defined benefit plans and defined contribution plans. Defined benefit plans are typically referred to as “pension” plans in which the participant is generally to receive a certain sum per month, based upon, in part, actuarial assumptions. Additionally, formulas have been provided through case law such as Berry v. Berry, 647 S.W.2d 945 (Tex. 1983), Taggart, 552 S.W.2d 442 (Tex. 1971), and Cearley, 544 S.W.2d 661 that provide guidance as to characterization.
Defined contribution plans encompass plans typically known as “401(k), IRA, profit sharing, and SEPs” and often rely on both employee and employer contributions on a periodic basis to provide a fund for retirement. Several cases have held that the before and after methodology for tracing is an acceptable method when trying to determine the characterization of a retirement account. Smith v. Smith, 22 S.W.3d 140 (Tex. App. - Houston [14 Dist.] 2000, no writ); Pelzigth
v. Berkebile, 931 S.W.2d 398, 402 (Tex. App. - Corpus Christi, 1996, no writ). However, the court in Iglinsky v. Iglinsky, 735 S.W.2d 536 (Tex. App. - Tyler 1987, no writ) inferentially approved the use of a traditional tracing methodology within a retirement plan. In footnote 2, the appellate court stated the following:
We do not disapprove of the trial court's division of the accumulated funds into separate accounts. On the contrary, where an adequate accounting of contributions is available, this method of division appears to reflect an accurate apportionment of benefits. Thus, if the court had determined the community interest in the funds on the basis of contributions of earnings during marriage and then proceeded to divide each fund into two accounts, each party would have received a proper share and would have equally borne the risk of non-maturity.
(emphasis added); Iglinsky, 735 S.W.2d 536. See also Hopf v. Hopf, 841 S.W.2d 898 (Tex. App. - Houston [14tth Dist.] 1992, no writ).
a. Characterization - Defined Benefit Plans. “Defined benefit plans”
are commonly referred to as pension plans. The approach to characterization of a defined benefits plan varies depending upon whether the employee was a member of the plan at the time of marriage and whether the employee is still a member of the plan at the time of the divorce. There are a number of possible combinations of facts that present themselves. The reader is directed to other articles addressing this topic in more detail.
Where the present value of the right is not subject to determination by reason of uncertainties affecting the vesting or maturation of the benefit, the community interest in a defined benefit plan can be mathematically ascertained by apportioning the benefit between the months in the plan during marriage and the total number of months necessary for accrual and maturity. Taggart v. Taggart, 552 S.W.2d 422 (Tex. 1977). Where the benefit is a contingent interest it has been suggested the apportionment to the nonemployee spouse be made effective if, as, and when the benefits are received by the employee spouse. Cearley, 544 S.W.2d 661; see also Miser v. Miser, 475 S.W.2d 597 (Tex. Civ. App.--Dallas 1971, writ dism'd).
The extent of the community interest in a defined benefit plan is generally based on the number of months in which the marriage coincides with employment (the numerator) divided by the total number of months of employment (the denominator). Taggart, 552 S.W.2d 422. However, the value of the benefits are apportioned to the spouses based upon the value of the community interest at the time of divorce. Berry v. Berry, 647 S.W.2d 945 (Tex. 1983). To the extent that the benefits increase as a result of additional years of work after divorce, the increase is the separate property of the employee spouse. Id. see also Jensen, 665 S.W.2d 107.
In Stavinoha v. Stavinoha, 126 S.W.3d 604 (Tex. App. – Houston [14 Dist] 2004, no pet.),th
Instead of retiring immediately, the husband elected to participate in a “deferred retirement option plan”. Under this plan, the husband continued working and receiving a salary while his monthly retirement annuity is deposited into a deferred retirement option program account in his name. When the husband does ultimately retire, he receives the money in the account as a lump sum and begins receiving his pension payments monthly. In reversing the trial court’s determination that the funds in the deferred account were the husband’s separate property, the Houston Court of Appeals held that retirement benefits earned during marriage are community property, even if they are not immediately subject to possession and enjoyment at the time of divorce.
b. Characterization - Defined Contribution Plans. The methodologies
used to characterize defined benefit plans as described in Berry, Taggart and Cearley are not applicable to defined contribution plans. Smith v. Smith, 22 S.W.3d 140, 149 (Tex. App.--Houston [14 Dist.] 2000, no writ). Many courts have utilized a simplistic approach to valuing theth
community interest in a defined contribution plan. Specifically, several courts have suggested that one need merely subtract the value of the plan at the time of trial from the value of the plan at the time of marriage. Smith, 22 S.W.3d at 148-49; Pelzig v. Berkebile, 931 S.W.2d 398, 402 (Tex. App. - Corpus Christi, 1996, no writ). Other decisions imply that it may be possible to trace assets within a 401-K plan. See Hopf v. Hopf, 841 S.W.2d 898 (Tex.App.--Houston, [14 Dist.] 1992, no writ).th
Iglinsky v. Iglinsky, 735 S.W.2d 536, 539 N.2 (Tex. App.--Tyler 1987, no writ). Still another case utilized an inception of title concept and held that a 401-K plan that was fully funded prior to marriage should be treated as a trust and all income within the plan and increases in the value of the plan are separate property. Lipsey v. Lipsey, 993 S.W.2d 345 (Tex. App. - Fort Worth, 1998, no writ).