Is a Disability Pension Subject to Equitable Distribution?

By on June 12th, 2008

Posted in New Jersey

It is well-settled law that retirement plans such as pensions, 401(k)s, 403(b)s, KEOUGHs, profit sharing plans, deferred compensation plans and IRAs are subject to equitable distribution in the event of divorce.

But what about a disability pension?  Is that an asset accumulated during the marriage and subject to equitable distribution like a retirement pension, or should it be looked at like a personal injury award or worker’s compensation award wherein if it’s attributable to pain and suffering it is not subject to equitable distribution.

In a recent New Jersey Appellate Court case, the Husband, who had been a fireman, was injured on the job and entitled to the Police and Fire Retirement System disability pension.  The issue was whether this disability pension was subject to equitable distribution.  It must be noted that State of New Jersey employees, whether public employees, teachers, police or firemen, are entitled to a pension upon retirement if those employees have the requisite number of years in the retirement system.  If an employee becomes disabled before retirement, that employee may be eligible for a disability pension which takes the place of a future retirement pension.

It was determined by the New Jersey Appellate Court that the State disability pension is made up of two components–one that represents a retirement allowance and one that represents compensation for the disability.  It was held that the retirement allowance portion is subject to equitable distribution and the compensation for disability portion is not.  Since the Court was not provided with evidence in allocating a value to each of these components and since the plan itself  is not divided into separate components, the Court came up with its own formula.

In this particular case, wherein the disability was the result of a traumatic event occurring during the performance of duties, the disability allowance was two thirds (66-2/3%) of the employees’ final compensation regardless of age or years of service or contributions to the pension.  There is a lower percentage disability allowance in the event of disability which is not a qualifying traumatic event (i.e. disabling illness).  If an employee  is injured early in his career, he/she receives the same percentage of final salary as an employer who may be injured later on in his/her career.  In comparing the ordinary retirement pension to a disability pension, the retirement pension is dependent upon years of service and age.  Those pensions generally range from 50% to 65% of final salary.  Therefore, the enhanced benefit in the event of a qualifying traumatic event during performance of duties is anywhere between 16-2/3% and 1-2/3%.

The expectations of a divorcing couple are that the retirement portion of this pension, which was a forced savings during the marriage and an anticipated benefit by both parties in the future, should be allocated between the two of them upon divorce.  If the disability occurs when the employee would have already been eligible for retirement, even if early retirement, then we would know what percentage of the disability pension would have been for retirement–anywhere between 50% to 65% depending on the number of years of service.

So, for example if the employee had worked for 20 years and would have been eligible for a retirement pension of 50% of their final salary, but became disabled as result of a qualifying traumatic event and therefore received a disability pension of 66-2/3% of a final salary, then  the additional 16-2/3% of the disability pension is related to the disability and 50% of the pension is related to service and subject to equitable distribution.

But what happens if the employee does not have enough years of service in to be eligible for the ordinary retirement pension?  How are the two components determined?

The Appellate Division decided that it would use the earliest retirement percentage of final salary which is 50% attributable to 20 years of service, stating that the disabled employee would have most likely worked until early retirement but for the disability.  So, for example, if the employee became disabled after 10 years on the job, in order to determine the percentage of the retirement portion of the pension subject to equitable distribution, we should use a coverture fraction wherein the numerator of this fraction is the number of years the employee worked during the marriage (in this example, 10 years) and the denominator is the total number of years worked (or in this case, number of years he would have worked but for the disabling injury, which is 20 years).  Therefore, the coverture fraction would be 10/20 or ½.

Now, assume the employee’s final salary before the qualifying traumatic disability was $60,000.  The disability retirement pension would be $40,000 per year, or 2/3 (66-2/3%) of the employee’s final salary.  A normal retirement pension would have been $30,000 or 50% of the final salary.  The $10,000 per year difference between the two is the disability component  which belongs to the injured employee and is not subject to equitable distribution.

The retirement pension component is subject to the coverture fraction, as discussed above, wherein 10/20 or ½ of the $30,000, or $15,000 per year, is subject to equitable distribution.

This recent case now gives us a definitive answer that State disability pensions are subject to equitable distribution as well as gives us the formula for determining which portion is divisible in the case of divorce.

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