Ohio's Highest Court Speaks on Unvested Retirement Benefits in Divorce

Daniel v. Daniel, Slip Opinion No. 2014-Ohio-1161 (March 26, 2014)
Unvested Military Retirement Benefits Earned During Marriage Constitute Marital Property

Decided: March 26, 2014
To be Published
Judgment Reversed and Cause Remanded

In Daniel v. Daniel, Slip Opinion No. 2014-Ohio-1161 (March 26, 2014), the Supreme Court of Ohio squarely addressed the issue of whether an unvested military pension earned during the marriage should be considered marital property subject to equitable division.  This case was brought to my attention by a colleague, after our recent discussion regarding the status of unvested retirement benefits in divorce under Ohio law.  If there was any question, this author's opinion is that the matter has finally been put to rest by Daniel:  Unvested retirement benefits earned during the marriage constitute marital property subject to equitable division by either the present cash value or deferred distribution method (via QDRO, or other similar court order).

An unvested retirement benefit is one where the employee has not yet fully earned the right to receive the benefit. Typically, companies – or federal/state/municipal agencies and the military – require a certain number of years of service before an employee becomes vested, and the employee often becomes vested in increments.  An employee is said to be vested when he or she completes the minimum terms of employment necessary to be entitled to receive retirement pay in the future.

By statute in Ohio, under R.C. 3105.171(A)(3)(a)(i) and (ii), trial courts must consider "the retirement benefits of the spouses" acquired during the marriage when dividing marital property in accord with R.C. 3105.171(C).  According to Ohio’s intermediate appellate courts, this mandate extends beyond vested retirement benefits to include unvested benefits as well.  See Lemon v. Lemon, 42 Ohio App. 3d 142, 537 N.E. 2d 246, 248 (4th Dist. Hocking County 1988); see also Younkin v. Younkin, 1998 WL 894849, *3 (Ohio App. 10th Dist. Franklin County 1998); Varns v. Varns, 1992 WL 6649, *1 (Ohio App. 9th Dist. Wayne County 1992); Haller v. Haller, 1996 WL 116140, *2 (Ohio App. 12th Dist. Warren County 1996)(citing numerous cases from the 10th and 12th Districts).  As a matter of first impression in Ohio, in Lemon, a seminal and oft-cited case on point, the Appellate Court determined that the trial court erred in failing to consider Husband's unvested Ohio Operating Engineers Pension Plan (a private-employment defined benefit plan) a marital asset subject to division upon the parties' divorce.  The Lemon Court held that the controlling statute clearly required consideration of unvested retirement benefits as marital assets.  Lemon, like the Daniel Court, interpreted the applicable statute to have broad reach, concluding that the legislature must have intended so; both Courts expressly observed that no statutory distinction was made between vested and unvested retirement benefits (see Lemon at 249; Daniel at Paragraph 9, page 4; see generally Daniel's "Syllabus of the Court"). 

Of note, and a basis upon which to read the Daniel Opinion as having a general application beyond that of military benefits, the Daniel Court referenced Wilson v. Wilson, 116 Ohio St.3d 268, 2007-Ohio-6056, 878 N.E.2d 16 (2007).  In Wilson, the trial court awarded one-half of Husband’s Teamsters' pension earned during the marriage to Wife, “if and when it becomes vested”.  After acknowledging the private-employment nature of the Teamsters' pension, as opposed to a non-private military pension, the Daniel Court aptly reflected: 

Our holding in Wilson v. Wilson, 116 Ohio St.3d 268, 2007-Ohio-6056, 878 N.E.2d 16, provides a useful example of the “deferred distribution” method of accomplishing an equitable division of an unvested retirement benefit.

(See Daniel at Paragraph 12 & FN1, page 5).  

After Daniel and Wilson, as well as Lemon and its progeny, I think it a safe position to take that in Ohio, both vested and unvested retirement benefits earned during marriage fall within the ambit of “martial property” as defined by R.C. 3105.171(A)(3)(a).  Thus, such benefits are subject to equitable division pursuant to R.C. 3105.171(C), and trial courts may utilize a QDRO, or other similar order, as a mechanism to defer distribution until benefits become fully vested and mature.  

