June 20, 2012 – When it comes to dividing property in a divorce, not everything is as it appears, nor as it may be labeled or named. Such was the case involving a simple stream of pension payments, which highlights another family law practice landmine. 

In Topolski v. Topolski, 2011 WI 59, the Wisconsin Supreme Court found that disability pension payments, received prior to retirement, constituted income not subject to property division under the terms of a marital settlement agreement.

Although not readily apparent, there are two subtle lessons in the Topolski decision, which makes clear the distinction between payments from a pension that may be divisible at divorce versus pension payments that replace income and are not divisible.

The first lesson is to have a well-drafted qualified domestic relations order (QRDO) entered at the front end of the divorce, which takes into account the particular type of plan being divided, the various methods under which the plan may make payments to a participant, and the precise time or date when those payments should begin to occur.¹

The second, more important lesson is the method of analysis promulgated by the Wisconsin Supreme Court to distinguish between divisible retirement plan assets and non-divisible payments from a retirement plan that replaces income. If such a distinction can be made with a retirement plan interest held by a party to a divorce, it would be best to address it up front through a QDRO rather than through a marital settlement agreement (MSA).

The Topolski case

The facts of Topolski are relatively simple. Mr. Topolski was a participant in a pension plan (the Plan), and when Mr. and Mrs. Topolski were divorced, their MSA awarded Mr. Topolski all retirement and pension benefits, less $912 per month to be paid to Ms. Topolski, if and when Mr. Topolski received these benefits. No QDRO was entered at the time of divorce.

Subsequently, Mr. Topolski became disabled and began receiving disability pension payments from the Plan. After learning that he had been receiving pension benefits for some time without paying her, Ms. Topolski moved the circuit court for a QDRO to enforce the $912 payments under the MSA.

The circuit court found that the disability pension payments were divisible retirement benefits, and awarded Ms. Topolski the $912 per month retroactive to the date of the first payment.

The court of appeals reversed the trial court, holding that the payments were disability payments, but that Ms. Topolski could receive retirement payments from the Plan when Mr. Topolski reached the Plan’s normal retirement age of 65.

Ultimately, the state supreme court developed a methodology to distinguish between benefit payments that may be divisible at divorce, such as disability payments, versus benefit payments that replace income and are not divisible, such as pension payments.

Supreme Court Decision 

The supreme court reviewed the MSA and found no mention of disability payments or definitions for the words “retirement” or “pension.”

Thus, the court gave those words their plain meaning, defining “retirement” as withdrawal from work due to reaching a particular age, and “pension” as income received when a person reaches retirement age and no longer has employment income.

The court acknowledged that the value of a spouse’s interest in a retirement account or pension is generally classified as a divisible asset subject to property division at divorce, whereas a disability benefit is wage replacement generally classified as income and consequently is not an asset divisible upon divorce.

Looking to the MSA, the court surmised that the Topolskis’ intent was to allow Ms. Topolski to receive a portion of Mr. Topolski’s retirement account.

The Plan itself provided three kinds of pensions – a normal pension payable at age 65, an early pension payable at age 55 but before 65, and a disability pension payable as a result of total and permanent disability.

The court observed that under the terms of a plan, a disability benefit could be both a replacement for lost future wages and a replacement for deferred compensation – depending upon the situation, and therefore should be viewed under the totality of the circumstances to determine whether any of the benefit replaces post-divorce lost wages or deferred compensation.

The court stated that when a disability benefits replace wages, they should be characterized as income, but when the disability benefit replaces deferred compensation, it should be characterized as retirement income and is thus subject to property division at divorce.

Under the facts, the court held that prior to reaching age 62, Mr. Topolski’s disability benefit was akin to compensation for lost wages. However, any benefits paid to Mr. Topolski after he reaches age 62 would be in the nature of a pension, based on his own testimony that he expected to retire at age 62.

When he receives a disability payment after attaining age 62, the disability payment effectively becomes (and is transformed into) a retirement payment, which would be subject to division under the MSA. Accordingly, the court found that under this methodology, the expectations of both Mr. and Mrs. Topolski were effectively protected under the MSA because the result puts them both in the same position they would have been had Mr. Topolski not become disabled, and gives them both exactly what they bargained for.

Conclusion 

The Topolski case is a “one-off” set of facts. There was no formal QDRO in place at the time of divorce. Considering the value of the benefit, it’s a classic example of poor planning. To avoid this, have a well drafted QRDO entered at the front end of the divorce.

Note: The Plan itself was a defined benefit plan with three types of pensions. These types of plans provide benefits for the life of the retiree, but are becoming increasingly rare due to the costs of maintenance, the lack of appreciation and understanding by participants, and the desire of most employers to have employees participate by making their own contributions.

About the author

Daniel Welytok is a shareholder in the Milwaukee office of von Briesen & Roper S.C. His areas of practice include ERISA and employee benefits.

This article is adapted from the February 2012 State Bar Wisconsin Journal of Family Law, published by the Family Law Section. The State Bar offers its members the opportunity to network with other lawyers who share a common interest through its 26 sections. Section membership includes access to newsletters, email lists to facilitate information sharing, and other resources.

Endnotes

¹ Note that if retirement benefits are to be assigned 100 percent to either party and no division is contemplated, then a QDRO should not be used, and in fact would be improper under Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 129 S. Ct 865, (2009).