Deferred Retirement Option Plans in an AZ Divorce | Hildebrand Law, PC

Wed 30th May, 2018 Arizona Community Property Laws

Do you have questions about the division of Deferred Retirement Option Plans in an Arizona divorce?

Well, the Arizona Court of Appeals in the memorandum decisions of Lambert vs. Sheets issued a ruling on whether an Arizona Deferred Retirement Option Plan, also know as the DROP program, was subject to being divided in a divorce in Arizona.

In that case, Mr. Sheets (“Husband”) appealed the trial court’s post-decree domestic relations order awarding Ms. Lambert (“Wife”) a pro rata share of any cumulative interest in his Deferred Retirement Option Plan (“DROP”) account.

The Court of Appeals stated Wife served Husband with a petition for dissolution of marriage in March 2012. At the time, Husband was eligible to retire under the Arizona Public Safety Personnel Retirement System (“PSPRS”) pension plan. He was eligible to receive $3,930.84 per month in benefits upon retirement but chose to continue working. He was qualified to participate in DROP, see A.R.S. §§ 38-844.02 et seq., but had not elected to do so.

The Court of Appeals stated In November 2015, the parties finalized their dissolution of marriage and consent decree that incorporated a property settlement agreement (“PSA”). The parties agreed to divide Husband’s PSPRS benefit pursuant to Koelsch v. Koelsch, 148 Ariz. 176 (1986). Under the agreement, each party received 50% of the community interest accrued through the date of service of the divorce petition.

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Spousal Maintenance and Deferred Retirement Option Plans

The Court of Appeals stated the parties also agreed that Husband would make the remaining payments on their joint Chapter 13 bankruptcy plan and would thereafter pay Wife monthly, as non-modifiable spousal maintenance, “one-half of the community monthly benefit Husband would have been entitled to receive from PSPRS as of the date of service of the divorce petition.” The parties agreed to the amount of $1,965.42 in spousal maintenance.

The Court of Appeals stated that upon Husband’s retirement, spousal maintenance would terminate, Wife would receive a portion of the PSPRS benefit in “the amount Husband had been paying as spousal maintenance,” and Husband would receive the remainder. Wife would not receive an increased benefit resulting from Husband’s additional service “because she commenced receiving benefits at the earlier date.”

The Court of Appeals stated the parties also agreed that the prevailing party in an action to enforce the PSA would be entitled to recover reasonable attorney’s fees. The next year, Wife sought a domestic relations order in connection with her interest in the PSPRS benefit.

The Court of Appeals stated Husband objected to the provision in the proposed order allocating Wife “a pro-rata share of any DROP benefits and contributions” made by him, should he elect to participate in DROP. The wife then amended her proposed order to provide her a share of the “cumulative interest” in Husband’s DROP account. Husband again objected, arguing that because Wife had “commenced receiving benefits at the earlier date,” she would not be funding the DROP account and therefore, was not entitled to any portion of it. After an evidentiary hearing, the court determined that Husband’s decision to participate in DROP would “place his PSPRS accrued funds into DROP, from which he will receive a lump sum upon retirement.”

The Court of Appeals stated the court concluded that such a decision “has the result of depositing his entire PSPRS account into an interest-bearing deferred compensation account.” Therefore, “[Wife] would be entitled to calculate her 50% of the community interest to include interest earned in DROP.”

Finally, the court held that the interest earned in DROP constituted an increase due to the “intrinsic quality” of the retirement plan in which Wife would be entitled to share. See Koelsch, 48 Ariz. at 185. The court awarded Wife:

(1) an amount equal to 50% of Husband’s pension benefit accrued under the PSPRS as of March 16, 2012, and

(2) “a pro rata share of any cumulative interest accumulated under DROP.” (Emphasis in original.)

The court denied Wife’s request for attorney’s fees.

Husband appealed that decision.

Cumulative Interest

Spousal Maintenance and Deferred Retirement Option Plans

The Court of Appeals agreed with Husband argument that the court erred by awarding Wife a share in the cumulative interest in the DROP account. See A.R.S. § 25-318(A).

The Court of Appeals indicated that although property acquired during the marriage is presumed to be community property, property acquired after service of the dissolution petition is separate property if the petition results in a decree of dissolution.

The Court of Appeals indicated that the dispositive question was whether Wife’s property interest in the PSPRS benefit will be used to generate the accumulated interest in Husband’s DROP account. The Court of Appeals concluded it will not.

The Court of Appeals indicated that upon Husband’s participation in DROP, he must designate a retirement date no later than five years from the date of his decision and he must retire on the designated date.

The Court of Appeals indicated that by participating in the DROP program, Husband will not accrue benefits under PSPRS, but rather, his “normal retirement benefit” will be deposited into an interest-bearing account.

The Court of Appeals noted that the consent decree required Husband to pay $1,965.42 per month to Wife, which compensates her for the interest in the PSPRS benefit that is delayed by his decision not to retire.

The Court of Appeals concluded that because Wife’s property interest in the PSPRS benefit will not be used to accumulate interest in Husband’s DROP account, she will not be contributing a share of the “normal retirement benefit” to the account.

The Court of Appeals indicated that, accordingly, Wife is not entitled to draw on either the principal or the interest.

The Court of Appeals pointed to the ruling in Koelsch vs. Koelsch finding that an increase in the value of a pension benefit is separate property if it is based on the employee spouse’s efforts after dissolution and is community property if it is based on “the inherent quality of the pension plan.” The Court of Appeals Husband DROP program is the former and not not the latter.

The Court of Appeals explained that an “inherent quality” increase in a retirement plan is granted “regardless of whether the employee was still working or had retired.” The Court of Appeals then pointed out that Husband must continue working to participate in the DROP program.

The Court of Appeals concluded, therefore, that any increase in the value of his retirement benefit would be attributable to his own post-marital effort and funds, not unexpected or passive appreciation.

If you have questions about the division of deferred retirement option plans in an Arizona divorce case, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have decades of combined experience successfully representing clients in community property and family law cases.

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.

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