Kentucky's Pension Reform Proposals - UPDATED

Last November on this blog, my office gave a brief rundown of the significant proposals being made to reform Kentucky's public retirement systems. Four months later, it's worth checking in on these efforts again, which I've done below:

Revised pension reform bill released and headed to committee in the Kentucky Legislature. After pulling back their original bill and removing, or making more palatable for some,  certain provisions related to cost-of-living adjustments (COLAs) under the Kentucky Teachers’ Retirement System (KTRS); the implementation of substitute defined contribution plans, similar to 401(k)s (albeit minus the opportunity for SSDI accruals/benefits, as pointed out in our November blog post); among other varyingly dramatic cost-reduction measures, Kentucky Senate and House leaders released their ‘Proposed Senate Substitute’ (PSS) to Senate Bill 1 this week. The full, 293-page text of the proposal has been made available on the State Legislature’s web site, here. It’s hard to know what might stay or go in this revised version; the original draft legislation was itself the product of untold numbers of revisions in the months elapsed from its announcement to its filing on February 20th. And beyond that: I’m not a politics reporter, I just have a thing for retirement systems.

Takeaways from the past two weeks’ developments in Frankfort, for family law attorneys and their clients:

  1. Future clients, who would likely be affected the most by the systemic changes originally included in the plan (more than, say, a participant and former spouse with an already lengthy service record), are likely to keep their defined benefit plans after all, as the switch to 401(k)s appears to have been scrapped due to its unexpected costs.

  2. Future clients are not entirely out of the woods, however, as the current bill’s switch to/integration of a ‘cash balance’ formula to supplement (in some cases) and succeed (in others) the Kentucky Teachers' Retirement Systems’ traditional pension formula may necessitate two separate QDROs, in the event of divorce/dissolution, for the two distinct benefit formulas.

  3. None of this may matter, as leaders from both chambers are facing substantial pressure from constituents who stand to have their benefits reduced or frozen under the proposals, and to whom appeals for consideration of the state’s enormous unfunded pension liabilities (estimated to be somewhere in the range of $40 Billion) understandably ring hollow.

  4. 293 pages is a lot of pension reading, even for me, so I skimmed in both reading and retelling. If you’ve found something within the new text that you think I missed, or would like me to discuss here, or just find interesting and need someone to talk about it with, send me an email and we’ll talk!

As soon as things begin to settle, and we can start to form a clearer picture of what changes may be at hand for Kentucky's public retirement systems and their members, I hope to write another update, this time detailing any specific changes which might affect benefits division in a divorce/dissolution. In the interim, Kentucky Retirement Systems (KRS) is providing detailed daily updates on its web page, here, alongside a number of tools which track the bill's progress and the changes made to its provisions.


  • Of additional interest: Kentucky Attorney General, Andy Beshear, released this 6-page letter to the Legislature, arguing what his office deemed were at least 21 instances of illegality within the new bill itself. 

Hammertime - Part Four: Ohio Case Law Updates

 What's round on the end and high in the middle? QDROs, that's what.

What's round on the end and high in the middle? QDROs, that's what.

We've almost made it all the way through my four-part 'Hammertime' blog series! I don't know about you, but I'm getting pretty exhausted with all this QDRO news, so here's that .gif of MC Hammer dancing again.  Let us all look to its perpetual motion, and effortless, unending dance, as a source of strength, and a testament to the boundless nature of human endurance...  And endurance you'll need, because we've now entered the final installment of my 'Hammertime' blog series, highlighting some of the most recent and important decisions coming out of Ohio.

Cook v. Cook, 9th Dist. Summit No. DR-2003-08-3121, 2017-Ohio-8848
Trial Court has Broad Discretion to Determine Marital Property Interests in a Pension

Dated: December 6, 2017
Affirming

This is a great case for a refresher course on your favorite thing, coverture!  In this case, the decree stated, in part, that Husband’s OPERS pension (payable at Husband’s retirement as a stream of future monthly benefits over his lifetime) should be equally divided by DOPO (Division of Property Order), and that, for purposes of making the division, the marital period was from the date of marriage to the date of trial.  The subsequent DOPO, entered by the trial court and signed by both parties, awarded Wife a percentage of a fraction of Husband’s benefits (50% of the coverture fraction, i.e., number of years of marriage overlapping with OPERS participation, divided by total years of service credit).   The DOPO did not indicate a limit to the number of monthly payments Wife should receive.  Ten years later, Husband claimed that the DOPO should terminate because Wife had, by the time of his motion, received half of the marital portion of his OPERS pension (based on what appeared to be a present day cash valuation he obtained for the term of marriage).  Husband further claimed that if the DOPO was not terminated, the trial court would otherwise run afoul of improperly modifying the decree by way of the DOPO. 

