FLORIDA RETIREMENT SYSTEM (FRS) DRAFTING ADVISORY

Note this article is limited to Non-Contributory Defined Benefit Plans offered by the Florida Retirement System.

INTRODUCTION:
This is a discussion and analysis of the Florida Supreme Court's decision in Boyett (22 Fla. L. Weekly S 755) regarding the division of the Florida Retirement System's pension benefits incident to divorce. Recent guidance was provided in Pullo (31 Fla. L. Weekly D 1069), which suggested that the focus of Boyett was the timing of a pension evaluation. Pullo stated:

Nevertheless, over time a view has emerged that expanded, perhaps improperly the impact of Boyett. Boyett made clear that employee contributions subsequent to the end of marriage date are the sole and separate property of the titled-spouse. That is a timing and valuation issue. It did not deal with the concept of the equitable interest of a non-titled spouse to a Defined Benefit Plan. Has Boyett been interpreted in a manner that fails to recognize the growth of assets over time? Boyett did provide:

Based on the above citation there is within Boyett a recognition of growth over time.

A careful reading of Boyett does not reveal a clear distinction between employee contributions to a Defined Contribution Plan and employer funded Defined Benefit Plan. Can it be concluded that Boyett did not in fact address non-contributory Defined Benefit Plans such as those offered by the Florida Retirement System?

There is difference between an employee's accrued account balance on a stated date (Defined Contribution Plan) and an employee's monthly accrued benefit on a stated date (Defined Benefit Plan). We take no issue with the view that the interest of a non-titled spouse can be firmly established for an individual account balance plan (Defined Contribution Plan) on the date of divorce or a date agreed to by the parties. However, to "freeze" the size of a non-titled spouse's monthly benefit in a Defined Benefit Plan may not produce an equitable result. In the discussion that follows we examine two interpretations of Boyett as it applies to the Defined Benefit Plans of the Florida Retirement System. One interpretation "freezes" the benefit of the non-titled spouse as of the end of marriage date. The other interpretation does not.

Florida's equitable distribution cases uniformly acknowledge the necessity of a division that recognizes the need for economic equity. The intent of the statutes and the courts was to create methodologies for the Equitable Distribution of pension benefits regardless of the type of settlement elected by the parties. Neither party should be disadvantaged by methodology or a pension division formula.

The observations made herein are based on the view that within the Florida statutes and common law there is an inherent presumption of economic equity regarding the division of marital property. This article is predicated on that assumption: economic equity is inherent within the Florida concept of Equitable Distribution.

In the discussion that follows two terms will be used to describe the respective Boyett formulas:

First Formula:
Boyett, "Non-Recognition of Growth". Under this interpretation there is no recognition of growth on Alternate Payee' share from the date of divorce up to the date of retirement by the titled-spouse.

Second Formula:
Boyett, proportionate recognition of growth on Alternate Payee' share

For ease of discussion the non-recognition of growth formula will be termed "Boyett Frozen Benefit"
For ease of discussion the recognition of growth formula will be termed "Boyett Growth Adjusted"

The mechanics of the "Boyett Frozen Benefit" formula regarding the division of a Defined Benefit Plan are as follows:

Step I.
A Plan administrator determines the titled-spouse's monthly accrued benefit as of the Date of Commencement of the Divorce Action.

Step II.
The monthly benefit computed at Step I is multiplied by a fraction:
Numerator: total period of time the parties were married and a benefit was being accrued up to the Date of Commencement of the Divorce Action.
Denominator: the titled-spouse's total credited service up to the Date of Commencement of the Divorce Action.
The product of this multiplication is the marital part of the pension benefit.

Step III.
The product of the Step II calculation is multiplied by the agreed interest of the Alternate Payee, e.g. 50%.

Summary: The Boyett Frozen Benefit formula is determined at the time of divorce. The Alternate Payee's pension benefit is "frozen" at the time of divorce. It will not increase over the years up to the titled-spouse's retirement.

The Boyett Growth Adjusted formula's pension benefit is computed at the time of retirement of the titled-spouse.