BOTH SIDES OF THE RIVER?

Kentucky appellate courts have taken the same position – i.e., that vested and unvested retirement benefits earned during the course of the marriage constitute marital property subject to equitable division.  See Poe v. Poe, 711 S.W.2d 849, 856 (Ky. App. 1986); Smith v. Rice, 139 S.W.3d 539, 541 (Ky. App. 2004).  As a matter of fact, and as observed by the Daniel Court, the majority of states have reached the same conclusion (see Daniel at Paragraph 10, page 4, citing a Tennessee Supreme Court case listing similar cases from 37 states). 

To that end, of the six states bordering the Ohio River, there is only one state that considers unvested benefits separate non-marital property.  In Indiana, unvested retirement benefits belong to the employee-spouse and are not divisible in divorce (however, the court may consider their eventual value as part of dividing other marital property).  Under Indiana’s statute, the determinative factor as to whether retirement benefits constitute "martial property" subject to distribution falls upon whether the employee-spouse “possesses” the funds.  To the extent retirement benefits remain unvested at the time of equitable distribution, such will be "acquired," if at all, only after the dissolution and therefore should not be characterized as a divisible marital asset.  See Bizik v. Bizik, 753 N.E.2d 762 (Ind. App. 2001); Harvey v. Harvey, 695 N.E.2d 162 (Ind. App. 1998).

TODAY’S ‘TAKE HOME’ FOR FAMILY LAW PRACTITIONERS ON BOTH SIDES OF THE RIVER

Thus, in Ohio and Kentucky, when classifying and dividing retirement benefits in divorce, both vested and unvested benefits earned during the marriage should be considered marital property subject to equitable distribution.  This means that whether in settlement negotiations or at trial, these amounts are ‘on the table’. Especially when representing the Alternate Payee, you do not want to leave the table without having ensured appropriate allocations; the Alternate Payee should maintain the same vesting status as the Participant and distributions should be made accordingly. 

VEST, VESTED, VESTING -- Words That Should Never be Arbitrarily Used in a QDRO

Don’t inadvertently short-change your client’s rights.  As seen by the canvas of cases above, it is state law, not ERISA, that determines how much of an employee’s retirement benefit is available for distribution in divorce (for non-ERISA plans, the same is also generally true, though there are exceptions, such as the Federal Thrift Savings Plan).  In fact, ERISA allows the assignment to an Alternate Payee of 100% of the current or future retirement benefits of the employee-spouse. 

However, most defined contribution plan model QDRO forms limit the Alternate Payee's award to a portion of the Participant's “total vested account balance”.  This is because the plan’s model is designed in an effort to ease the plan’s administrative and financial burdens by attempting to avoid the additional bookkeeping involved with an award of unvested benefits to an Alternate Payee.  Therefore, when using a retirement plan’s model QDRO, when you see the words "vest, vested, or vesting", first look to controlling state law to determine whether there is indeed any such restriction on divisibility with regard to unvested benefits.  The bottom line in Ohio or Kentucky?  When the plan's model language assigns only "vested" benefits to the Alternate Payee, if such language differs from your client’s goal or the parties’ intent, make sure you use your own language, not the plan’s.

Also, be aware that some plans may (wrongly) resist language assigning unvested benefits to the Alternate Payee, or even flatly reject a QDRO until the Participant’s account has vested.  To get around such obstacles, if the intent is to award a portion of the unvested benefits to the Alternate Payee, make sure you’ve included language in the parties' property settlement agreement (or trial order) that will make the Participant personally liable to the Alternate Payee for any such amounts.  A motion holding the employee in contempt may be less expensive and time consuming than trying to force the plan through litigation to pay unvested amounts, or the risk and expense associated with waiting to submit a later QDRO, once the unvested amounts ultimately vest with the Participant.

Finally, make sure to review the Participant’s most recent account statement, particularly with a defined contribution plan.  If the entire account balance is vested, non-vesting is obviously a non-issue, and saves a fight with a recalcitrant plan (for another day...).