The case that keeps on giving...

Shown v. Shown, No. 2013-CA-001523-MR (Ky. Ct. App. 2015)
Social Security Offset - Consideration Under KRS 403.190(1) When Dividing KTRS Pensions In Divorce

Rendered: December 18, 2015
To Be Published
Opinion Vacating and Remanding

Author’s Note: Thank you Tom Pugh (of Pugh & Roach, Attorneys at Law, PLLC) for sharing this case with me the day it came out - actually that very morning. A holiday gift from a fellow nerd. Just what I always wanted, and it fits me perfectly!!

Just in time for the holidays… the case that keeps on giving. As you will see, Shown has been around the block once before, all the way up to the Kentucky Supreme Court, in fact. In the first round, the landmark Supreme Court decision resulted in Kentucky Teachers’ Retirement System (KTRS) pensions being considered marital property subject to equitable division in divorce (in certain statutorily proscribed circumstances). This time around, the Kentucky Court of Appeals has followed suit by issuing an equally momentous decision with regard to KTRS pensions, but this time concerning the applicability of Social Security offset when dividing KTRS benefits in divorce.

The topic of Social Security offset could be its own white paper… but I’ve got New Year’s Eve plans. Believe it or not, my plans don’t involve lecturing a bunch of unwilling party attendees about the equities of dividing retirement assets in divorce. That will be at the after-party brunch tomorrow… 

In the meantime, for lack of time, suffice to say that Social Security offset is an equitable remedy of the court. The offset issue is triggered when an employee participates in a pension plan that does not contribute to Social Security, and his/her spouse has accrued Social Security benefits during the marriage. Under federal law, Social Security benefits cannot be assigned, and so such benefits remain separate property of the non-employee spouse in divorce. On the other hand, the employee spouse’s “hypothetical Social Security” (amounts contributed to their pension in lieu of Social Security) are still ‘on the table’ and subject to division to the extent accrued during the marriage (by way of the pension being divided between the parties). 

This resulting disparity can be ameliorated in several ways, depending on the jurisdiction. The most common approaches are for a court to offset the Social Security that the employee spouse would have received (hence the term “hypothetical approach”), or to offset the actual amount of the Social Security benefits of the non-employee spouse. This is where I could go on forever, but you already know how limited my time is with the New Year’s festivities fast approaching. So let’s just get to it.

As mentioned, this is the second appeal of this case. In the first appeal the Kentucky Supreme Court agreed with Wife when she asserted that the trial court had erroneously excluded Husband’s KTRS pension from classification and division as marital property. The Supreme Court reversed and vacated the trial court’s judgment and remanded with the specific direction to the trial court to “exercise the discretion vested in it under KRS 403.190(1).” Shown v. Shown, 233 S.W.3d 718 (Ky. 2007).

Following remand from the first appeal, Wife filed a motion for entry of a single QDRO on the basis of offsetting the value of Wife’s SEP-IRA from the marital value of Husband’s KTRS pension. In the alternative, Wife requested that the trial court order the marital portion of each party’s retirement account be divided by two separate QDROs. In response, Husband filed several motions, including to adjust the relative amounts the parties would receive under the QDRO based on the fact that as a public school teacher Husband was not entitled to Social Security.

The trial court denied Husband’s motions and entered an order adopting Wife’s alternative motion allowing Wife’s counsel to prepare a QDRO for the division of Husband’s KTRS pension to insure that Wife received one-half of the marital accrual and another QDRO for the division of Wife’s SEP-IRA.

This second appeal ensued, wherein Husband argued that the trial court failed to consider his non-participation in Social Security, resulting in an inequitable division of the retirement plans (recall that prior to the first appeal, KTRS pensions were not divisible since it was recognized that KTRS benefits substituted for Social Security). Husband asserted that it was inequitable for the trial court to now go back and divide his account without consideration of the unique characteristics of the KTRS pension.

This time around, the Court of Appeals agreed with Husband and vacated the judgment. The Court of Appeals further remanded the case, requiring that the trial court make sufficient findings under KRS 403.190(1), including taking expert testimony on the calculations necessary to compute the present value of a Social Security benefit that Husband would have received (i.e., hypothetical method), had he contributed to Social Security, so that such value could be deducted from the present value of Husband’s entire retirement pension in order to determine the marital portion subject to division. Say that ten times fast.

The real story here is how Shown continues to shape the way that KTRS pensions are equitably divided in divorce, and that perhaps this time around Shown will have even wider impact than before with regard to other retirement systems that do not pay into Social Security. But that is all fodder for my white paper, and oh, the after-party brunch tomorrow. What a way to ring in 2016!!

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