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Arizona Community Property Laws | Hildebrand Law, PC

Pensions and Divorce in Arizona

Pensions and Divorce in Arizona.

How Pensions Are Divided in a Divorce in Arizona

If you are going through a divorce and one of the spouses has a pension, you may be wondering when and how you will receive your community property share of that pension and even how your interest in that pension will be calculated.

Pensions and divorce in Arizona present many complicated issues.

A 401(k) or IRA are easier to divide because you will know the exact value of those retirement accounts and can calculate the community property portion of those accounts.

Either a particular order is issued by the court directing the company managing the retirement account to move a portion of the retirement account into a separate retirement account in the spouse’s name.

Or, the plan administrator may be able to simply do a rollover whereby the amount is rolled out of the existing account into a new retirement account.

Difference Between a Pension and a 401(k) in a Divorce in Arizona

Pensions, however, are different than a traditional 401(k) or IRA.

A pension provides the recipient a series of monthly payments for either a fixed period of time or for the lifetime of the employee after that employee reaches retirement age.

A Pension’s Survivor Benefit Election in a Divorce in Arizona

When dealing with pensions and divorce in Arizona, you should know that many pensions also have what is referred to as a Survivor Benefit Election, which decreases the amount of the pension payments, but guarantees the non-employee spouse will continue to receive the pension benefit even after the employee spouse dies.

The employee spouse in a divorce, typically, does not want to be forced into choosing the survivor benefit election for what will soon be his or her former spouse because it decreases the total overall pension payment to both spouses.

Additionally, choosing the survivor benefit election for a soon to be former spouse prevents the spouse who earned the pension from naming another person, such as a new spouse upon remarriage, as the survivor for the pension.

The non-employee spouse typically wants the Survivor Benefit Election to ensure his or her share of the pension does not automatically terminate upon the death of his or her soon to be former spouse.

Also, the non-employee spouse may argue it is not fair or equitable to allow his or her spouse to name his or her new wife upon remarriage as the beneficiary under the survivor benefit election because some or all of the pension was earned during that spouse’s first marriage.

Arizona Court of Appeals Decision on a Benefit Survivor Election in a Divorce in Arizona

The Arizona Court of Appeals in the case of Boncoskey v. Boncoskey ruled a divorce judge does not have the authority to order a spouse to choose the survivor benefit election on a pension because there is no statute granting the court that authority in an Arizona divorce.

The Court of Appeals reasoned forcing a spouse to name his or her spouse to receive a survivor benefit was akin to allowing a former spouse to continue to accrue benefits from the former spouse in the future.

It also reasoned it would prevent the employee spouse from naming his or her future spouse to receive survivor benefits in a pension.

However, the experienced attorneys at Hildebrand Law, PC have a solution to enable a non-employee spouse to receive an enhanced benefit of a pension when the employee spouse refuses to name the soon to be ex-spouse as the beneficiary of a survivor benefit election in a pension.

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Using a Qualified Domestic Relation Order to Divide a Pension

Similar to a 401(k) or IRA, a special order called a Qualified Domestic Relations Order (for non-governmental pensions) or a Domestic Relations Order (for governmental pensions) is signed by the divorce judge dividing the pension payments between the two spouses.

The amount each spouse receives of the pension depends upon how much of the pension was earned by the employee spouse prior to marriage or after service of the divorce petition (i.e., the “sole and separate portion” of the pension) and how much was earned during marriage (i.e., the “community property portion” of the pension).

The experienced Arizona divorce attorneys at Hildebrand Law, PC have over 100 years of combined experience calculating the division of pension benefits in a divorce in Arizona.

Call us today at (480)305-8300 or complete our new client form to learn how much you or your spouse will receive from a pension in a divorce in Arizona.

Dividing Vested, Unvested, and Contingent Pension Benefits in a Divorce in Arizona

One of the first steps in dividing a pension in an Arizona divorce is to distinguish between vested pension rights and unvested pension rights.

A person has a vested pension right if they have the current ability to begin receiving pension benefits, whether they have elected to receive those pension payments or have voluntarily deferred the receipt of those pension payments.

A person has an unvested pension right when they have a contingent or contractually enforceable right to receive pension payments in the future depending upon the terms of the pension plan.

A person with an unvested pension right has to wait until some time in the future, such as reaching retirement age, before he or she will have the right to receive pension payments.

In some cases, a spouse may not be entitled to participate in a company’s pension plan until they have worked for the company for a certain number of years.

This raises the question of whether the community has an interest in a pension when one of the spouses has accumulated some “credit” towards participating in a company pension but is not yet an actual participant in that pension plan.

