Lisa Flowers vs. Randy Flowers No. 2010-20243

Civil Action-Family Law-Divorce-Equitable Distribution-Special Master-Retirement Account-Valuation-Cash Balance Plan-Defined Benefit Plan-Defined Contribution Plan-Coverture Fraction-Credit-Tax Ramifications-Future Retirement Income

Defendant filed Exceptions to the Report and Recommendation of the Special Master in Divorce, asserting that the Special Master erred and abused her discretion in equitably distributing the marital estate by valuing his Hershey Retirement Account based upon valuation of the account as a 401(k) that did not utilize a coverture fraction and failing to award him credit for tax implications of his future retirement income.

1. A special master’s report is advisory in nature. While advisory, the court must give the special master’s report the fullest consideration, particularly in the area of credibility. The reviewing court must conduct an independent review of the record and must examine the appropriateness of the special master’s recommendations.

2. A cash balance plan is a hybrid between a defined contribution plan and a defined benefit plan. A defined contribution plan is a pension plan in which an individual account is established for an employee to which his employer and sometimes the employee contributes a specific amount. The employee bears the investment risk, and the employer does not guarantee a retirement benefit to the employee.

3. A defined benefit plan is a pension plan where an employee is promised a retirement benefit based upon a formula set forth by the plan. An employee has no claim to any particular asset that composes a part of the plan’s general asset pool and instead receives an annuity based on the employee’s earnings history, usually the most recent or highest paid years and number of completed years of service to the employer. The employer bears the investment risk.

4. The Hershey Retirement Account is a cash balance plan, which is a form of a defined benefit plan, as cash balance plans are required to offer payment of an employee’s benefit in the form of a series of payments for life.

5. Title 23 Pa.C.S. § 3501(c) requires that the marital portion of any defined benefit plan must be valued using a coverture fraction.

6. In light of the fact that the Hershey Retirement Account is a cash balance plan which is a type of defined benefit plan, the Hershey Retirement Account must be valued using a coverture fraction as required by § 3501(c).

7. Title 23 Pa.C.S. § 3502(a)(10.1) provides that in equitably dividing the marital estate, the court should consider the federal, state and local tax ramifications associated with each asset to be divided, the ramifications of which need not be immediate and certain.

8. When the parties agreed to an equitable distribution scheme prior to the Special Master’s hearing, Defendant is not seeking credit for a tax or sale liability he would incur as a result of liquidating his retirement accounts and the use of the current tax brackets of the parties fails to account for the parties’ future tax liability based upon changes in income or the tax law, the Special Master appropriately denied Defendant’s request to award him credit for the tax implications of his future retirement income.

L.C.C.C.P. No. 2010-20243, Opinion by Charles T. Jones, Jr., Judge, February 12, 2016.

Kelli Metzger Knerr, Esquire, for Plaintiff

Keith L. Kilgore, Esquire, for Defendant

IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY, PENNSYLVANIA

CIVIL LAW – FAMILY DIVISION No. 2010-20243

LISA A. FLOWERS, Plaintiff

v.

RANDY L. FLOWERS, Defendant

ORDER

AND NOW, this 12th day of February, 2016, after careful consideration of the record, Defendant/Husband’s Exceptions to the Special Master’s Report and Recommendation are hereby DENIED in part and GRANTED in part.

BY THE COURT:

CHARLES T. JONES, JR., J.

APPEARANCES:

Kelli Metzger Knerr, Esquire For Plaintiff

Buzgon Davis

Keith L. Kilgore, Esquire For Defendant

Spitler and Kilgore

OPINION BY JONES, J.:

Before this Court are Husband’s Exceptions to the Special Master’s Report and Recommendations.

FACTUAL HISTORY

Lisa Flowers (herein “Wife”) and Randy Flowers (herein “Husband”) were married on June 26, 1999. The parties separated on March 16, 2010. As of the date of the Special Master’s Hearing (herein “SM’s Hearing”) on May 4, 2015, Husband was sixty-one (61) years old and Wife was forty-eight (48) years old. Husband has worked at Hershey Foods since August 6, 1979 and expects to retire at the age of sixty-six (66). Wife is disabled and has been on Social Security Disability (herein “SSD”) since 2000. Wife receives one thousand forty dollars ($1,040) a month from SSD as of the date of the SM’s Hearing.