The crux of Husband’s argument was premised on his notion that the decree provided for a fixed value assignment of the marital portion of the OPERS account to Wife, and that this ascertainable amount had been paid.  The trial court disagreed with Husband’s interpretation of the decree, and determined instead that a specific value had not been established by the terms of the decree, and therefore, that there had likewise been no improper modification of the decree by way of the DOPO. 

This opened the door to the Court of Appeals’ full review of the trial court’s excellent analysis distinguishing the methods that a trial court might employ to determine an equitable division of a pension based on either: a fixed present cash value (for an immediate distribution offset with property other than the pension itself); a frozen coverture method (to divide the pension itself at retirement, with a formula and value that are fixed as of date of divorce); or a traditional coverture method (to divide the pension itself at retirement, with a formula that is based on the value as of the date of retirement - the method employed by the DOPO).  The differences between the three methods, and what circumstances warrant utilization of one over another could be the basis of a white paper; so suffice it to say for this post, at least, that Ohio courts typically utilize the traditional coverture method, as espoused under Hoyt v. Hoyt.   But if you ever get confused, Cook provides an excellent primer.

Berger v. Berger, 11th Dist. Geauga No. 2017-G-0108, No. 2017-Ohio-9329
Trial Court has Broad Discretion to Secure an Awarded Property Interest

Dated: December 29, 2017
Modified and Affirmed as Modified

Although this case is concerned more with the adequacy of the security ordered by the trial court to preserve a spouse’s awarded marital property interest ($1.9 million, which was to be paid over a 12 year period), it is hinged on the proposition that a trial court has broad discretion in fashioning its equitable division of marital property.  To the extent a trial court deems necessary, as in this case, this may include the discretion to order Husband’s maintenance of a life insurance policy for Wife’s benefit to protect her property interest until fully transferred. The take home here: particularly when assigning an interest in a retirement asset that cannot be immediately realized by the assignee spouse, such as with many non-qualified ‘executive’ plans and certain government and church plans exempt from ERISA (which do not accept QDROs or other state court property division orders), precaution must be taken to ensure the transferee spouse’s property interest is secured.  This may be by a term-life policy, or some kind of beneficial interest in the asset itself, such as with a preretirement or postretirement survivor annuity, when available under the plan terms.

Okoye v. Okoye, 9th Dist. Summit No. 2013-09-2546, 2018-Ohio-74
Trial Court has Broad Discretion to Determine Marital Property Interests in a 401(k)

Dated: January 10, 2018
Affirmed

Husband argued that a marital 401(k) account should not be considered marital property subject to division to the extent a portion of it – he claimed – was pledged to re-pay a marital debt, including a loan expended for purposes of medical treatment and the adoption of the couple’s children.  The trial court did not find Husband’s evidence of the debt (his unrebutted oral testimony) to be credible, and instead found Husband had dissipated funds from the account without Wife’s knowledge.  The trial court thus determined the entire account to be marital, and subject to equitable division.  The Court of Appeals, in affirming, reminds us that: “Only in the exceptional case, where the evidence presented weighs heavily in favor of the party seeking reversal, will the appellate court reverse.”  The Court was unimpressed by the fact that the testimony was unrebutted, noting, “The mere fact that testimony is uncontroverted does not necessarily require [a court] to accept the evidence if [it] found that the testimony was not credible.”

Fitzgerald v. Fitzgerald, 8th Dist. Cuyahoga No. DR-14-352039, 2018-Ohio-387
A QDRO that Improperly Modifies the Decree is Voidable for Error and Subject to Appeal

Released and Journalized: February 1, 2018
Reversed and Remanded

The parties in this case agreed that the QDROs entered by the trial court deviated from the terms of their settlement agreement.  The parties disagreed, however, as to whether this made the QDROs "void" for lack of subject matter jurisdiction (meaning the QDROs were not final appealable judgments, but could be vacated or set aside under the inherent powers of the trial court), or "voidable" for error only, and subject only to appeal for review of the error concerned.  The Court traversed a riddled landscape of prior case law within the 2nd and 8th Districts – including review of the dangers inherent in “jurisdictionalizing” error – and determined that the QDROs, which were agreed to be non-compliant with the settlement terms, were not void for lack of jurisdiction, but rather, voidable for error, and appealable.  Since the appeals were timely filed, the Court vacated the QDROs, and remanded to the trial court for further review in light of the parties’ agreement.  

