Even Pending Appeal, Winners and Losers in KRS & KTRS Reforms

Pension 090418.jpg

If you’re a family law attorney in the Cincinnati metro area, there’s a good chance you’ve dealt with a client or spouse of a client who has accrued benefits under either the Kentucky Retirement Systems (KRS), or the Kentucky Teachers’ Retirement System (KTRS), and you’re no doubt aware of the current uncertainties (merited and otherwise) surrounding their future form and amount(s).

That same uncertainty has spurred some public employees who participate in these plans to retire earlier than they might otherwise have planned, rankling others who feel they’re “gaming the system,” or “double dipping.”  Two Former (and likely to be newly re-elected, this fall) County Prosecutors have found themselves under unexpected scrutiny, and the scapegoats of some Kentucky Legislators (for whom there might be some convenience in highlighting the $60-odd thousand yearly pension of a few individual members, in lieu of the greater systems’ $64 billion in unfunded liabilities, and the stalled reform thereof), for commencing their own pension benefits and running for likely re-election to the same office they vacated to commence them from. In the event either former County Attorney Bobbi Jo Lewis or former Commonwealth’s Attorney Laura Witt return to the offices they retired from, they would draw a salary while receiving pension benefits for their previous service and participation under the Plan(s).

From their perspectives, these attorneys are just making a choice they’re entitled to make, regarding benefits their years of service have entitled them to take. And both cited the uncertainty of ongoing (currently stalled, pending a State Supreme Court ruling on the Governor’s Appeal of the state Attorney General’s successful suit to block the already watered down, but still controversial, Senate Bill 151) reform efforts, as or among their primary reasons for doing so. And, since both are running unopposed, the prospect of their receiving both salaries and pension benefits, come January, seems assured.

In your own practice, you may have encountered clients whose individual benefits, either as Plan Participant or Alternate Payee, seem uncertain at present (whether for real or perceived reasons), which can spell trouble for and complicate property settlement negotiations. And, as Attorneys Lewis and Witt’s examples make clear, individual circumstances and considerations are unique to every plan beneficiary.

The takeaway:
While the current, pending legislation reserves most of its effects for future employees, or those whose benefits in the systems are new or otherwise limited, any negotiations concerning or offsetting individual benefits under the (potentially) affected retirement systems should be done with full cognizance of all prospective changes thereto. Or, if neither the parties nor counsel(ors) wish to navigate the full text of Senate Bill 151 to deduce the exact effect and extent thereof such reform may have on a party or parties’ prospective benefits, you may find that the safest, most assuredly equitable solution is to avoid any offsetting of (potentially) affected benefits entirely, and to instead divide the benefits or portion(s) therein between the parties via… you guessed it: QDRO.

(If you do, be sure to utilize the form specified under KRS Chapter 13A, or other controlling regulation, or shoot an email to your friendly, QDRO blogging expert for a contract to get started.)

Be sure to check back for updates leading up to Governor Bevin’s September 20th Kentucky Supreme Court challenge, or read more about previous iterations and developments of Kentucky's pension reform on our blog, here.

Kentucky's Pension Reform Proposals - UPDATED

Last November on this blog, my office gave a brief rundown of the significant proposals being made to reform Kentucky's public retirement systems. Four months later, it's worth checking in on these efforts again, which I've done below:

Revised pension reform bill released and headed to committee in the Kentucky Legislature. After pulling back their original bill and removing, or making more palatable for some,  certain provisions related to cost-of-living adjustments (COLAs) under the Kentucky Teachers’ Retirement System (KTRS); the implementation of substitute defined contribution plans, similar to 401(k)s (albeit minus the opportunity for SSDI accruals/benefits, as pointed out in our November blog post); among other varyingly dramatic cost-reduction measures, Kentucky Senate and House leaders released their ‘Proposed Senate Substitute’ (PSS) to Senate Bill 1 this week. The full, 293-page text of the proposal has been made available on the State Legislature’s web site, here. It’s hard to know what might stay or go in this revised version; the original draft legislation was itself the product of untold numbers of revisions in the months elapsed from its announcement to its filing on February 20th. And beyond that: I’m not a politics reporter, I just have a thing for retirement systems.

