Marriage of Kelm, In re

• Decision Date: 26 February 1996
• Docket Number: No. 94SC184,94SC184
• Citation: 912 P.2d 545
• Parties: In re the Marriage of Nelson Oliver KELM, Petitioner, and Eloise Rae KELM, Respondent.
• Court: Colorado Supreme Court

Page 545

912 P.2d 545

In re the Marriage of Nelson Oliver KELM, Petitioner and Eloise Rae KELM, Respondent.

No. 94SC184.

Supreme Court of Colorado En Banc.

Feb. 26, 1996.

Rehearing Denied March 25, 1996.

John E. Kirchner, Colorado Springs, for Petitioner.

William H. Kirkman, Jr., Colorado Springs, for Respondent.

Justice MULLARKEY delivered the Opinion of the Court.

We granted certiorari in In re Marriage of Kelm, 878 P.2d 34 (Colo.App.1994), to review whether the trial court erred in awarding wife: (1) a portion of husband's retirement benefits attributable to his employment after divorce; (2) all benefits from her pension plan; and (3) a lump-sum distribution of contributions to the husband's pension plan should he die prior to retirement. ¹ The court of appeals affirmed in part and reversed in part. We now hold that the trial court abused its discretion and affirm in part and reverse in part the decision of the court of appeals. We return the case with instructions to the court of appeals to remand the case to the trial court for further proceedings consistent with this opinion.

I.

Eloise Rae Kelm (wife) and Nelson Oliver Kelm (husband) were married for twenty-six years prior to the dissolution of their marriage in 1992. At the time of dissolution, husband had worked in a civil service position for the United States Army and possessed a vested interest in federal Civil Service Retirement System (CSRS) benefits having already accumulated nineteen years of service toward his pension. Wife was employed as a part-time librarian with the Colorado public school system. She had accumulated six years of service under Colorado's Public Employee's Retirement Association (PERA) benefit plan. In short, at the time of dissolution, both parties held vested but unmatured interests in their respective pensions.

In addition to the pension benefits, the parties owned a home (which they subsequently sold) and had amassed credit card debt in the amount of $12,600. The marital assets did not permit immediate distribution of husband's pension benefits on a net present value basis to be offset against other assets in the marital estate. It was uncontested that the parties' vested but unmatured interests in the two pensions were marital property. The trial court awarded wife nineteen-thirtieths ( 19/30) of one-half of husband's pension benefits on an as-received basis--a total of 31.7%. The trial court reserved jurisdiction over the husband's pension benefits in the event husband took early retirement or was laid off due to cut backs or early buy-out of his retirement benefits. The trial court awarded wife all of her PERA benefits which it valued according to the contributions made by wife toward the plan by way of withheld salary as of the date of dissolution. Last, the trial court ordered husband " 'to maintain [wife] as beneficiary of the retirement funds in the event of his demise prior to retirement.' " Kelm, 878 P.2d at 37 (quoting the trial court).

On husband's appeal of the trial court's property distribution, the court of appeals held that the trial court had not abused its discretion and had properly treated both husband's CSRS and wife's PERA pension benefits. However, the court of appeals found that the trial court erred in awarding wife the entire lump-sum credit under husband's retirement plan if he were to die prior to retirement. Hence, the court of appeals remanded back to the trial court with directions that the trial court amend its order "to provide that wife receive a lump-sum distribution of only the pre-dissolution contributions." Kelm, 878 P.2d at 37.

II.

Pension benefits are marital property and are subject to distribution upon dissolution. In re Marriage of Grubb, 745 P.2d 661, 665 (Colo.1987). In our recent decision in In re Marriage of Hunt, 909 P.2d 525 (Colo.1995), ² we explained the different methods of pension distribution and the advantages and disadvantages of each method in detail. Hence, the discussion here will be brief.

There are three methods that a court can use to distribute pension benefits upon dissolution: (1) net present value; (2) deferred distribution; and (3) reserve jurisdiction. See Brett R. Turner, Equitable Distribution of Property § 6.11 (2d ed. 1994 & 1995 Supp.). If the first method is used, the net present value of the pension is distributed immediately and offset against other property in the marital estate. Under the remaining two methods, distribution is delayed. If the deferred distribution method is employed, the trial court devises the nonemployee's percentage share in the pension in advance of receipt of benefits. The nonemployee's share is determined by applying the "time rule" formula if and when the benefits are received. ³ Alternatively, reserve jurisdiction permits a trial court to wait until the benefits are actually received and to divide them at that time. This last method allows a trial court the flexibility to consider any changes in circumstances that have transpired during the interim period between dissolution and receipt of benefits.