As an aside, noting the potential consequence of its decision, in that often a plan administrator may reject a QDRO long after the time for an appeal has expired, the Court opined that when there was no issue regarding the conformity of a QDRO to settlement terms, but rather an issue arises because a plan administrator subsequently refuses the terms of the QDRO, a Rule 60(B) motion is the appropriate venue for reconsideration. 

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In closing out 'Hammertime' - I can't resist hammering it home with this final gem.  The takeaway?  Sometimes when you have a hammer, it really is a nail!  Thanks to Maury White, Esq. for sharing this from a past IACP workshop.

Hammertime Installments:

Additional Links of Interest for Diehard QDRO Fans:

Hammertime - Part Three: Kentucky Case Law Updates

HammerNails.jpg

I'm sure to no one's disappointment but my own, we're just going to launch into this third installment of my four-part 'Hammertime' blog series, leaving behind hammer jokes and dated cultural references for now (I'm not promising there won't be any, but you'll have read on to find out).  Below please find some of the most recent and important opinions coming out of Kentucky.

Grasch v. Grasch, No. 2016-SC-000591-DG (Ky. 2017)
Contingency Fee Contracts May be Considered Marital Property

Rendered: December 14, 2017
To Be Published
Reversing and Remanding

What do contingency fee contracts have to do with the division of retirement assets?  Just about everything, says the Court of Appeals. This case determined the status of contingency fee contracts as marital property subject to equitable division under KRS 403.190(2).  In so finding, the Court relied heavily on the analogous treatment of non-vested retirement assets in divorce, under Kentucky law (specifically Poe v. Poe), and a lineage of cases (in and out-of-state) recognizing that certain property interests – such as unvested retirement assets – may be considered marital property to the extent they eventually vest.  Contingency fee contracts, like unvested retirement assets, must be treated equitably in divorce, requiring the trial court in this case to “…[focus] on the contribution of the non-attorney ex-spouse to the marriage through work both outside and inside the home.”  The Court conceded that this diverges from traditional notions of property law, but found such treatment captures the “modern relationship” between property law and family law.  In its holding, the Court further determined, consistent with Kentucky law, that the trial court must apply a delayed-division method and formula to determine the parties’ respective shares of such marital property, if any, at the time of decree.

Duffy v. Duffy, Nos. 2016-CA-000983-MR & 2016-CA-000995-MR (Ky. App. 2018)
Unvested Restricted Stock Units (RSUs):  Asset or Income Column, the Court Must Choose

Rendered: January 19, 2018
To Be Published
Affirming

“Double-dipping” might sound delicious if we’re talking Graeter’s, but the legal concept of “double-dipping” is not-so-good.  A marital interest is either property or income to be included for support calculations, but it can’t be both.  For this reason, the trial court amended its own Findings of Fact and Conclusions of Law, and the Court of Appeals agreed with such amendment, finding no reason that the double-dipping prohibition would not apply both to calculation of gross income and to potential income.  Further, the Court upheld the trial court’s determination that Husband’s RSUs were “paid” during the marriage (despite the fact that Husband separated from employment, causing forfeiture of the RSUs), were marital property, and therefore were subject to equitable division.  The Court further affirmed that Husband purposely dissipated marital assets, namely the RSUs, after reviewing the trial court record evidencing Husband’s separation from employment was part of a scheme to prevent Wife from receiving any share of the RSU proceeds.

Davisson v. Davisson, 2015-CA-001559-MR (Ky. App. 2018)
Pre-Trial Disclosure of Separate Property Claims in Retirement Accounts

Rendered: January 19, 2018
Not To Be Published
Affirming in Part, Reversing in Part, and Remanding

This case stands as a stark reminder that a party claiming any non-marital interest in property has the burden of establishing such claim.  The Court affirmed the trial court’s assignment of Husband’s retirement account, as well as the trial court’s determination that Husband waived any pre-marital claims to such account.    As its basis, the trial court observed that the account, containing pre-marital stocks, was not disclosed on Husband’s Preliminary or Final Verified Disclosure Statements, despite his comprehensive listing of over 70 other assets in which he claimed a non-marital interest.   Observing that this seemed like an inadvertent omission, the Court nonetheless respected the trial court’s broad discretion over pre-trial discovery orders, and, while acknowledging that the result was a harsh one, determined that the trial court did not abuse its discretion.

