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Here’s the situation, and I apologize for the length and if I am not getting all the terminology correct as I am not a professional.

Mother and Father (from now referred to as M & F) are nearing end of divorce that started years ago.  For reasons I’d rather not get into on this forum, I’m helping M.    F, age 70,  is 100 percent owner of company (4 plan participants including himself) with a defined benefit pension plan that is significantly overfunded.  He has the vast majority of pension vested benefits.  His vested benefits are 10 times that of employee #2 (longtime 30 year employee), employee #3 (family member), employee #4 (new employee).  Despite M working for free for years for the company, she was never an official employee that had any interest in the pension plan.

The pension overfunding is so large that it almost equals the amount of F’s current vested benefits.  To soak up overfunding, F shifted a couple hundred thousand dollars into employee #3’s plan , which didn’t make much of a dent in overfunding, and since he is only 30 years old, maxed him out on his future expected benefits.  F is trying to soak up the rest of the overfunding by having the plan buy term life insurance for employees, and pay the yearly premium.  The plan has more than enough overfunding to pay the upfront premiums and pay the yearly premiums for the 30 year duration of the policies.  As per law, the death benefit on the policy can be 100 times the monthly salary of the plan participant…so figure that as long as F doesn’t live till 100, his designated beneficiaries get a hefty life insurance payout.  If he lives till 100, all the premiums went down the toilet, but hey he won anyways, he lived till 100!

As part of divorce settlement, F has agreed to give M half of his vested benefits of pension plan in a QDRO.  However there is significant value in the overfunding that F is extracting via life insurance purchases for his choice of beneficiary, and possibly other ways to monetize overfunding in future (such as selling the company or a part of it, and the overfunding)… at bare minimum, overfunding reverts to company at 10 cents on the dollar after excise/income tax.  F refuses to make M or her choice of heirs a ½ beneficiary of this life insurance he is purchasing, and refuses to compensate M not even 1 dollar for the value of the overfunding.  M is upset because it was through F’s own foolishness that he built up overfunding with their money and effort over the years and now he is getting value out of it and he is refusing to give her anything.  

Questions are as follows

1)     Is there a way to transfer any portion of this Overfunding into M’s QDRO, whether through cash or pension assets?  If so what are the legal ways to do it? 

2)     Can a judge order the pension plan trustee to transfer Overfunding cash or assets into a Wife’s QDRO?

3)     Does anyone know of any instances in which Overfunding has been valued in a courtroom setting, and more specifically in marital law?  For instance, at the very minimum that overfunding is worth 10 cents on the dollar if all the money reverts to the company and excise/income tax is paid…but F is purchasing life insurance with the overfunding to avoid the excise tax., and there is an expected value to that death benefit his choice of beneficiary is receiving.   There also other creative options for monetizing overfunding.  .Does anyone have any experience with convincing a judge or negotiating a settlement based on pegging a value to an employee’s interest in his pension plan’s overfunding?

4)     Any other suggestions that would help M get value from pension overfunding that F is getting benefits from and may monetize in the future, but refuses to share with M?

I have talked to a lawyer in pension funding, who has helped me get this far, but as you can see this is a very niche issue and any fresh perspectives or experience would be much appreciated.  Thank you!

-Rich

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Richard, defined benefit plan maximum benefits cannot be exceeded, so I don't think there's much more that could be done directly via the plan, especially if ancillary tactics (life insurance) are taken after the QDRO is filed. However, this excess value in the plan does have value to F and his company and could be considered among all other assets when identifying and dividing - the trick is how to value. Good luck.

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If M was really an employee of the company, it's possible the plan could be amended to provide a benefit to her. Since she was working "for free", it wouldn't be a large benefit.

Amending the plan like this would be subject to non-discrimination rules.

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CuseFan,

Thanks for the reply.  The QDRO has not been filed yet, but life insurance can't be bought for Mother as she is not an official employee...really the only way she could benefit from the life insurance is if she was made a 1/2 beneficiary of the policy that is being bought for Father....which he refuses to do.   Term life insurance is generally not considered a marital asset so I don't think the judge could force Father to name Mother half beneficiary.

Legally speaking, like you said the "value" lies in the overfunding, which could be assigned a number when dividing the estate.  Do you have any suggestions of methods and manners to come to that value number?  I would say floor is 10 cents on the dollar (reversion to company after excise/income tax) and ceiling is 60 cents on the dollar (what the company would net if it sold the overfunded pension as part of a company sale to another company, assuming maybe a 20 cents discount on the pension assets and a 20 cents capital gains tax)...The real value lies somewhere in between...do you (or anyone) know of any case law or instances where overfunding has been valued in a legal setting?

Would I be able to hire an Actuary to value that overfunding?

Tymesup,

In a cooperative situation, the plan could be amended to officially hire the Mother, Unfortunately this is an adversarial situation where the Father is trying to avoid paying Mother anything, so any solution would need to past legal muster as being enforceable by a judge to compel Father to do so.....or at the very minimum Father needs to think a judge could force him to do so, so he settles.  I don't think a judge could force him to hire Mother.

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This sounds like it is ultimately a divorce negotiation problem.  F is refusing to divide a marital asset.  It depends in part on whether they are fully divorced, or if they still have some window to negotiate the division of assets.

F was willing to 50-50 split for the QDRO, but insists on 100% keeping the overfunding?  Is that because the settlement is done and the divorce is final?  It sounds like he knows that M has no leverage.

