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FLORIDA RETIREMENT SYSTEM (FRS)
DEATH & SURVIVOR BENEFITS – DRAFTING TRAPS


DOMESTIC RELATIONS ORDERS
FLORIDA STATE RETIREMENT SYSTEMS
DEATH & SURVIVOR BENEFITS – DRAFTING TRAPS

This Practice Aid covers three Florida Retirement Systems

  • Regular Class
  • Special Risk Class
  • Senior Management Risk Class

This Practice Aid is directed to attorneys representing the non-employee spouse in marriage dissolution actions involving any of the above three Retirement Systems when the settlement mode is Deferred Distribution and a Domestic Relations Order is required to provide annuity benefit payments to the alternate payee upon the retirement of the member.

The current retirement system is a result of legislation in 1970 which brought into the FRS, the Teachers’ Retirement System, the State and County Officers and Employees’ Retirement System, and the Highway Patrol Pension Fund. In 1972 the Judicial Retirement System, became part of FRS. All of these occupations are within the broad spectrum of FRS. This Practice Aid does not cover DROP and alternate payee death and survivor annuity benefits resulting from such participation. That subject will be treated in a separate Practice Aid.

The purpose of this Practice Aid is to alert the attorney representing the non-employee spouse to the dangers of a Deferred Distribution Settlement involving any of the above indicated FRS classes of Retirement. The specific danger is the fact that not one of these Retirement Systems permits an alternate payee to be either:

  • Surviving Spouse
  • Joint Annuitant

The following illustration highlights the exposure of the alternate payee to loss of benefits as a result of the death of the member or retiree. The following determination of the marital benefit incident to a marital dissolution action is intended to be consistent with the methodology of Boyett (703 So. 2d 451). For this discussion some of the values shown below have been rounded for each of illustration.

Basic Data.
Police Officer Fred Hadley
Wife Alma Hadley

Regarding Fred
Date of Birth September 1, 1966
Date of Marriage September 1, 1992
Date of Hire September 1, 1989
Date Action Commenced September 1, 2011
Valuation Date September 1, 2011
Normal Retirement Age September 1, 2014
(attains 25 years of Police Service)
Annual Pension Pay at end of marriage $85,000.00
Age at Retirement 48
(typical for this occupation)

Annual Benefit Accrual Percent 3%
(per statute)
Annual Post-Retirement COLA 3%
(per statute)

Based on the above the following may be derived.
Coverture Fraction 86.36%
(19 ÷ 22)
Monthly Accrued Benefit at end of marriage $4,675.00
Marital Part of Benefit (rounded) $4,038.00
Monthly Award to Alma Hadley (alternate payee) $2,019.00

Present Cash Value of Marital Benefit $664,000.00
Award to Alma (alternate payee) $332,000.00

Based on the assets of the parties it is not possible to implement an Immediate Offset Settlement. Because of the economics of this matter the parties have no alternative but to settle pursuant to a Deferred Distribution format. Hence, a Domestic Relations Order is required.

Explanation.
Because of Florida statute and common law, it is Troyan’s view that it is not possible to fully protect the property award (annuity) to an alternate payee of a FRS employee or retiree when the settlement mode is Deferred Distribution and a Domestic Relations Order is required. The aim of this Practice Aid is to make clear the risks that will be encountered by the attorney representing the alternate payee and then to indicate what can be done to minimize this exposure of the alternate payee to loss of entitlement to a portion of the member’s benefits or the retiree’s monthly annuity. This is an exercise in damage control, not a presentation of a complete solution. What is likely, is the fact that the more knowledge the practitioner possesses on the issues presented, the greater the opportunity to craft a Property Settlement Agreement and Domestic Relations Order reducing the risk of loss of benefits to an alternate payee. Again, we do not believe there is a complete solution to this problem, but there are attorney opportunities to enhance the probability of minimal loss to an alternate payee as a result of the death of the FRS employee while active or retired.

As noted the monthly annuity award to Alma was $2,019.00. A Domestic Relations Order was then prepared and Alma and her attorney are satisfied that she will receive her monthly benefit starting when Fred retires (three years hence). The parties are divorced. A Domestic Relations Order is crafted and accepted by the Retirement System. The award indicates that upon Fred’s retirement, Alma will receive her annuity benefits over Fred’s lifetime. Case Closed.

Post-Divorce Events.