Brodie v. Brodie, No. 2016-CA-000453-MR (Ky. App. 2018)
Equitable Division and Retirement Account Loans

Rendered: January 19, 2018
Not To Be Published
Affirming in Part and Remanding 

If music is the poetry of air, then QDROs are the poetry of my heart.

Sure, Husband got to keep the songs he wrote (according to even Wife, Husband was an excellent songwriter), which were found to be marital property, but because they had no ascribed monetary value, they were not subject to equitable division.  But whether the loans taken from the parties’ mutual retirement accounts were marital in nature turned out to be a more difficult tune to follow. 

The Court spent a great deal of time picking (see what I did there?) through the evidence regarding the timing and reasons behind the various loans to determine whether they were taken for marital or non-marital purposes.  From an equitable division standpoint, it is important to recognize that a loan taken from a retirement plan is held by the plan as an asset in the balance of the retirement account.  Therefore, when the Court considers a division of the retirement account, the loan must be determined – just as the retirement plan itself – to be marital or non-marital in nature prior to establishing an equitable division.  After all, the Court noted, if the loan funds had been maintained in the account (rather than being converted to loan proceeds), the funds would have likewise been subject to equitable division to the extent accumulated during the marriage.

The final chorus:  When there is a loan on a retirement account in a divorce, special attention must be paid as to the timing and use of the loan proceeds in order to properly determine the loan’s status as either marital or non-marital, and to equitably apportion the parties’ liabilities accordingly.

Hammertime Installments:

Hammertime - Part Two: Sixth Circuit Weighs In On QDROs

Sun Life Assurance Co. v. Jackson, No. 17-3120 (6th Cir. 2017)
United States Court of Appeals for the Sixth Circuit:  Decree Deemed to be a QDRO

Decided and filed: December 13, 2017
Affirming

 What could be inside?

What could be inside?

It isn’t often LeBron James comes up in a QDRO case, trust me.  But that is exactly what you will see when you sit down to read this important case coming out of the 6th Circuit.  In outlining its standard of what is and is not 'clearly specified' (as defined under the 'REACT' amendments to ERISA, 1984), the Court observed:

"...of a sports fan asked this question:  Who is the greatest basketball player of all time: Michael Jordan or LeBron James?  He might respond “LeBron James,” which clearly specifies the answer.  Or he might respond “Number 23,” which does not clearly specify the answer.  But if he responded “Number 23 of the Cleveland Cavaliers,” no one would be confused.  The sports fan did not state “LeBron James.”  But he did specify him."

This case touches upon several circuit-specific themes, including preemption of state law, and the validity of posthumous orders.  In this case, a divorce decree itself was deemed to be a QDRO, establishing the divorced couple's child as the legal beneficiary of Husband’s employer-sponsored life insurance policy.  This, despite Husband’s failure to change his designation to name the child in compliance with the decree (Husband had instead left intact, through the time of his death, his pre-decree designation of his uncle).  The Court found that the proceeds must be paid to the parties’ daughter, pursuant to the terms of the decree-deemed-QDRO, and not to Husband’s designated beneficiary on file with the insurance company (naming his uncle).  To reach this result, the Court went through the QDRO requirements under ERISA in detail, and found, under § 1056(d)(3), that the terms of the decree “clearly specified” each of ERISA’s requisites.

That's it for this installment of my four-part 'Hammertime' blog series, but keep checking back for my Kentucky and Ohio case law updates, which will follow quite closely after this posting.  And who knows? Maybe I'll work in a few more hammer jokes, while I'm at it. A certain Peter, Paul and Mary song, perhaps?

Hammertime Installments:

Kentucky’s Proposed Pension Reform Plan

On October 18, 2017, Governor Matt Bevin and state Republican leaders unveiled a plan that transitions Kentucky Retirement Systems’ traditional pension plans and hybrid ‘Cash Balance’ plans into Defined Contribution Plans for all newly enrolled (and many current) employees.  If the bill passes, substantial changes will be made, impacting participant benefits, retiree healthcare, disability, and death benefits. 

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