Prior to the SM’s Hearing, the parties had reached an agreement as to the value of the majority of the marital assets. The parties also agreed upon an equitable distribution scheme prior to the SM’s Hearing. The majority of the assets, with a few exceptions, were to be distributed fifty-five percent (55%) to Wife and forty-five percent (45%) to Husband. The cemetery plots, art prints, and Husband’s Hershey Retirement Account (herein “the HRA”) were excluded from the above distribution scheme and were dealt with separately. Husband agreed to purchase Wife’s cemetery plot for one thousand dollars ($1,000). The art prints and the HRA were to be distributed fifty-fifty (50/50). The parties memorialized their agreement in writing and introduced the document as an Exhibit at the SM’s Hearing.

The parties could not come to an agreement as to the value of the HRA and they could not agree if Husband was due credit for tax implications on the HRA. At the SM’s Hearing, Husband presented a statement dated December 31, 1999 which showed the balance of the HRA to be forty-five thousand seven hundred six dollars and sixty cents ($45,706.60). This value was used as the premarital value of the HRA because this is the amount as close to the date of marriage as possible. As of December 31, 2014, the HRA had a balance of two hundred twelve thousand seven hundred eighty dollars and five cents ($212,780.05). The HRA is a cash balance pension plan which is a hybrid of a defined benefit plan and a defined contribution plan. Hershey must meet minimum funding requirements and interest credits as defined in the plan documents. The plan is similar to a 401(K) in that the balance increases each year based on an “addition pay base credit” and increases for interest credits. The plan is not a 401(K), but rather a 401(A).

Jonathan Cramer (herein “Cramer”), a consulting actuary with Conrad Siegel Actuaries in Harrisburg, Pennsylvania, performed a valuation of the HRA on behalf of Wife. He valued the HRA as though it were a 401(K) plan because he believed that it was more like a 401(K) than a defined benefit plan. The value that Cramer presented at the SM’s Hearing for the marital portion of the HRA was one hundred nine thousand six hundred ninety dollars and eighteen cents ($109,690.18). Pension Appraiser’s Inc. performed a valuation of the HRA on behalf of Husband. They used the coverture fraction to value the HRA because it is not a defined contribution plan, but a hybrid, which they believe should be classified as a defined benefit plan. The value that Pension Appraiser’s assigned to the marital portion of the HRA was sixty-four thousand seven hundred seventy dollars and twenty-five cents ($64,770.25). The Special Master (herein “the SM”) accepted the value presented by Cramer as the correct value for the HRA.

The SM determined that Husband was not entitled to a tax credit. Husband believes that under the Divorce Code, Factor 10.1, he is entitled to a credit for future incomes taxes that he will be required to pay when he begins earning retirement income from his retirement accounts. Husband argues that because he is currently in the fifteen percent (15%) tax bracket and Wife currently has zero (0) tax liability, that this will cause the distribution to be unequitable against him. The SM denied Husband’s request for credit because she was not determining the equitable distribution of the marital assets and because the tax implications were too speculative.

PROCEDURAL HISTORY

Wife filed a Complaint in Divorce on April 1, 2010. Wife filed an Amended Complaint in Divorce on August 1, 2012. Wife filed a Motion for Appointment of a Special Master on June 16, 2014. Attorney Loreen M. Burkett (herein “the SM”) was appointed on June 17, 2014. On November 7, 2014, a Notice of the Special Master’s Hearing was sent to the parties setting the Hearing for February 25, 2015. On February 10, 2015, a Notice of the Special Master’s Hearing was sent setting the Hearing for May 4, 2015. The Hearing was held on May 4, 2015.

The SM filed her Report and Recommendations (herein “the R&R”) on July 9, 2015. The SM found the value of the HRA to be one hundred nine thousand six hundred ninety dollars and eighteen cents ($109,690.18) and denied Husband’s request for credit for future income tax that would be taken out of his retirement income in the future. Husband filed Exceptions to the SM’s R&R on July 29, 2015. Husband filed a Praecipe for Disposition on August 12, 2015. The Court filed an Order to List the matter for Argument Court on August 25, 2015. That same day the Notice for Argument with a Briefing Schedule was sent to the parties. Argument was scheduled for October 30, 2015. Wife filed a Motion for Continuance on August 31, 2015. On the same day, the Court directed the matter be listed for the November 2015 Term of Argument Court. A Notice for Argument and a new Briefing Schedule were sent to the parties on September 9, 2015 listing the matter for Argument on November 27, 2015.

