Arizona is one of the nine U.S. states operating under the principles of “community property.” The basic premise of community property: assets acquired during the period of the marriage are presumed to belong to the marital community (and thus to the spouses equally). There are lots of qualifications and exceptions, but one issue crops up especially often: what is the relationship between retirement benefits and community property rights?
It’s one thing to say that a divorcing spouse has an interest in the other spouse’s retirement benefits. It’s another to figure out how that interest can be calculated, and it’s another again to figure out how to pay it out. The problem is particularly acute when the retirement plan is a “defined benefit” plan. The current value of the future right to receive benefits is hard to calculate, and there’s no “account” to divide anyway.
Basic principles of retirement benefits and community property
Arizona has seen a number of appellate court decisions trying to address the problem. In a 1986 Arizona Supreme Court case (Koelsch v. Koelsch) the state’s high court set out some basic rules. A simplified version: at the time of the divorce, the value of the divorcing spouse’s interest in the working spouse’s retirement plan should be calculated. If there are non-retirement benefits available to satisfy that interest, they can be assigned to the divorcing spouse. Otherwise, the retirement plan administrator can be ordered to divide each future retirement check proportionally.
But what happens if the employed spouse decides not to take early retirement? Can she change her ex-spouse’s benefits payout just by continuing to work? And what about earnings in the retirement plan after the divorce? Who gets the benefit of those?
The Koelsch case answered some of the inevitable questions. It expressed a clear preference for giving the divorcing spouse something else of equivalent value, rather than a continuing right to future benefits. It also made clear that some kinds of retirement plans (like most IRAs and 401(k) plans) can actually be divided.
Before Koelsch the common practice had been to create a formula, and embed it in the divorce decree. Typically, it involved a fraction, with the number of months of plan participation divided into the number of months of marriage (while in the plan). That fraction could then be halved (to reflect the divorcing spouse’s interest) and applied to any future retirement benefit. But that effectively rewarded the divorcing spouse for earnings (and wage increases) after the divorce. Koelsch disapproved of that approach.
Dividing retirement plans after Koelsch
How to balance the divorcing spouses’ legitimate interests in a divided retirement plan? It’s often not easy. The Koelsch case suggested one way: calculate the value of the divorcing spouse’s interest at the time of the divorce. Then the court could order the retirement plan to pay the divorcing spouse directly. If the working spouse decides not to retire, he or she could be ordered to pay the ex-spouse the same amount until retiring.
Those choices won’t cover every arrangement, and the Supreme Court recognized that. They encouraged divorce judges to be creative in addressing individual cases. For over thirty years now, divorce courts have tried to balance the equities in cases involving retirement benefits and community property rights.
But what could go wrong?
What if, for instance, the divorcing couple agrees to a division that does not address all the issues? In such a case, when the working spouse decides not to retire, can the ex-spouse get relief in a later court case? Probably not — that’s the holding in the Quijada v. Quijada case decided earlier this year (and explained in this newsletter at the time).
Last month, the Arizona Supreme Court got to address another follow-on question. While most of the earlier cases involved participants in Arizona governmental retirement plans, the new case came from a different milieu. This time, one spouse was a U.S. Marine, and covered by the Marines’ military retirement pay program Would the same principles govern the federal military retirement program?
As it turns out, no. The divorce court judge had followed the same kind of approach suggested in the Koelsch case. Beginning in 2023, the Marine husband would have to pay his ex-wife that amount unless he actually retired. That way, the judge reasoned, she would be guaranteed her interest in the accumulated retirement account.
The Marine appealed. The Arizona Court of Appeals reversed the order, deciding that federal law precluded Arizona’s approach. The Supreme Court agreed to review that ruling, and then affirmed the Court of Appeals.
The problem with Arizona’s prior practice: federal law on military retirement pay preempts states’ creative approaches. That doesn’t mean the Koelsch approach no longer works — only that it doesn’t work in military retirement cases. Barron v. Barron, May 21, 2019.
Are there larger messages in the Barron decision?
Of course we think there are some generalizations worth making, or we wouldn’t have selected this case to describe. Some observations:
- All of the cases described here are Arizona cases. If you don’t live in Arizona, do not assume that the Barron or Koelsch cases apply to your situation.
- Even if your state adopts a similar view of military retirement pay, the Barron case won’t affect your situation if you are not in a community property case. The rules in the so-called “common law” states are different. Period. Which states are community property states? Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
- Not every retirement plan can be divided in the same way suggested in Koelsch and initially approved in Barron. Consider those descriptions as suggestive of the possibilities, not mandatory rules. Remember that the Arizona Supreme Court has specifically endorsed creativity.
- We don’t practice divorce law. We do deal with retirement benefits, and see the results of divorces completed before we ever talk to our clients. That’s why we are writing about retirement benefits and community property rules. We do not intend to tell anyone how to divide their retirement benefits if they are contemplating divorce — that’s not our lane.
As always, we encourage you to talk with your lawyer about your own specific legal issues. We hope this helps you frame your questions for that lawyer.