Takeaways from the past two weeks’ developments in Frankfort, for family law attorneys and their clients:

  1. Future clients, who would likely be affected the most by the systemic changes originally included in the plan (more than, say, a participant and former spouse with an already lengthy service record), are likely to keep their defined benefit plans after all, as the switch to 401(k)s appears to have been scrapped due to its unexpected costs.

  2. Future clients are not entirely out of the woods, however, as the current bill’s switch to/integration of a ‘cash balance’ formula to supplement (in some cases) and succeed (in others) the Kentucky Teachers' Retirement Systems’ traditional pension formula may necessitate two separate QDROs, in the event of divorce/dissolution, for the two distinct benefit formulas.

  3. None of this may matter, as leaders from both chambers are facing substantial pressure from constituents who stand to have their benefits reduced or frozen under the proposals, and to whom appeals for consideration of the state’s enormous unfunded pension liabilities (estimated to be somewhere in the range of $40 Billion) understandably ring hollow.

  4. 293 pages is a lot of pension reading, even for me, so I skimmed in both reading and retelling. If you’ve found something within the new text that you think I missed, or would like me to discuss here, or just find interesting and need someone to talk about it with, send me an email and we’ll talk!

As soon as things begin to settle, and we can start to form a clearer picture of what changes may be at hand for Kentucky's public retirement systems and their members, I hope to write another update, this time detailing any specific changes which might affect benefits division in a divorce/dissolution. In the interim, Kentucky Retirement Systems (KRS) is providing detailed daily updates on its web page, here, alongside a number of tools which track the bill's progress and the changes made to its provisions.


  • Of additional interest: Kentucky Attorney General, Andy Beshear, released this 6-page letter to the Legislature, arguing what his office deemed were at least 21 instances of illegality within the new bill itself. 

Kentucky’s Proposed Pension Reform Plan

On October 18, 2017, Governor Matt Bevin and state Republican leaders unveiled a plan that transitions Kentucky Retirement Systems’ traditional pension plans and hybrid ‘Cash Balance’ plans into Defined Contribution Plans for all newly enrolled (and many current) employees.  If the bill passes, substantial changes will be made, impacting participant benefits, retiree healthcare, disability, and death benefits. 

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SHOW ME THE MONEY: UPDATE TO MY BLOG POSTS DATED JUNE 12, JULY 1 & AUGUST 21, 2014

Fraley v. Maxey, NO. 2013-CA-001447-MR (Ky. App. 2014)
In Allocating the Marital Portions of 401(k) Accounts, the Non-Participant Spouse is Only Entitled to 1/2 of the Marital Contributions and Appreciation Thereon

Rendered: November 21, 2014
Not To Be Published
Opinion Affirming

Add another notch to my QDRO lipstick case. If you click on “TRACING” on the tag-cloud to the right of this post, you’ll see this is my fourth blog post highlighting this well-settled area of law:  traceable gains on pre-martial contributions are non-marital when the increase does not result from the efforts of either party. (See my blog posts dated June 12, 2014; July 1, 2014, and August 21, 2014).

In jurisdictions such as Kentucky and Ohio, tracing is utilized as an evidentiary vehicle to value and prove the passive increase of pre-marital contributions in a 401(k)-type plan during the period of marriage. [For citations to applicable Kentucky and Ohio statutory and case law, see my blog post dated August 21, 2014.]

Tracing allows one to make an accurate determination of the growth (or loss) on both the marital and non-marital contributions in the account by calculating the rate of return experienced on the account during the marriage. Take the following example from one of my own consulting cases (the story you are about to hear is true; only the names have been changed to protect the innocent), wherein I traced the passive growth of a pre-marital account balance over the span of a ten-year marriage:

The balance in Steven’s 401(k) on his date of marriage was $173,364. At the time of the divorce, the account had grown by $251,266 to $424,630. However, of this $251,266 increase, it was determined that only $144,290 was divisible due to contributions made during the marriage, and passive market growth thereon. Therefore, Steven retained $280,339, in addition to half of the divisible $144,290. 

Without competent evidence, a court may have instead found the full $424,630 divisible – netting $212,315 to each spouse. However, after my tracing of the marital contributions and growth thereon during the marriage, Steven ended up with $352,485, and his spouse with $72,145.  Wow!