Husband filed a Motion for a Continuance on October 5, 2015 requesting the matter be continued until the January 2016 Term of Argument Court. A Court Order granting Husband’s Motion was filed on October 5, 2015. A Notice for Argument and a new Briefing Schedule were sent to the parties on November 18, 2015 listing the matter for January 29, 2016. Husband filed his brief on January 4, 2016. Wife filed her brief on January 15, 2016. Oral Argument was held as scheduled. The matter is now ripe for disposition.

STANDARD OF REVIEW

A special master’s report is advisory in nature. Morschhauser v. Morschhauser, 516 A.2d 10 (Pa.Super.1986). A reviewing court has the responsibility to conduct an independent review of the record and to examine the appropriateness of the special master’s recommendations. Kohl v. Kohl, 564 A.2d 222 (Pa.Super.1989). While those recommendations are advisory only, we must give them our fullest consideration, particularly in the area of credibility. Goodman v. Goodman, 544 A.2d 1033 (Pa.Super.1988).

DISCUSSION

Husband raises two (2) issues in his Exceptions; (1) whether the SM erred or abused her discretion in valuing the HRA; and (2) whether the SM erred or abused her discretion in failing to award Husband credit for future income taxes. Wife argues that the SM did not err or abuse her discretion on either issue.

The HRA

The HRA is a cash balance plan, which is a hybrid between a defined contribution plan and a defined benefit plan.

There are two general types of pension plans: defined contribution plans and defined benefit plans. A defined contribution plan is a pension plan in which an individual account is established for an employee to which his employer (and sometimes the employee too) contributes a specific amount. See 29 U.S.C. § 1002(34); Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439, 119 S.Ct. 755, 761 (1999). The employee is entitled “to whatever assets are dedicated to his individual account.” Id. at 439, 119 S.Ct. at 761. The employee bears the investment risks and the employer does not guarantee a retirement benefit to the employee. See id., 119 S.Ct. at 761.

A defined benefit plan, on the other hand, is any plan that is not a defined contribution plan. 29 U.S.C. § 1002(35). It is generally a pension plan where the employee is promised a retirement benefit based on a formula the plan sets forth. The plan consists of a “general pool of assets rather than individual dedicated accounts.” Hughes Aircraft, 525 U.S. at 439, 119 S.Ct. at 761. Participants in a defined benefit plan have no claim to any particular asset that composes a part of the plan’s general asset pool, but, instead, receive “an annuity based on the retiree’s earnings history, usually the most recent or highest paid years, and the number of completed years of service to the company.” Depenbrock v. Cigna Corp., 389 F.3d 78, 79 n.1 (3d Cir. 2004) (quoting Campbell v. BankBoston, N.A., 327 F.3d 1, 4 (1st Cir. 2003)). Under a defined benefit plan the entity funding the plan, i.e., the employer, bears the investment risks. The pension plan at issue in this case is a cash balance plan. A cash balance plan, by law, is a form of defined benefit plan and must comply with the statutory regulations applicable to defined benefit plans. See, e.g., Esden v. Bank of Boston, 229 F.3d 154, 158 (2d Cir. 2000). However, in actuality, a cash balance plan is a hybrid between a defined contribution plan and a defined benefit plan as it contains attributes of both. See, e.g., id. at 158-59. A cash balance plan is classified as a defined benefit plan because cash balance plans, like traditional defined benefit plans such as the plan PNC maintained before January 1, 1999, “are required to offer payment of an employee’s benefit in the form of a series of payments for life . . . .” Burstein v. Ret. Account Plan for Employees of Allegheny Health Educ. & Research Found., 334 F.3d 365, 370 n.6 (3d Cir. 2003).

Register v. PNC Financial Services Group, Inc., 477 F.3d 56, 62 (3rd Cir. 2007) (emphasis added). Husband and Wife rely on the above case law in defining the HRA.

Wife’s cites to Register and argues that this case is different because it is a divorce case. Wife argued that the Court must look at how the plan accrues in order to determine the type of plan and how to value that plan. Husband and Wife agree that the HRA is a cash balance plan, which is a hybrid of the two general types of pension plans. However, this Court could find no case law to support Wife’s contention that the HRA should be valued as a 401(K) because of the way it accrues. The Court in Register clearly stated that “a cash balance plan, by law, is a form of defined benefit plan.” Id.