  • Fred Remarries on September 1, 2012
  • Fred Retires on September 1, 2014
  • Fred Dies on September 1, 2015

With this knowledge of the future let us return to the time of the crafting of the parties Property Settlement Agreement and Domestic Relations Order.

Central to the concerns of the attorney representing the alternate payee is the preservation of the annuity benefits negotiated for the benefit of his or her client. Florida attorneys are wise to be mindful of the default position of the FRS regarding survivor and death benefits intended to be paid to an alternate payee.

Participant may select any retirement option of his choosing at retirement, but the payment to the Alternate Payee shall be measured as though he had made the option 1 selection.

Option I, Defined:

  • Option I. Benefits are paid over the lifetime of the retiree. Upon the death of the retiree all benefits cease.

Commentary:
There appears to exist a degree of confusion among practitioners as to whether there is any basis in the Florida Statutes that facilitates the protection of the annuity benefits awarded to an alternate payee in a marriage dissolution action. The prevailing view is that it is not possible to protect an alternate payee’s annuity when the benefits provider is FRS. Generally True! There is not much that an attorney representing the alternate payee can do to protect his or her client, the alternate payee by way of enforceable survivor or death benefit language. See Title X, Chapter 21, 121.091. What we seek in this Practice Aid is to alert the practitioner as to the limited extent to which an alternate payee’s annuity, subsequent to the death of the member/retiree can be protected by appropriate language that is acceptable to FRS.

Clarification.
This Practice Aid is limited to “vested” FRS employees only.
FRS, vesting rules:

  • First employed prior to July 1, 2001: Ten Years
  • First employed on or after July 1, 2001: Six Years

The best point to begin development of the tools available to the attorney representing the alternate payee is with a basic understanding of:

  • Death Benefits
  • Retirement Options

When these terms are understood, the practitioner may be able to modestly expand his or her opportunities to protect an alternate payee.

Discussion of Death Benefits.
The form of benefit payable as a result of a member dying prior to actual retirement is an “annuity”. However, the statute [(121.091(7)] references this “annuity” as “DEATH BENEFITS”. The size of this annuity depends on the member’s class, because qualification for “early retirement” varies with class. Generally for Regular Class members early retirement payable as a result of the death of the member means “assumed” retirement prior to age 62. For Special Class members early retirement payable as a result of the death of the member means “assumed” retirement prior to age 55 (unless the member at the time of his death had attained 25 years of credited service). The amount of the reduction for this “assumed” early retirement is five percent (5%) per year (.4167% per month). This is a very substantial reduction. Attorney’s should consult with their pension experts for illustrations of how these reductions impact on annuity payments to an alternate payee at various “death” ages (of the employee).

Discussion of Survivor Annuity Benefits.
This section discusses benefits as a result of the death of the member subsequent to his or her retirement. What will be paid to a “surviving former spouse” alternate payee is contingent on the factors discussed herein. Shortly before retirement the member elects from four options his or her choice.

Option 1.
Annuity payable for life of retirement. Upon retiree’s death all payments cease. This is the largest annuity. All other options are the “actuarial equivalent” of this benefit.
Actuarial Equivalent: Of equal worth. At the time of death or retirement the member’s/retiree’s Immediate Annuity worth is a stated sum. Thus, the cost of each annuity is the same. For each Option other than one this cost “purchases” a smaller benefit. Since, the benefit under Option 3 is most costly, the benefit reduction is greatest.

Option 2.
An annuity payable for the greater of ten years or the lifetime of the retiree. This is generally termed “10 CC”, which means ten years (120 months) continuous and certain. If death occurs prior to 120 payments the full annuity is paid to the designated beneficiary for the balance of the 120 months (more on this point later).

Option 3.
Prior to discussion of Options 3 and 4, it is necessary to clarify the term “Joint Annuitant”.
Joint Annuitant Defined.
The definition provided here is not the full definition, rather it is limited to what is relevant to a Dissolution Action.
Joint Annuitant: Spouse of the member or retiree.

Option 3.
A Joint and 100% survivor annuity.
Thus, upon the death of the retiree the same benefit continues to be paid to the surviving annuitant.

Option 4.
A Joint and 66 ⅔% survivor annuity.
Thus, upon the death of the retiree 66 ⅔% of the benefit continues to be paid to the surviving annuitant.

