Around the nation, trial and appellate courts have had to decide whether or not disability pensions should be considered as marital property. Under what is called the "analytic" approach, the disability pension is divided into the "regular pension" component and the pure disability component (which is in lieu of future earnings), and only the regular pension is considered marital property. Under what is called the "mechanistic" approach, the entire disability pension is marital property, if the right to receive the disability pension occurred during the marriage. The majority of decisions across the nation favor the analytic approach.

In Larrison v. Larrison, 392 N.J. Super. 1 (App. Div. 2007), this very issue came before the court in a matter involving a New Jersey Police and Firemen's Retirement System (PFRS) disability pension. The trial court in Larrison selected not to separate the regular-pension component from the pure-disability component. The Appellate Division reversed the trial court, in support of the analytic method articulated in Avallone v. Avallone, 275 N.J. Super. 575, (App. Div. 1994).According to Avallone , when addressing an equitable distribution claim against a disability pension, the reviewing court must determine "which portion of the pension represents a retirement component in which plaintiff would be entitled to share, and that portion which represents compensation for defendant's personal disability and personal economic loss." In Larrison , the appraiser for the plaintiff (nonemployee spouse) applied the coverture fraction (78.18 percent) to the entire disability pension of $2,733 per month and calculated a marital present value of $536,407. The appraiser admitted that at the time of the disability retirement, the employee spouse was not entitled to an early retirement, and if he retired at that point, without disability, he "would only have received a 'refund of his contributions,' which totaled $35,430." The appraiser for the defendant (employee spouse) calculated the deferred accrued benefit, payable at normal retirement (age 55), to be $1,127 per month, as of the date of disability. In other words, if the employee spouse had terminated on the date of disability and then collected a deferred pension at age 55, the benefit would have been $1,127 per month. The appraiser then calculated the present value of this benefit, after coverture, to be $60,371.

The only problem is that the PFRS requires 10 years for vesting, and if the defendant terminated on the date of disability, he could not have received a deferred pension at age 55, only a refund of contributions. Therefore, the defendant's appraiser also discounted the pension for nonvesting. The proper method is to use plan statistics to actually calculate the probability of the defendant reaching 10 years of service, but the appraiser used a factor .825, which was years of service as of date of disability (8.25) divided by the 10 years required for vesting. With this further discount factor, the defendant's appraiser arrived at a figure of $49,806 as the marital present value.

The appellate court in Larrison , citing Avallone as well as cases from North Dakota and Tennessee, used the analytic approach, stating that "courts utilizing the analytical approach will separate the benefits into a retirement component, and a true disability component, with the retirement component being classified as marital property and the disability component being classified as separate property." Peter Gorman of the Department of Treasury, Division of Benefits and Pension, testified at the trial court to the effect that defendant was disabled and receiving a disability pension, but could not break the pension into a pure disability component and a retirement component.

At this point, while the Appellate Division found against the plaintiff (non-employee spouse) and in favor of the analytic approach, it did not find exactly in favor of the defendant or the marital present value presented by the defendant's appraiser ($49,806). Instead, the case was remanded back to the trial court, with instructions to find a way to separate the true-disability from the retirement component. There are several reasons for this.First, the defendant was not eligible for early retirement. If he had been eligible, it would have been easy to separate the retirement component from the disability component, since his early retirement pension, calculated as if he had retired without disability, would be the retirement component. This is why Gorman was unable to break the disability pension down into the two components.

Second, since the defendant was unable to commence early retirement as of the date of disability, the next best solution was to calculate the deferred benefit accrued as of the date of disability, payable at normal retirement (age 55 in this case). This is not the preferred solution, since the monthly payments cannot be broken down into a retirement component and a disability component, but it does yield a marital present value, which in this case was $60,371. However, in this case, the defendant was not vested. Because of this, the defendant's appraiser reduced the amount to $49,806.

However, there was a basic flaw in this method. Reduction for the probability of nonvesting makes sense when valuing a nonvested pension when the employee is still active, i.e., what is the probability of the employee working the additional years needed to become vested? This question makes sense when we are looking at the future and it is possible for the employee to work the additional years required.

But, in this case, we know for certain that he never vested a retirement pension, and never will vest; the probability that this defendant will become vested is zero. Thus, if we take the marital present value of the benefit accrued as of date of disability, payable at normal retirement, $60,371, and multiply this by the probability of vesting, the result is zero. Larrison became disabled at 8.25 years of service and would never work as a policeman again. His only non-disability retirement benefit was a refund of contributions.

In fact, the appellate court appeared to lean in this direction, for in the remand instructions, the court stated that "the trial court should explore, with the assistance of expert analysis, other options, including limiting the amount subject to equitable distribution to defendant's contributions to his pension, which is what he would have received had he left the police department at the time."

Note that the appraiser for the plaintiff (nonemployee spouse), in addition to valuing the entire disability as marital property, which the Appellate Division rejected, stated that if the defendant had terminated at the date of his disability, he would only have received a refund of contributions, totaling $35,430. The defendant's appraiser valued the non-vested accrued benefit as of the date of disability and included a nonvesting discount factor that was not appropriate actuarially. The appellate court rejected the plaintiff's valuation, but did not accept the defendant's appraiser's result either.

The Appellate Division leaned toward using the contributions as the marital portion subject to equitable distribution. Therefore, it is likely that if the defendant's appraiser had come up with this same result, using the contributions as the marital portion, the appellate court would have affirmed that result, instead of remanding. After all, if the question is what the employee would have received had he terminated on the date of disability, without disability, the answer is: his contributions.

Veisblatt is an associate with Obermayer Rebmann Maxwell & Hippel LLP in Cherry Hill. She is a member of the firm's Litigation department and Family Law Group. Altschuler is an actuary and the president of Pension Analysis Consultants Inc., in Elkins Park, Pa.

Reprinted with permission from the New Jersey Law Journal, [June 13, 2011]. Copyright 2011, ALM Media Properties, LLC. All rights reserved


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