The Divorce Code requires that any defined benefit plan be valued using the coverture fraction. See 23 Pa.C.S.A § 3501(c). The statute specifically states the following:

Notwithstanding subsections (a), (a.1) and (b):

(1)  In the case of the marital portion of a defined benefit retirement plan being distributed by means of a deferred distribution, the defined benefit plan shall be allocated between its marital and nonmarital portions solely by use of a coverture fraction. The denominator of the coverture fraction shall be the number of months the employee spouse worked to earn the total benefit and the numerator shall be the number of such months during which the parties were married and not finally separated. The benefit to which the coverture fraction is applied shall include all postseparation enhancements except for enhancements arising from postseparation monetary contributions made by the employee spouse, including the gain or loss on such contributions.

(2)  In the case of the marital portion of a defined benefit retirement plan being distributed by means of an immediate offset, the defined benefit plan shall be allocated between its marital and nonmarital portions solely by use of a coverture fraction. The denominator of the coverture fraction shall be the number of months the employee spouse worked to earn the accrued benefit as of a date as close to the time of trial as reasonably possible and the numerator shall be the number of such months during which the parties were married and not finally separated. The benefit to which the coverture fraction is applied shall include all postseparation enhancements up to a date as close to the time of trial as reasonably possible except for enhancements arising from postseparation monetary contributions made by the employee spouse, including the gain or loss on such contributions.

23 Pa.C.S.A. § 3501(c). As noted by both parties, the Divorce Code says nothing specifically about cash balance plans.

This Court can find no case law dealing with a cash balance pension specifically in a divorce case. While the Circuit Court in Register found that certain characteristics of a cash benefit plans distinguish them from traditional defined benefit plans, the court nevertheless recognized that a cash balance plan was a defined benefit plan. There is no case law to support a finding to the contrary. This Court finds that the HRA is a type of defined benefit plan. As such, the plan must be valued utilizing the coverture fraction as described in the Divorce Code. Therefore, this Court finds that the SM did err in accepting Cramer’s valuation of the HRA because he valued it as though it were a 401(K). Husband’s Exception as to the value of the HRA is granted. This Court accepts the valuation performed by Pension Appraisers of sixty-four thousand seven hundred seventy dollars and twenty-five cents ($64,770.25).

Tax Credit

Husband believes that the SM erred by failing to award him credit for tax implications on his future retirement income. This Court notes that the SM did not fail to award Husband such credit, but rather specifically denied the credit. Husband believes that he is entitled to a tax credit under factor 10.1 which states: “The Federal, State, and local tax ramifications associated with each asset to be divided, distributed or assigned, which ramifications need not be immediate and certain.” 23 Pa.C.S.A. § 3502(a)(10.1). Wife argues that Husband is not entitled to such credit for two reasons. First, because Husband’s future income tax liability is too speculative. Second, because he bases both parties income tax bracket on their current tax bracket without taking into consideration equitable distribution and the taxes that will be due on those items.

The purpose of factor 10.1, along with twelve other factors, is to ensure that the distribution of the martial estate is equitable. The factors listed in Section 3502 of the Divorce Code are to be used in determining equitable distribution. The first problem in this case is that the parties agreed to an equitable distribution scheme prior to the SM’s Hearing. It is not the province of the Court to disturb an agreement between the parties simply because one party later decides that the distribution is unfair. The second problem is that the “Legislature intends the assets simply be given the value they would have to distribution after deducting every expense necessary to achieve liquidation.” Balicki v. Balicki, 4 A.3d 654, 664 (Pa.Super. 2010). In Balicki, the court was concerned that Wife was receiving a large sum of cash as part of the equitable distribution while Husband was receiving the value of property and other assets, not cash. Husband was going to be required to pay to Wife a large sum of cash in order to fully equitably distribute the marital estate. Id. The purpose of the factors is to ensure that the costs of equitably distributing the estate are shared between the parties instead of coming solely out of one party’s portion.

In this case, Husband is requesting credit for the income taxes which he will be required to pay when he begins receiving his income from his retirement accounts. He is not seeking a tax or sale liability which he would incur as a result of liquidating his retirement accounts. Further, Husband bases his argument on his current tax bracket and Wife’s current tax bracket without taking into consideration the tax obligation which Wife will owe after equitable distribution, any changes in Wife’s future income, or any changes in the tax law, including changes in tax brackets. This Court agrees with the SM that the tax credit sought by Husband is too speculative. This Court also finds that because the parties have already determined and agreed upon an equitable distribution scheme Husband cannot ask the Court to add or change the terms of the agreement. Therefore, Husband’s Exception as to the tax credit is denied.

CONCLUSION

For the reasons set forth above, Husband’s Exceptions to the Special Master’s Report and Recommendations are granted in part and denied in part. An Order will be entered consistent with the foregoing.