The Bad News.
Either Option 3 or Option 4 are ideal options to secure the annuity benefits awarded to an alternate payee. Unfortunately, the FRS will not implement either a court order or Domestic Relations Order making the alternate payee the “Joint Annuitant”. The FRS position is that the right to elect an option is limited to the member. An alternate payee does not meet the statutory eligibility criteria. If you present FRS with an Order containing either of these options it will not be accepted.

What’s Left?
What may be possible is to use Option 2. This at least can guarantee to the alternate payee payments for up to 120 months (measured from the first annuity payment to the retiree). This is called a “possible” opportunity for the attorney representing the alternate payee, because the FRS’s position as understood by Troyan is that option selection is limited to the member. At this time FRS will accept a Domestic Relations Order with the Option 2 beneficiary as the alternate payee. However, if this mandated selection by a court is challenged by the member/retiree, it is likely that FRS will enter the case on the side of the member/retiree and oppose any designation of an alternate payee as the Option 2 beneficiary. Option 2, used in tandem with properly computed life insurance remains the best albeit a tenuous choice for the attorney representing the alternate payee. But see limitations discussed immediately below.

The Protection of an Alternate Payee’s Annuity. The Process Begins.
At the time of divorce your expert can provide you with a calculation of the actuarial present worth of the alternate payee’s annuity. The attorney representing the alternate payee must recognize that in fact there are two possible annuity streams that must be considered.

  • A. Protect the alternate payee’s annuity from loss from the date of divorce up to the retirement of the member
  • B. Protect the alternate payee’s annuity from loss from the date of retirement up to the death of the retiree

Bad News regarding “A” above.
Option Two is not generally available if the member dies while an active FRS employee. What follows is my paraphrasing of FRS language relevant to the death of an active member.
If a vested active member’s death occurs other than in the line of duty, and before retirement, and the member’s designated beneficiary does not qualify as a joint annuitant, then this beneficiary (alternate payee) could only receive a refund of the member’s personal retirement contributions. Since the FRS became non-contributory between January and October 1975, employee contributions are rare.

The death of an active duty member, effectively bars payment to an alternate payee from FRS. Thus, the solution regarding the preservation of an alternate payee’s annuity interest is likely to involve term life insurance. Because of the structure of a “Boyett” (703 So. 2d 451) award to an alternate payee this will be a calculation of the present cash value of the “Immediate Annuity Cost”. The annuity awarded to the alternate payee does not change, but as the member nears retirement the worth of this fixed asset continues to increase. This is discussed below.

Explanation of Increasing Worth of a Fixed Annuity.
Valuing this annuity is akin to a sinking fund to pay off a debt. Assume you had an obligation to pay to the lender at the end of ten years, $25,000.00. Each year you set aside money to meet this sum due in ten years. As the payment date approaches the amounts in the account grow. Thus, amortization of a sinking fund debt is analogous to estimating the “Immediate Annuity Cost” of the member’s retirement annuity. For an illustration of the operation of this concept request an illustration on your letterhead from Troyan Inc.

Regarding solution “B” above.
It is our understanding that FRS will accept Option 2, regarding a retiree. The member need not be retired for a Domestic Relations Order to mandate this election. Further, based on FRS form “FST-12, Survivor Benefits”, it is possible to designate more than one Option 2, beneficiary. This enables the attorney representing the alternate payee to rebut his or her adversary’s argument that selection of Option 2, results in a substantial overpayment to the alternate payee. The mathematics of how to calculate the percent of this Option to be paid to the alternate payee is beyond the scope of this article. Again, for specifics in your matter contact Troyan, Inc. Some attorneys may be satisfied with this level of protection of an alternate payee’s annuity benefit award. If the attorney seeks greater protection for his or her client or finds that it is not possible to obtain agreement regarding use of Option 2, then Life Insurance is an option to consider. The point of contention will be the appropriate amount of Life Insurance. In fairness, this is a negotiable item. What may be best is for your expert to prepare a series of scenarios each requiring a different amount of “decreasing term” Life Insurance. Naturally, the Life Insurance option is predicated on the “insurability” of the member/retiree.

TROYAN INC. WILL CONDUCT SEMINARS ON FRS BENEFITS, NEGOTIATING STRATEGIES AND LANGUAGE FOR THE PROPERTY SETTLEMENT AGREEMENT. WE OFFER THIS TO COUNTY BAR ASSOCIATIONS OR FOR MEETINGS OF TWENTY OR MORE FAMILY LAW ATTORNEYS.