What is interesting and notable about Fraley (even after multiple exhilarating blog posts on the subject), is that – unlike Steven’s marriage – the parties were only together three years. The trial court in Fraley initially found that Wife’s Fidelity and TIAA-CREF accounts had increased in value during the three-year marriage in the amount of $72,564.00. Thus, the trial court determined Husband’s share was ½ of that, or $36,282.00. 

However, Wife subsequently filed a motion to alter, amend, or vacate the trial court’s findings of fact. Wife’s motion pointed to competent evidence within the record that traced her pre-marital contributions and passive growth thereon during the marriage, proving the marital portion was only $3,127.00. In response, the trial court amended its findings, concluding that Wife met her burden, and that Husband was only entitled to $1,563.55 (½ of $3,127.00), instead of $36,282.00. Wow! The Court of Appeals, citing to KRS § 403.190(2)(e), affirmed, summarizing:

In allocating the marital and nonmarital portions, we agree with the family court that [Husband] was only entitled to one-half of the total marital contributions and any appreciation in value of the marital portion during the marriage. The nonmarital contributions and any increase in value of those contributions not attributable to the efforts of the parties during the marriage were correctly assigned to [Wife].

Today’s lesson? Don’t make the mistake of thinking a short-term marriage isn’t worth the effort to examine. 

The law holds no secret at this point as to the evidentiary burden itself. What may still be somewhat elusive is understanding how tracing works and identifying the most preferred (and court-approved) methods of tracing. At risk of self-aggrandizing my QDRO Blog (with an admitted readership consisting of only close family and a few other gluttons), I refer you to my previously mentioned three related posts. These posts thoroughly explore relevant state law in Kentucky and Ohio, evidentiary considerations, how-to’s, and even some tips for trial motions.

KY & OH: “EQUITABLE” IS ALWAYS FAIR, BUT NOT ALWAYS EQUAL

Pitman v. Pitman, NO. 2013-CA-000249-MR (Ky. App. 2014)
The Trial Court Has Discretion to Award the Entirety of a Marital Retirement Account to One Party

Rendered:  October 24, 2014
Not To Be Published
Opinion Affirming

Another case where it doesn’t matter whether you are a practitioner in Kentucky or Ohio. The law is essentially the same on this point: Kentucky and Ohio law provide for an equitable division of marital property upon dissolution of a marriage. The word "equitable" means "fair," which does not always equate with an equal division of property. (Say that ten times fast.)

Division is not always 50/50

Division is not always 50/50

While Ohio Revised Code (ORC) § 3105.171 does state that a division shall be equal, it allows the court to order an unequal division if "an equal division of marital property would be inequitable." The statute contains various factors for the court to consider in deciding whether to award an unequal division of marital property.

Kentucky Revised Statute (KRS) § 403.190 has similar effect. Although the statute does not expressly reference an ‘equal division’ of marital assets, as does the ORC, it does require the court to divide marital property in “just proportions” with consideration of “all relevant factors” (including a list of four specific factors). It is well settled that, pursuant to KRS § 403.190, an unequal award of marital retirement benefits is proper if needed to make the overall division of marital property in “just proportions”. See Pitman at page 4, citing Snodgrass v. Snodgrass, 297 S.W.3d 878, 888 (Ky. App. 2009); Smith v. Smith, 235 S.W.3d 1, 17 (Ky. App. 2006); Overstreet v. Overstreet, 144 S.W.3d 834, 839 (Ky. App. 2003). 

In Pitman, the facts are more interesting than the outcome, in that the above-holding is not breaking news. Husband and Wife lived apart much of their marriage, with Wife ultimately raising their son in Kentucky. Wife had a successful business designing “Fabulous Hats” and selling them at various events, including the Kentucky Derby (she was eventually successful enough to have a brick and mortar establishment). During big hat events (pun intended), Husband would come to Kentucky and care for their son while Wife tended to her business. Wife did not disclose her business assets, but during a single event she earned as much as $100K in gross income. 

During the pendency of the divorce, Husband offered that Wife keep her business and in exchange Husband would keep his retirement account, estimated at $25K (both were marital property). Wife did not agree, arguing she contributed to Husband’s ability to earn a living by caring for their son.

