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STATE OF FLORIDA RETIREMENT SYSTEMS

DIVORCE - ESSENTIAL CALCULATIONS

LOSS OF SURVIVOR BENEFITS – ALTERNATE STRATEGIES

Upon divorce the Former Spouse of a State of Florida employee loses all rights to a survivor annuity. This loss is not negotiable. It will happen by operation of the Florida Statutes.

Pursuant to the Florida Statutes a Former Spouse is not an eligible person to receive a survivor benefit upon the death of an actively employed or retired member of any of the Florida State Retirement Systems.

Clarification.

The FRS does not use the term "Joint and Survivor Annuity". The equivalent term for the FRS is "Joint Annuitant". By definition a Former Spouse is not an eligible "Joint Annuitant".

Joint Annuitant Defined: [1]

means any person designated by the member to receive a retirement benefit upon the member's death who is:

(a) The spouse of the member;

In addition to "spouse", a Joint Annuitant can be:

Natural or Adopted Child under the age of 25…

A parent or grandparent…

Conspicuously absent from the enumeration of eligible persons is "Former Spouse".

The absence of capacity to designate a Former Spouse as a surviving spouse means that in any Deferred Distribution Settlement the Former Spouse has a contingent interest, i.e. the right of a Former Spouse to receive her or his portion of the employee's pension benefits terminates upon the death of the annuitant (retiree). Should death occur prior to the retirement of the employee the, Former Spouse's distributive award is also extinguished.

Because of these adverse circumstances, the attorney representing the Former Spouse functions in a manner intended to offset the adverse impact of the statutory bar to a Former Spouse being treated as a surviving spouse. In this article it will be demonstrated that effective mitigation requires the practitioner to first obtain calculations that graphically represent the worth of the Former Spouse's assigned portion of the employee's pension. Calculations are provided for the two major classes of Florida State Employees.

Employee: Special Risk Class (Police Officer)

Employee: Regular Class (Teacher)

Clarification.

The discussion and calculations that follow are intended to clarify that the task of the Former Spouse is to equate in dollar terms the possible loss of the annuity awarded incident to the divorce. Because, the Former Spouse's benefit is not guaranteed by a survivor annuity it becomes necessary to find an alternate method of securing the award to the Former Spouse. This resolution will be in the form of Life Insurance that equates to the present value of the survivor annuity which is not available to the Former Spouse of a FRS employee/retiree. The Former Spouse must compute in a manner that is persuasive to the court the Life Insurance equivalent of the lost survivor annuity. In a simplified sense the life insurance benefit enables the Former Spouse to "purchase" the equivalent of the unavailable "Joint Annuity".

A Final Word on the Worth of an Annuity.

The reader will observe that the present cash value (read cost) of the annuities illustrated continues to increase as the employee approaches retirement. Upon attaining retirement status, the replacement cost of the annuity begins to decay. This ise and fall in what is technically termed "Immediate Annuity Cost" is attributable to actuarial factors beyond the scope of this article. For those having a specific matter it is suggested that you contact Troyan.

See Appendix "A" for:

  • Statistical Data regarding pension of Police Officer
  • Statistical Data regarding pension of Teacher

See Appendix "B" for:

Charts showing the annual amount of protection required to protect the Former Spouse over the lifetime of the retiree

Discussion.

For each employee class, the present cash value of the Former Spouse's share is given at two distinct points in time:

  • Valuation Date
  • Employee's Normal Retirement Age

The objective of the attorney representing Former Spouse is to insulate the Former Spouse from loss of benefits awarded in divorce benefits as a result of the death of the employee/retiree spouse (before or after retirement). The suggested solution is life insurance equal to the present cash value of the Former Spouse's share of the pension. This is a valuation issue. Suggested Procedures are as follows.

Step I.

Compute the "Boyett" benefit awarded to the Former Spouse.

Step II.

Compute the Life Insurance Equivalents of the monthly benefit awarded to the Former Spouse.

Commentary.

As indicated above the calculations relating to the Former Spouse's portion of the pension are given at two points in time. These values should be based on actuarially relevant "annuity purchase factors". [2] However, the immediate task of the attorney is to find an insurance equivalency schedule that will provide meaningful protection to a Former Spouse from loss of her or his pension award. As the three Appendices illustrate for an active employee the insurable interest of the Former Spouse is an increasing sum up to the employee's retirement. From retirement forward the worth of the Former Spouse's share of the pension decreases in value. It thus, follows that for a retired employee the annual worth of the Former Spouse's pension award is decreasing. [3]

Additional Clarification Effort.

The death benefit will in effect be the equivalent of the Former Spouse purchasing an annuity (at the time of the retiree's death).