The answer to that question is beyond the scope of this article, but suffice it to say there are arguments on both sides of this issue that are strongly dependent on the facts of the case, so call us today at (480)305-8300 or complete our new client form to learn what your rights are in a vested, unvested, or contingent pension plan in a divorce in Arizona.

Commencement and Deferment of Pension Payments in an Arizona Divorce

One of the more important aspects of dividing a pension in a divorce in Arizona is when those payments should begin to be paid.

All pension plans have a “minimum age requirement” or a “years of service requirement” that must be met before an employee has the right to begin receiving pension payments.

However, many pensions also allow an employee to defer their receipt of pension payments. So, what happens to the non-employee spouse’s share of a pension divided in an Arizona divorce if the employee spouse chooses to defer the receipt of pension payments?

The answer depends upon whether those pension benefits are vested or unvested at the time of the divorce.

As we learned above, a vested pension benefit is one in which an employee spouse has met all of the requirements to begin receiving pension benefits.

The employee spouse has the option to begin receiving those pension benefits now or to elect to defer those benefits to a later date.

If the employee spouse chooses to begin receiving those benefits at or about the time of the divorce, the court will simply divide the community property portion of the pension and each spouse will receive his or her share of that pension contemporaneously with the divorce.

So, what does an Arizona divorce court do when the employee spouse chooses to defer his or her pension benefits in an otherwise vested pension?

Arizona Court of Appeals’ Decision About the Intentional Deferrment of Pension Benefits

Fortunately, the Arizona Court of Appeals answered that question in the case of Koelsch v. Koelsch.

The Arizona Court of Appeals in the Koelsch case concluded the court has no authority to order a spouse to retire in a divorce in Arizona. However, in those cases where a spouse chooses to defer receipt of his or her fully vested pension benefits, the court does have the authority to order the employee spouse to start making monthly payments to the non-employee spouse equivalent to what the non-employee spouse would have received had the pension benefits not been voluntarily deferred by the other spouse.

Division of Unvested Pensions in a Divorce in Arizona

Division of Unveste Pensions in a Divorce in Arizona.

As discussed above, a pension is unvested when the employee-spouse is not currently eligible to receive monthly pension benefits; either because they have not reached “retirement age” or the “years of service” requirements of the pension. So, have are these unvested benefits divided in a divorce in Arizona.

Well, the Arizona Court of Appeals in the case of Boncoskey v. Boncoskey provided valuable insight into how trial courts are required to divide unvested pensions in an Arizona divorce case.

The Bonkoskey court distinguished between vested (a.k.a. matured) rights and nonvested pension rights. A pension is matured if the person is presently entitled to retire and begin receiving pension payments.

A pension is nonvested if the person is not currently entitled to a pension, but may be entitled to pension payments in the future. Let’s talk about that case.

In that case, Mr. and Mrs. Boncoskey went through a divorce in Arizona.

Mr. Boncoskey accumulated some time in his employer’s pension system, but he had not yet worked enough years to be entitled to retire or receive pension payments.

Mr. and Mrs. Boncoskey reached an agreement resolving almost all of the issues in their case. They disagreed, however, on how the Qualified Domestic Relations Order needed to be drafted to divide Mr. Bonkoskey’s pension.

The court ultimately concluded, over Mr. Boncoskey’s objections, that Mr. Boncoskey would have to make payments to Mrs. Boncoskey when he first becomes eligible to retire even if he continues to work past that age and is not, therefore, actually receiving pension payments.

Those payments were deemed by the trial court to be spousal maintenance and would end when Mr. Boncoskey retires at which time each spouse would receive their community property share of the pension.

The Boncoskey court referred to a prior Arizona Supreme Court case of Van Loan v. Van Loan, which held that a pension that is not vested and, therefore, may not necessarily result in a spouse receiving pension payments, such as if they leave employment before becoming vested in the pension plan.

The spouses still constitute community property and are subject to division in a divorce of the potential right to receive those payments.

The next question the court of appeals addressed was whether Ms. Boncoskey had a right to receive the equivalent of what her pension payments would be when Mr. Boncoskey first becomes eligible to receive pension payments, but he elects to continue working; thereby delaying either spouse from receiving pension payments for many years into the future.

The court made an important distinction on this point.

Specifically, the court distinguished between spouses going through a divorce when one of the spouses has already vested in his or her pension and, therefore, has an immediate right to receive pension payments but chooses to delay retirement from spouses going through a divorce and the vesting of one of the spouse’s pension will not occur for years to come.