But M should weigh the value of the overfunding versus the cost of lawyers.  Lots of divorcing spouses will squander two or five or ten times the value of an asset just to deprive their ex of getting the full asset.  Is this enough money that it is worth fighting over?

 

On 6/19/2019 at 4:12 AM, Richard Tate said:

1)     Is there a way to transfer any portion of this Overfunding into M’s QDRO, whether through cash or pension assets?  If so what are the legal ways to do it? 

Sort of.  The court can give M a bigger value of the QDRO to de facto capture some of the value of the overfunding.  It depends where in the divorce process M and F are.

On 6/19/2019 at 4:12 AM, Richard Tate said:

2)     Can a judge order the pension plan trustee to transfer Overfunding cash or assets into a Wife’s QDRO?

Nope. A QDRO cannot order a plan to pay a form of benefit that it was not already going to pay.  A divorce judge cannot add a new type of benefit to the plan or change funding or distribution practices.  QDROs can redirect the beneficiary of existing plan benefits.  An ERISA plan has to qualify a DRO and if the order tries to change the form of benefits offered by the plan then the plan can refuse to qualify the DRO.

On 6/19/2019 at 4:12 AM, Richard Tate said:

3)     Does anyone know of any instances in which Overfunding has been valued in a courtroom setting, and more specifically in marital law?  For instance, at the very minimum that overfunding is worth 10 cents on the dollar if all the money reverts to the company and excise/income tax is paid…but F is purchasing life insurance with the overfunding to avoid the excise tax., and there is an expected value to that death benefit his choice of beneficiary is receiving.   There also other creative options for monetizing overfunding.  .Does anyone have any experience with convincing a judge or negotiating a settlement based on pegging a value to an employee’s interest in his pension plan’s overfunding?

Not a divorce lawyer and no idea on precedent.  But my instinct is that you should figure out the most valuable possible use of the overfunding, attribute the appropriate proportion of that amount to F, then treat that as the value of the overfunding to their marital assets.  If he insists on getting 100% of the value of the life insurance, then F could sacrifice some of the regular benefit, or some of the non-pension assets.

On 6/19/2019 at 4:12 AM, Richard Tate said:

4)     Any other suggestions that would help M get value from pension overfunding that F is getting benefits from and may monetize in the future, but refuses to share with M?

Did they already finalize the division of assets?  Did M already file the QDRO?  You can go back and re-divide assets but that might be more trouble than it's worth.  If the division of assets is not finally decided, then M should try to add the overfunding to the list of assets.

23 hours ago, tymesup said:

If M was really an employee of the company, it's possible the plan could be amended to provide a benefit to her. Since she was working "for free", it wouldn't be a large benefit.

Amending the plan like this would be subject to non-discrimination rules.

At the very least, this would need F's assent, though.  So if F is not interested in splitting life insurance, my guess would be F may not be interested in retroactively making M an employee.

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Loserson-  Thank you very much for your input and your answers on the QDRO..your answers very much align with my thinking.  The divorce is not finalized but both parties are close to settlement.  This "overfunding" issue is one of the final pending issues that is in dispute....obviously both sides would like to avoid costly litgation

The major problem is that this is such a niche issue, there really isn't much legal precedent on it.  Logically, the overfunding has value to it (how much debatable of course, I like your idea of "most valuable possible use") but since really there is scant legal precedent for splitting the value of overfunding in a divorce, Husband is staying very firm on refusing to give the wife anything...that's why I asked if anybody knew of any legal cases or precedent regarding it.   

I guess to win this argument in court or in settlement negotiations, one would need to bring in an expert witness, either a valuation expert, or actuary to actually give expert testimony and/or assign a numerical value to the Overfunding as accretive to the value of the company (or to the Husband).  

Would you (or anyone else) know of any actuaries or experts that might be able to put together a specific valuation of the overfunded portion of pension assets that would be acceptable to a court?

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Disclaimer - I know nothing about this area of law - but if she worked "for free" for many years, could she sue for retroactive status an an employee, thereby entitled to back wages and benefit accruals?

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I think you are looking for a benefits consultant, actuary or benefits attorney to advise on the things you can do with overfunding, then to estimate the highest value use of the money, then to figure out how much of that use will go to F, then to multiply that by 50%.  A consultant might have the most creative ideas, an actuary would have the most grasp of numbers, and an attorney might be more comfortable with such an unusual legal question.

If you asked me how to use up the overfunding, after maxing out benefits and buying life insurance, I would say: match 401(k) contributions within the DB, add family members as participants, hire more employees, pay for participant and retiree health coverage, or just sell the company and merge the overfunded DB into the buyer's not-overfunded DB.  There might be other ideas, but you want to get your expert, if you get one, to figure out the various values of these and then determine which is most valuable to F.

Sale of the company and merger of the plan into another plan is probably the most valuable to F, because a buyer would probably pay close to dollar-for-dollar for those contributions.  They would relieve the buyer of the need to make contributions.  But the cost of the sale and the cost of the merger might be enough to ruin that plan.  And F might not want to sell, so it might be difficult to convince them to use plan merger as the relevant metric if they claim plan merger would never happen.

Relatedly, can you just say that the overfunding is functionally a company asset (despite being legally a trust asset) and increase the value of F's company dollar for dollar?  Then reallocate the value of the company?  The trust assets probably increase the sale price of the company and they allow the company to reward employees without increasing payroll.  I know this is too simplistic, but I feel like your best argument is to count the overfunding's nominal value.

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Wouldn't the over funded pension raise the value of the business which was likely part of the marital settlement? Or do I have it wrong.

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