After considering the relevant factors set forth in KRS 403.190(1), particularly (1)(a), the trial court awarded Wife’s business to her and Husband’s retirement account to him.  Wife appealed, wanting half of Husband’s account. The Court of Appeals affirmed, finding the trial court did not abuse its discretion.

As I said, nothing newsworthy here, just a reminder that you have license to be creative (pun intended) when negotiating the division of marital assets.  It isn’t necessary that marital assets just get divided down the middle. However, when on the defensive, it may not hurt to remind your client that the trial court can divide the marital piggy any way it deems equitable in light of the parties’ circumstances.

QDROS ARE AN ATTORNEY’S BEST FRIEND: TAX ISSUES & DIVIDING EMPLOYEE RETIREMENT BENEFITS WHEN THERE IS NO QDRO

Kelly v. Kelly, NO. 2012-CA-001081-MR (Ky. App. 2014)
When There is No QDRO, Income Tax Liabilities and Reporting Obligations Must Be Negotiated, Allocated and Structured Between the Parties

Rendered: August 29, 2014
Not To Be Published
Opinion Reversing

To: Domestic Relations Attorneys on BOTH Sides of the River
Re: I’m Sorry, and You’re Welcome

Let me start by saying, if you hate QDROs, I wager that this post will help you see QDROs through a more affectionate lens….

To that end, qualified ERISA-based plans should be your preference when assigning retirement benefits to a former spouse. In fact, a red flag should go up whenever you encounter a plan that is not governed under ERISA. Importantly, non-ERISA plans are subject to their own set of rules that may limit or even prohibit the assignment of benefits to a former spouse. 

For attorneys in Ohio and Kentucky, there are certain retirement plans out there you should be on the lookout for that are “non-ERISA” and/or “non-qualified”.  THESE PLANS MAY NOT BE ABLE TO BE DIVIDED VIA QDRO OR SIMILAR COURT ORDER. For instance, if your client (or his/her spouse, or former spouse) has a retirement plan with the City of Cincinnati, listen up. City of Cincinnati pension benefits cannot be divided by QDRO. The same may be true if one of the parties is an executive with Procter & Gamble, or General Electric, to name only  a very few local employers with supplemental executive retirement plans. 

You are thinking, “What’s the big deal Eileen?” That is because you are ahead of the bell curve. You are one of the lucky who discovered pre-decree that you could not divide the pension via QDRO. You were able to instead negotiate an alternative equitable distribution of the pension; perhaps an offset with the parties’ much coveted rare, mint condition first edition Princess Diana Beanie Baby collection. You saved yourself and your client a lot of time, money, and heartache by not simply having the parties sign off on a property agreement “splitting the pension via QDRO”, only later to find out post-decree that the pension could not be divided via QDRO. I bet you were a ‘hand-raiser’ in law school too. As for the rest of us...

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UPDATE TO MY BLOG POSTS DATED JUNE 12 & JULY 1, 2014: SHOW ME THE MONEY

Deboer v. Deboer, NO. 2012-CA-000464-MR AND NO. 2012-CA-000514-MR (Ky. App. 2014)
Traceable 401(k) Gains On Pre-Martial Contributions Remain Non-Marital When the Increase Does Not Result From the Efforts of Either Party

Rendered: August 22, 2014
Not To Be Published
Opinion Affirming

I’ve written several recent blog posts providing ample citation to cases in both Kentucky and Ohio reciting the law concerning the evidentiary burden of proving non-marital amounts in retirement accounts.  Deboer raises the issue once again, with Wife claiming that the trial court erred in calculating Husband’s non-marital interest in his 401(k) by including a net increase in the value of his premarital contributions realized over the course of the marriage.

We know the question that is raised anytime passive growth accrues on pre-marital contributions made to a 401(k)-type plan during the marriage.  Who gets the money?  The answer has been made clear through the litany of repetitious cases presented to the Courts of Appeals in both Kentucky and Ohio.  When passive growth on pre-martial contributions occurs during the period of marriage, if it is traceable in such a manner that the party claiming the non-marital interest can meet their evidentiary burden, that party takes home the proverbial money bag.

This is a well-settled area of law that can’t seem to be set out to pasture:  traceable gains on pre-martial contributions are non-marital when the increase does not result from the efforts of either party.  As in Deboer, this includes when market forces - rather than efforts of the parties - generate the increase in value.