In the first case, the Arizona Court of Appeals reaffirmed the Arizona Supreme Court’s ruling in the prior Koelsch v. Koelsch case.

In Koelsch, the Arizona Supreme Court faced a situation wherein one of the spouses was fully vested and eligible to receive pension payments at or about the same time the parties were getting divorced.

In Koelsch, the Arizona Supreme Court concluded the court had no authority to order that spouse to retire but did indicate the court could order that spouse to begin making monthly payments in the same amount she would have received from the pension if her spouse retired.

The Arizona Court of Appeals in Boncoskey, however, distinguished that case from the case at hand because the spouse was not vested at or about the time the parties were divorced.

The Arizona Court of Appeals in Boncoskey held that in such a situation the trial court cannot order a spouse to begin making payments to the other spouse when they become eligible to retire if he or she continues working.

In such a case, the other spouse simply has to wait until the other spouse chooses to retire to receive her or her share of the pension.

Dividing Unvested Pension Payments that are Eligible to Vest After the Divorce in Arizona

However, another Arizona Court of Appeals case in the matter of Delintt vs. Delintt distinguishes the ruling in Boncosky to allow a spouse to seek reimbursement for pension payments from a former spouse who, although not eligible to retire at the time of the divorce, subsequently becomes eligible to receive pension payments but defers those pension payments to continue working.

In the Delintt case, the husband had not vested in his pension rights at the time he and his former wife got divorced.

However, seven years after the divorce, Husband became eligible to retire but chose not to retire and begin receiving his pension because he wanted to continue working.

The Arizona Court of Appeals in the Delintt case ruled the parties had specifically reserved jurisdiction in the divorce decree over pension payments to be paid in the future. As a result, the former wife did not waive her right to come back to court seven years after the divorce was finalized to seek her share of the monthly payments she was to receive as her interest in the husband’s pension even though he chose to work and not retire when he was first eligible to retire.

The Court of Appeals ruled the husband would have to pay wife directly for the share of the pension she was not receiving because he did not retire and, therefore, the pension would not pay either spouse until he decides to retire.

In doing so, the Arizona Court of Appeals distinguished another Court of Appeals decision it made in the case of Quijada vs. Quijada. In the Quijada case, the spouses agreed the non-employee spouse would receive his/her share of the pension when the pension payments were distributed to the employee-spouse.

The Arizona Court of Appeals in the Delintt case also indicated the trial judge could consider the tax implications, if any, that would effect Husband from the payments he would need to reimburse wife for her share of the pension, so long as those tax implications are proven to “be immediately and specifically determined” and not be a “speculative future effect”, which was prohibited from being considered in the prior Arizona Supreme Court Decision in the case of Johnson vs. Johnson.

The Court of Appeals in the Delintt case also indicated the trial court may exercise is limited discretion to “defer all or part of the monthly payment owed to the non-employee spouse, subject to repayment with interest and property security, such a life insurance policy.

Preferred Method for Dividing a Pension in an Arizona Divorce

Preferred Method for Dividing a Pension in an Arizona divorce.

The Arizona Court of Appeals in Boncoskey affirmed the prior Arizona Supreme Court ruling in Johnson v. Johnson that held the preferred method for dividing the community property interest is to perform a present value of the expected stream of income and order the spouse who will be eligible to receive the pension to pay the other spouse in a lump sum payment for his or her interest in the pension and then award 100% of the pension to the employee spouse.

That solution was not available in this case because the parties had already equally divided all of their other community assets.

The Arizona Court of Appeals, therefore, deferred to use the “reserved jurisdiction” method announced in the Johnson case wherein you divide the total number of months the employee works for the company by the number of years the parties were married during those years to determine the community property interest in a pension in an Arizona divorce case.

The justices also said a trial court has no authority to order a spouse to begin making payments to the other spouse simply because he or she continues working and, therefore, delays both parties’ community share of the pension.

The court of appeals also rejected the trial court’s decision to order Mr. Boncoskey to begin paying Laura for the payments she would have received if Timothy retired when he was first eligible to retire.

The trial court’s decision was overturned because, although a court is not bound by the terms of the parties’ settlement agreement, the court is required to hold an evidentiary hearing before issuing orders changing the provisions of the parties’ written settlement agreement.

The take away from this case is that dividing pensions can be very complicated.

If you need information about pensions and divorce in Arizona, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona divorce attorneys have over 100 years of combined experience successfully representing clients in divorce cases in Arizona.

Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.

Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your Arizona divorce case around today.

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Arizona Community Property Laws | Hildebrand Law, PC