For example:

Monthly benefit award to Former Spouse: $1,000.00

Retire Dies

Retiree Actuarial Life Expectancy at time of death: 18 years

Life Insurance Required to provide Former Spouse

A monthly benefit of $1,000.00 for 18 years: $154,000.00 [4]

Naturally, the time of death is not ascertainable at divorce. The calculations that are presented below give an approximation of the amounts of life insurance required at different points in time. For a specific matter these calculation must be refined to meet that situation. For greater clarification contact Troyan.

Caution.

The calculation of insurance amounts to protect the Former Spouse over time is a function of an experienced QDRO attorney. As a Florida practitioner you are familiar with §454.23 of the Florida Statutes regarding the unauthorized practice of law. QDRO attorneys should have a finance background. Based on the specifics of each matter involving a Florida Retirement System, it will be constructive for the attorney representing Former Spouse to obtain the required calculations that will facilitate the acquisition of relevant amounts of Life Insurance Protection for the duration of the exposure period.

Source of Life Insurance for FRS Employees.

  • All full time State Employees are automatically provided with $25,000.00 of life insurance.
  • Additional Optional Life Insurance Available:

The lesser of 5 times salary or $500,000.00. [5]

This firm's QDRO attorney is a graduate of the Stern School of Business at New York University.

APPENDIX A

Explanation of Abbreviations Used Below.

VD Valuation Date

Life Exp Life Expectancy

NRA Normal Retirement Age

Mo. Monthly

EOMD End of Marriage Date (Date Action for Divorce Filed)

Police Officer Teacher

Tom Miller Jane Johnson

Date of Birth 4/1/1971 4/1/1965

Date of Marriage 4/1/1994 4/1/1991

Date of Hire 4/1/1995 4/1/1989

Date Filed (EOMD) 4/1/2013 4/1/2013

Valuation Date 4/1/2014 4/1/2014

Valuation Date Age 43 49

Life Exp @ VD 35.5 34

Coverture Fraction 100% 91.67%

Numerator 18 22

Denominator 18 24

NRA 49 62

Earning Rate 7.75% 7.75%

Final Avg. Pay $74,670.00 $61,000.00

Accrual Rate 3.00% 1.60%

Mo. Benefit at EOMD $3,531.89 $2,033.33

Marital Portion $3,531.89 $1,870.67

Mo. To Former Spouse $1,765.95 $935.33

Worth on VD $156,833.42 $85,259.74

Discount Pd. 6 5

Disc Factor 63.90% 68.85%

Worth on NRD $245,438.28 $123,831.29

APPENDIX B

POLICE ILLUSTRATION TEACHER ILLUSTRATION

Life Exp. Insurance Life Exp. Insurance

35 $156,833.42 34 $44,044.72

34 $170,962.15 33 $47,458.19

33 $183,784.31 32 $51,136.20

32 $197,568.14 31 $55,099.26

31 $212,385.75 30 $59,369.45

30 $228,314.68 29 $63,970.58

29 $245,438.28 28 $68,928.30

28 $241,998.39 27 $74,270.24

27 $239,473.43 26 $80,026.19

26 $236,745.68 25 $86,228.22

25 $233,798.86 24 $92,910.90

24 $230,615.36 23 $100,111.50

23 $227,176.20 22 $107,870.14

22 $223,460.82 21 $116,230.08

21 $219,447.05 20 $113,933.45

20 $215,110.92 19 $111,452.37

19 $210,426.54 18 $108,772.03

18 $205,365.95 17 $105,876.42

17 $199,898.93 16 $102,748.26

16 $193,992.83 15 $99,368.86

15 $187,612.40 14 $95,718.06

14 $180,719.53 13 $91,774.05

13 $173,273.08 12 $87,513.28

12 $165,228.58 11 $82,910.32

11 $156,538.01 10 $77,937.68

10 $147,149.46 9 $72,565.67

9 $137,006.90 8 $66,762.22

8 $126,049.76 7 $60,492.68

7 $114,212.61 6 $53,719.62

6 $101,424.79 5 $46,402.58

5 $87,609.94 4 $38,497.90

4 $72,685.58 3 $29,958.36

3 $56,562.59 2 $20,733.00

2 $39,144.73 1 $10,766.71

1 $20,327.98 0 $0.00

0 $0.00

Column life expectancy is that of Employee/Retiree.



[1] See Florida Statute: 121.021(28).

[2] The actuarial earnings rates for funding the benefits payable to Florida retirees is provided by the System's actuary.

[3] See charts and graphics.

[4] Based on Generally Accepted Actuarial Assumptions.

[5] With evidence of insurability this maximum could reach $1,000,000.00.