pay. Instead, the justices ordered the lower court to award the Wife monthly payments as damages, due to Husband’s election causing “the loss or destruction of a property right belonging to [the wife].”
For nonmember spouses, when it rains it pours. In 2017, the U.S. Supreme Court stepped in, once again, in Howell v. Howell to take matters one step further. The U.S. Supreme Court held that a state court cannot order a veteran spouse to either indemnify or cover for the loss of a former spouse’s portion of military retirement that was caused by the veteran’s waiver of retirement benefits. (Such waivers of retirement benefits are made by veterans to instead receive service-related disability benefits).
Howell essentially overruled cases like IRMO Chapman, In re Krempin, IRMO Stenquist, and IRMO Cassinelli which attempted to compensate nonmilitary spouses for the loss of benefits resulting from the unilateral elections of the military spouse. With this decision, state courts now have no ability to fashion an equitable remedy to allow the nonmilitary spouse to receive the expected, designated portion of military retirement, if the military spouse decides to opt for non-divisible, disability pay instead. The U.S. Supreme Court, in Howell, described equitable remedies as merely changing the label on payments in order to get around the non-divisibility. The Court said that labeling the payments as reimbursements or indemnifications will not make them permissible.
Frozen Benefit Rule- More Changes to Military Retirement Pensions
In 2016, the federal government passed a law referred to as the “Frozen Benefit Rule”. (It was actually a revision to the Uniformed Services Former Spouses’ Protection Act). This has impacted military retirement division in the event the military spouse is still active duty at the time of dissolution. (If the military spouse is already retired, then the parties may continue to use the “Time Rule” - which is sometimes incorrectly dubbed the “Brown Formula” - which is a ratio of years of marriage weighed against creditable service years.)IRMO Poppe; IRMO Grey.
The reason it is called the “Frozen Benefit Rule” is that the pension is to be divided and valued based upon the retiree’s pay as if the retiree had retired on the date of division - not the retirement date. In other words, the non-military spouse’s portion of the pension is determined by the “High Three” (meaning the highest three years of pay) at the time of the division. The value of the benefit is “frozen” at the time of division- not at the time of the actual retirement. Thus, if the divorce occurs when the military spouse is of a lower rank, the non-military spouse will not get the “growth” on the pension resulting from subsequent years of post-judgment service.
This is contrary to California state law. In California, the non-employee spouse is entitled to the “growth” on retirement benefits (including pension benefits) even if they are not vested at the time of the dissolution. IRMO Brown. In California, the pension benefit is valued at the time of the retirement, not “frozen” at the time of dissolution. Thus, if the employee spouse’s pension benefits increase post-judgment (ie increased benefits due to promotion and salary increase), then the nonemployee spouse enjoys the increase in the community portion as well.
Since Howell has effectively tied the state court’s hands in regard to equitable remedies, it is not clear what the best method is for compensating non-military spouses for this loss of their rights under state law. There is a glimmer of hope, however. If the military spouse will agree to a reimbursement or indemnification in a judgment, then the state court can enforce the agreement. (The courts simply cannot impose equitable remedies over the military spouse’s objection). Certainly, practitioners are encouraged to utilize a QDRO expert to help with crafting language in their judgments that will help compensate the nonmember spouse for the loss of benefits. Possibilities include agreements to amend the division order after retirement, an actuarial buy-out, or a “Gillmore election.” While there are downsides to these options, there are no better available remedies at this time.