The trial court in Deboer did just as the Kentucky Court of Appeals has previously avowed – over and over again.  The trial court granted Husband an additional non-marital portion of his 401(k) that represented the gains attributable to his pre-marital contributions realized over the course of the marriage, but which did not result from any effort by Husband.  Why?  As the Court of Appeals found in affirming, there was ample evidence within the record tracing the growth upon the pre-marital funds.

***      ***      ***

For an in-depth analysis of the issues relating to tracing and proving the evidentiary burden in both Kentucky and Ohio, see my blog post dated June 12, 2014.  For a practical tip to help ‘short-cut’ writing the supporting brief on this issue in Kentucky, see my blog post dated July 1, 2014.  

ANTICIPATION IS KEEPING ME WAITING...

Mullins v. Mullins, NO. 2013-CA-000605-MR (Ky. App. 2014)
Is a QDRO Time Barred When Entered 15 Years Past the Date of Decree, Pursuant to KRS 413.190(1)?

Rendered: July 18, 2014
Not To Be Published
Opinion and Order Dismissing Appeal

I feel like I can already hear a collective “uh oh” ‘round the Commonwealth.  Sadly, this is actually an issue.  Meaning, it is shameful that QDROs – securing spousal rights to what is often a couple’s largest and most important asset – are not entered contemporaneously with a dissolution decree, much less more than fifteen years later.

The facts in Mullins are undisputed.  The parties were married almost 20 years.  On July 25, 1995, the Greenup Circuit Court granted Wife’s petition and dissolved the marriage.  The Decree set forth Findings of Fact, including:

The Respondent [Husband] has presently a pension through his employer and when the Respondent is entitled to draw any portion of the pension, either lump sum or periodic, at that time the Petitioner [Wife] shall be entitled to a portion of said payment... .

On January 31, 2013, nearly 20 years from the date of decree, I SAID NEARLY 20 YEARS FROM THE DATE OF THE DECREE, Wife filed a motion seeking discovery regarding Husband's pension so that she could enter a QDRO to obtain her marital property distribution.  Husband responded that Wife's motion was time barred under KRS 413.090(1).  

Is it that easy?  See for yourself, KRS 413.090(1), reads:

[T]he following actions shall be commenced within fifteen (15) years after the cause of action first accrued:
(1) An action upon a judgment or decree of any court of this state or of the United States, or of any state or territory thereof, the period to be computed from the date of the last execution thereon;  ...

(Emphasis added).

Husband’s argument, in a nutshell, was that a QDRO is an “action upon a judgment or decree”. Thus, Wife's motion to have the court enter a QDRO more than 15 years after the issuance of the decree would be time barred under KRS 413.190.

The trial court said ‘not so fast’, agreeing with Wife that her interest in the retirement account was in fact a property right, which vested with her at the time of the entry of decree.  Thus, the trial court determined KRS 413.190 did not apply, allowing discovery on the matter to proceed.

If I can’t wait to see what the Court of Appeals will eventually do with this case, Husband must be even more anxious:  Husband appealed the trial court’s order to allow discovery.  Of course, the Court of Appeals appropriately determined such was not a final appealable order subject to the Court’s jurisdiction.

So we have to wait (goodness, I hope not ANOTHER TWENTY YEARS), as the trial court has not yet granted Wife the ultimate relief she seeks, that is, entry of the QDRO.  But as the Court of Appeals observed, husband is not left without a remedy, and the issue is likely to come back before the Court of Appeals after entry of the QDRO by the trial court:

In the event the trial court enters a Qualified Domestic Relations Order, he may pursue a direct appeal at that time. See Goff v. Goff, No. 2009-CA-000902, 2010 WL 3810735, at *7 n.8 (Ky. App. Oct 1, 2010) ("A party who believes a QDRO fails in its purpose to enforce the judgment consistently with the judgment's terms may appeal that order to this Court.") (citing Perry v. Perry, 143 S.W.3d 632, 632-33 (Ky. App. 2004)).

I’m going with the trial court on this one; I believe the QDRO merely effectuates the transfer of a vested property interest.  But I feel like the lesson here is loud and clear.  Why test KRS 413.190(1)?  Just do it.