Second Formula:
The mechanics of the "Boyett Growth Adjusted" formula regarding the division of a Defined Benefit Plan is as follows:

Step I.
A Plan administrator determines the actual monthly retirement benefit of the titled-spouse at the time of his or her retirement. Since the FRS pays the full cost of the pension there are no employee contributions.

Step II.
The monthly benefit computed at Step I is multiplied by a fraction:
Numerator: total period of time the parties were married and a benefit was being accrued up to the Date of Commencement of the Divorce Action.

Denominator: the titled-spouse's total period of credited service.
The product of this multiplication is the marital part of the pension benefit.

Step III.
The product of the Step II calculation is multiplied by the agreed interest of the Alternate Payee, e.g. 50%.

Based on the "Boyett Growth Adjusted" formula the actual benefit to be paid to an Alternate Payee is not ascertainable at the time of divorce (the rate of future annual growth is not ascertainable at the time of divorce). This post-divorce growth is ascertainable upon the retirement of the titled-spouse. The method of awarding an Alternate Payee his or her proportionate share of this post-divorce growth is discussed below.

Boyett Frozen Benefit, formula:

The benefit based on the Boyett Frozen Benefit formula is determined at the time of the divorce using the titled-spouse's actual earned benefit as of the marital property cut off date. The Alternate Payee's benefit is computed from the marital portion of the titled-spouse's benefit earned as of the marital property cut off date. The Alternate Payee's pension benefit is "frozen". It will not increase over the years up to the titled-spouse's retirement. (See illustrations below)

Boyett Growth Adjusted formula:

The benefit based on the Boyett Growth Adjusted formula is not ascertainable at the time of the divorce. The Alternate Payee's benefit is computed from the marital portion of the titled-spouse's actual retirement benefit paid by the System. The benefit is ascertained when the titled-spouse actually retires. The method of awarding an Alternate Payee his or her proportionate share of this post-divorce growth is discussed below. (See illustrations below)

As a dissolution matter develops the practitioner faces two basic choices regarding the division and distribution of pension assets.

Immediate Offset Settlement (Present Value Method)

Deferred Distribution Settlement (Qualified Domestic Relations Order)
 

The Immediate Offset Method is based on the determination of present
cash value pursuant to Florida statute and common law. It is emphasized that
there is no determination of present cash value when the settlement mode is
Deferred Distribution.

 

Negotiating and drafting Property Settlement Agreements and Domestic Relations Orders against the Non-Contributory Defined Benefit Plans of the FRS presents the practitioner with two "Boyett" formulas that may be applied to award a portion of this pension to an Alternate Payee. Effective representation of the economic interests of your client requires an understanding of the results of these two allocation formulas. This article focuses on the economic equity of each of the two "Boyett Formulas". When other factors are included different conclusions may be reached and equity attained by alternate allocations of marital assets. Here we limit the focus of the practitioner to FRS pensions and economic equity. Pension distributions that are economically equitable is our subject. This is not a matter of advocacy, rather it is matter of evaluating the outcomes herein presented to determine which is the more equitable. A sound economic conclusion should have a mathematical foundation. The conclusions reached herein are based on mathematical models (for ease of presentation the underlying spreadsheets are not included).

Practitioners will quickly observe the very different economic outcomes of the respective interpretations of the "Boyett formula". As our illustrations indicate one of the Boyett formulas has a "positive tilt" in favor of the titled-spouse. We do not intend the term "positive tilt" to be viewed as a subjective observation. Rather, it is a result of the mathematical outcome of an allocation of benefits formula that does not recognize the inherent growth of a pension asset over time.

Analysis:

We believe it reasonable to assume that the division of Florida Retirement System's pension benefits incident to divorce is a fact-intensive circumstance. The determination of economic equity will be derived from analysis of the two "Boyett" pension allocation formulas discussed. To assist the practitioner we offer discussion of economic outcomes. It is for the reader to determine the economic equity of the two "Boyett" allocation of pension benefits discussed herein.