SUNDAY, MARCH 31, 2019
Drafting Tips for Judgments/MSAs
Take Heed When Awarding/Adjusting by Fixed Dollar Amounts

In re Marriage of Janes (2017) 11 Cal.App.5th 1043, is a reminder that the most seemingly simplistic award of retirement benefits can create confusion leading to dispute and high cost litigation. Although Janes is approaching its second anniversary, the problem of awarding fixed dollar amounts persists. The question in Janes was whether an award of a fixed dollar amount payable from a 401(k) account included interest—and if so—from which date do earnings on the fixed award begin to accrue. The solution to Janes is as simple as the drafting error that led to dispute. In the case of any Defined Contribution Plan or IRA, a fixed dollar award must include a Valuation Date to correspond with the award so as to avoid any doubt whether and when interest shall accrue. If earnings or losses are to be applied to the dollar award, the practitioner should be clear the award does or does not include earnings and losses on said award. 

While the same is true for a Defined Benefit Plan, there are other potential pitfalls. 

In the case of a traditional pension that only pays benefits in the form of monthly installments, a fixed dollar award is not possible. Thus, an award of $50,000 to the former spouse from the participant’s pension will inevitably lead to dashed expectations, disputes, malpractice, etc. At best, the parties will need to agree to convert the award to a percentage of future monthly payments which will require an actuarial valuation. So, if the overall pension is valued at $500,000, an award of $50,000 becomes 10% of the accrued benefit on a given date—which is typically paid in lifetime installments thereby resulting in the recipient receiving more or less than the fixed award depending on the total payments received over their lifetime. Note that in cases where a participant is in pay status, the parties could agree on a fixed number of payments terminating when the award has been satisfied.

An award of a fixed dollar from a Defined Benefit Plan where a party to the proceeding is both the trustee and plan participant may present problems. Even small plans (e.g., fewer than 10 participants) maintained by an entity owned by the parties in the proceeding are bound by actuarial standards that preclude making a lump sum payment unless the plan is adequately funded—by actuarial standards. This means that even where a defined benefit plan allows for a lump sum distribution, an award of a sum certain could be delayed if the plan funding level is too low. Practitioners should verify funding levels with the plan’s actuary before committing to a lump sum award with respect to this type of plan.

What You Ought to Know About the Deferred Retirement Option Plan (DROP)
Much has been written recently about the controversial DROP program—a voluntary component of the Los Angeles City Fire and Police Pension Plan (LAFPP). The Deferred Retirement Option Plan (DROP) has been in the news and under the spotlight for its high costs and abuses. Here is what you need to know about DROP. 

If you are involved in a case in which the subject pension plan is the LAFPP—you need to know about DROP.

DROP was introduced under the LAFPP as a way to retain veteran police officers and firefighters. Generally, safety members who had attained 50 years of age with 25 years of service could elect to participate in DROP for up to five (5) years—during which time they would (a) continue to receive their regular salary and (b) receive their monthly pension which would be deposited into an interest bearing account (guaranteed 5% annual return) that will be distributed in a single lump sum when they actually retire. At retirement, DROP participants therefore receive (i) the lump sum accumulation of their DROP account (which is eligible for IRA rollover); and (ii) their monthly pension for life.

1. Community/Separate Property. In re Marriage of Davis (2004) 120 Cal. App. 4th 1007, put to rest any question over the proper characterization of DROP funds. The fact that an employee may have entered DROP after the parties’ date of separation has no bearing on the characterization of DROP monies. DROP funds represent the member’s monthly retired pay which is deposited into an account pending the member’s actual retirement/departure from service. The amount deposited is determined under the plan’s retirement benefit formula where years of service are a substantial factor. As such, the time-rule is commonly used to determine the community property percentage of the DROP funds. While the member is enrolled in DROP, he/she is considered retired for benefit computation purposes and therefore no longer earns service credits towards the pension. When the Member enters DROP, the community property percentage is set and that percentage can be applied to both DROP and the future monthly lifetime benefit.