A brief description of the CSRS and PERA plans is warranted in order to understand the mechanics of the trial court's distribution and the issues presented here. There are two broad categories of pension plans, defined benefit plans and defined contribution plans. Defined benefit plans are usually funded solely by the employer (non-contributory plans). ⁴ Benefits under such a plan are computed pursuant to a formula containing variables, for example, the employee's length of service and the highest monthly salary. See J. Thomas Oldham, Divorce, Separation and the Distribution of Property § 7.10[b] (1995). A military pension plan is a classic example of a defined benefit plan.

In contrast, a defined contribution plan is "one which states the owner's interest as a balance in a plan account." Brett R. Turner, Equitable Distribution of Property § 6.10 at 336 (2d ed. 1994). Contributions are made into the account by the employer and/or the employee pursuant to a prescribed formula. See Oldham § 7.10[a]. The employee's contributions vest immediately and the value of the account is readily ascertainable since a separate account is maintained for each employee. Id. Upon retirement, the balance in the employee's account is used to purchase an annuity which funds the retired employee's benefits for the rest of his or her life. Id. Some government plans incorporate aspects of both defined benefit and defined contribution plans. Id. at § 7.10[c]. That is the case here--PERA and CSRS plans are considered hybrid plans.

CSRS and PERA are statutorily governed pension plans. See 5 U.S.C. §§ 8331 to- 8351 (1994); §§ 24-51-101 to -1404, 10B C.R.S. (1988 & 1995 Supp.). As noted above, both combine characteristics of defined contribution and defined benefit plans. The employee and the employer contribute a predetermined amount towards the plan under the respective CSRS and PERA statutory schemes. ⁵ Benefits under both plans are calculated according to a formula. ⁶ The formula, in turn, is linked to the three-years highest salary averaged during the total years of employment. ⁷ PERA and CSRS benefits vest after five years of service and are not subject to forfeiture past that time. ⁸ Covered employees are eligible to receive benefits by way of a lifetime annuity when the plans mature, upon retirement age. ⁹

In apportioning husband's pension benefits, the trial court utilized the "time rule" formula and awarded wife fifty percent of nineteen-thirtieths of husband's future retirement benefit (a total of 31.7% of the benefits on an as-received basis). The fraction represents husband's nineteen years of service during the marriage over the thirty years of total service that husband claimed he would achieve before retiring. The trial court used the thirty-year figure because it was persuaded by husband's testimony that he was going to retire at the earliest possible date on which he would be eligible to receive "maximum benefits"--after thirty years of employment. The trial court fixed the coverture fraction in advance of husband's actual retirement date and reserved jurisdiction in the event husband took early retirement or was laid off due to cut backs or early buy-out of his retirement benefits. ¹⁰ If any of these events were to take place, the trial court would presumably amend the "time rule" formula to reflect the changed circumstances. This would be accomplished by changing the denominator of the coverture fraction. The court of appeals characterized the trial court's distribution of husband's pension benefits as "a combination of deferred distribution and reserve jurisdiction valuation." Kelm, 878 P.2d at 36.

The trial court valued wife's PERA benefits according to the amount she had contributed toward the plan by way of withheld salary as of the date of the dissolution, a total of $3,100. The trial court awarded the PERA benefits entirely to wife. Finally, the trial court ordered husband to name wife as the sole beneficiary of a lump-sum credit in the event of his death prior to retirement.

III.

Husband raises three grounds for reversal of the trial court's property disposition. First, husband contends that the trial court's use of a coverture fraction permits wife to share in increased benefits that accrue post-dissolution and also to share in pension benefits linked to post-dissolution earnings. Second, husband contends that wife's PERA benefits were inaccurately valued by the trial court and the trial court inequitably applied different methods of distribution to the two pensions. Last, husband contends that wife's share in death benefits should not have exceeded fifty percent of contributions made during the marriage.

A.

Husband argues that application of the "time rule" formula improperly permits wife to share in his separate property, i.e., enhanced pension benefits attributable to his post-dissolution efforts...