2. Gillmore Election. The LAFPP does not permit a former spouse to receive payments of his/her share of benefits before the member spouse retires and commences benefits. As such, this plan is one of the few plans that warrant a Gillmore election whereby the former spouse of a non-retired member compels an “eligible to retire” member spouse to pay him/her directly the amount that he/she would receive on a monthly basis had the member spouse retired and commenced benefits. 

a. Not Yet in DROP. If the Member is still earning credits but has not yet enrolled in DROP, by electing to receive a monthly payment immediately under Gillmore the former spouse will receive an amount representing his or her portion of funds that may someday be deposited into DROP. The former spouse cannot have it both ways. That is, the former spouse cannot receive his/her marital share of monthly payments directly from the member; then receive the lump sum from the DROP account which represents the monthly pension that is being deposited into an interest bearing account.

b. Enrolled in DROP. If the Member has already entered DROP when Gillmore is elected, the former spouse is entitled to his/her community property share of DROP funds through the date of the Gillmore election (plus interest on such funds through the date DROP is distributed—but no new deposits (or earnings thereon)). From the date of the Gillmore election and after, the former spouse is only entitled to his/her Gillmore share paid by the member.

3. Changes to DROP. Most of the abuses concerning DROP involved employees who entered DROP and then took questionable injury leaves. Until recently, such individuals would continue to receive deposits into DROP while on injury leave. The most egregious cases involved a few ‘bad apples’ who took leaves—collecting their disability pay and receiving deposits into DROP during which time they were “caught” engaged in activities unbecoming of someone with a disability (e.g., running in marathons and riding horses in Cabo). Effective February 1, 2019, a new ordinance kicks in and suspends the DROP payments while someone is on an injury leave. If DROP payments are suspended, a member can then extend their DROP period up to 30 months. 

4. Will DROP be DROPPED? Although the LA City Council addressed the recent abuses, there are still greater concerns that the program is too costly and not an effective tool for retaining veteran employees. Both San Diego and San Francisco have done away with their DROP programs due to high costs—and there is pressure on LA City Council to do the same. 

5. Survivor/Death Benefits. The LA City Fire and Police Pension Plan is one of few plans that has no real means to guarantee a former spouse the right to benefits over his/her lifetime. Unlike many other governmental plans, a former spouse may only be awarded his/her share of benefits that may become payable to the member’s eligible surviving spouse—based on the eligible surviving spouse’s lifetime. This means that a former spouse may not receive any benefits following the member’s death (if the member dies without a surviving spouse) and will only receive such benefits for the life of the surviving spouse. 

a. DROP benefits are not subject to the above rules concerning survivor benefits which only affect the monthly pension. If a member dies before the DROP funds are distributed, 100% of the DROP account will be disbursed—and the former spouse will receive his/her community property share of the DROP account in a single lump sum—to the extent provided in the court order. 

6. Equalization Payment. Since DROP is an account with a determinable lump sum, it is ripe for adjusting the Non-member’s award (increased or decreased) to account for an equalization payment. If a member has a DROP account at the time of the Judgment and an equalization payment is required, like a deferred compensation plan, DROP may be used to make such an adjustment. 

Time’s Up for ‘Air Time’—and Is the Governmental Pension in Your Case Safe? 
In response to financially stressed pension plans, many local and state laws have chiseled away at pension benefits sparking litigation. Pension reform has included changes to the definition of compensation used to calculate benefits; elimination of ‘air time’; eliminating programs such as DROP; increased mandatory employee contributions; and more. The goal of each is to scale back generous pension benefits and bolster the financial health of the pension fund to ensure that there will be adequate funding of benefits for years to come. 

The issue is simple—whether such “cut backs” constitute a violation of an employee’s contractually protected right. For decades, California’s governmental employees enjoyed the comfort of the long standing California Rule—which provides that vested benefits cannot be impaired. The California Rule got its name through a series of California cases, which depart from most other State courts’ position, in which California Courts held that pension benefits in effect when employees are hired create a contractual right that employers cannot change. 

In the first of more tests to come, the California Supreme Court recently considered whether “air time” required constitutional protection. See Cal Fire Local 2881 et al., v. California Public Employees’ Retirement System (CalPERS) (Case No. S239958) (Decided March 4, 2019). The “air time” program allows employees to purchase up to 5 years of service credits unrelated to any period of employment. Since the number of service credits directly relates to the amount of an individual’s pension, there is a real upside to adding additional years of service to one’s account. In a unanimous decision, the Court upheld the elimination of “air time” noting that “air time” does not involve actual work—and as such—it differs from other core pension benefits that are granted to employees. The Court did not, however, tackle the larger question of whether any and all other reform measures are constitutionally protected. Thus, for now, the California Rule and the protection it affords to employees with vested pension benefits is still intact. That said, there are strong forces on each side of the issue including a push for legislation to override the California Rule.

Law Offices of Darren J. Goodman
2629 Townsgate Road, Suite 220 Westlake Village, CA 91361
Tel: (805) 494-0322 | Fax: (805) 494-0390

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