ACCIDENTAL DISABILITY
PENSION VALUATIONS - DOMESTIC RELATIONS ORDERS
THE IMPACT OF STERNESKY
The Sternesky decision (396 N.J. Super. 290; 933 A.2d 956, October 22, 2007),
presented the court’s position regarding the division of disability retirement
benefits incident to divorce. Additionally, the court offered a procedure to
compute and assign the exempt and not-exempt parts of such pensions. Based
on this decision it appears that prudent New Jersey attorneys now have a duty to
insert a provision into Property Settlement Agreements that deals with the
possibility of a post-divorce disablement of a participant-spouse. You will note
that this article does not suggest that attorneys draft a “Sternesky” disability
provision into their Domestic Relations Order. The reason for not drafting a
“Sternesky” disability provision into a Domestic Relations Order is that for ERISA,
Military, Federal and New Jersey State Retirement Systems, is that the insertion
of such language into an Order will cause Order to be rejected by these
Retirement Systems. 1
The decision itself is consistent with the reasoning of many other jurisdictions
and this article takes no issue with the underlying reasoning of the case. Troyan’s
concern, is the decisions applicability to a Deferred Distribution Settlement
requiring a Domestic Relations Order. To craft a Domestic Relations Order that is
consistent with Sternesky may not be possible because such Order requires
information not then available as well as calculations not possible at the time of
divorce. At the moment of divorce too many of the components necessary to
craft a “Sternesky Domestic Relations Order” are unknown. As indicated earlier
Plan Administrators for each of the New Jersey Retirement Systems will not
accept a Sternesky format (unless the employee is actually in pay status) since a
specific dollar amount must be inserted into the Domestic Relations Order. The
same is true for ERISA, Military and Federal defined benefit plans.
This article illustrates the Sternesky methodology. Once understood by the
practitioner it will become clear that her or his primary concern with Sternesky is
how to craft a Property Settlement Agreement and Domestic Relations Order to
protect the respective spouses from an unanticipated post-divorce disablement of
the participant spouse. The argument presented in this article is that such
protection is rarely available at the time of divorce. Attorneys will struggle
unsuccessfully to meet this challenge unless an alternate strategy is
implemented.
Central to Troyan’s concerns with Sternesky is the fact that it applied a Coverture
Fraction to the participant-spouse’s projected non-disability pension benefit
(payable at normal retirement age). Yet, at the time of submission of the
attorney’s Domestic Relations Order, the participant is neither a disabled or
1
The Military will accept a “Hypothetical” benefit. This is a complex, arcane topic, requiring
extensive calculations and is beyond the scope of this article.
retired employee. Therefore, it is not possible at such time to project with any
degree of accuracy a disability that may occur at a future indeterminate date. A
projected disability benefit is not by definition ascertainable at the time the Order
is submitted for Qualification.
The fact that the Sternesky method is based on a projected and not an
accrued to the date of disablement benefit is central to an attorney’s
drafting problem. In summary, the flaw in the Sternesky decision is that the
computations offered in the decision can’t be applied to the crafting of a current
Domestic Relations Order regarding an actively employed participant.
To give the practitioner insight into the specifics of the drafting problems
presented by this decision and its use of a PROJECTED benefit, we illustrate
how Sternesky divides a disability retirement pension not yet in pay status.
Data required for a Sternesky Calculation of the non-disability portion of a
Defined Benefit Pension plan for a New Jersey Teacher or PERS Employee.2
1. Final Pay (as defined by the plan),
2. Participant spouse’s total years of service projected to normal retirement
age
3. Plan Annual Rate of Accrual, e.g. 1/55 (1.8181%) for each year of service.
To understand and be able to perform Sternesky calculations we first provide the
statistics that will be used in our illustrations.
Illustration: New Jersey Teacher or PERS Employee.
Basic Statistical Data for William Jones.
Wife of N.J. employee is: Jane Jones.
Date of Birth
Date Service Began
Date of Marriage
Date Action Filed
Date of Disablement
Final Pay of Wm. Jones
Mr. Jones's Age at disablement
Normal Retirement Age (NRA)
Time: Disablement to NRA
Time on job while married
Total time on job till disabled
Coverture Fraction at disablement
Coverture Fraction, Normal Retirement Age
2
10/1/1961
10/1/1987
10/1/1991
10/1/2010
10/1/2010
$68,000.00
49
60
11
19
23
82.6087%
55.8824%
This article applies fully to Tier I and Tier II members. There is limited applicability to Tier III
members (enrolled after November 2, 2008). For individuals enrolled in the New Jersey
Retirement System after May 21, 2010 this article is not applicable.
Total Service projected to NRA
NJTPAF & PERS rate of non-disability accrual
Final Average Pay:
Service while married:
Total Service projected to NRA
Teacher or PERS annual rate of accrual
34
1.8181% (1 ÷ 55)
$68,000.00
19 years
34 years
1.81818%
The actual format to compute a Sternesky Disability Retirement Calculation is as
follows:
Step I
Compute non-disability benefit PROJECTED to normal retirement age based on
items 1 -3 above.
Step II
Multiply the Step I Projected result by the following Coverture Fraction
Numerator:
Denominator:
marital time while accruing up to disablement
all years projected to normal retirement age
The product of this calculation is the Coverture Fraction, which is then applied to
Step I, in order to determine the marital part of the benefit.
Step III
Multiply the product of Step II (Coverture Fraction), by the percentage awarded to
the non-participant spouse. For purposes of this writing assume 50%.
Based on the above statistics the actual Sternesky calculation for a disabled
Teacher or PERS Employee is as follows:
Step I
Compute the participant spouse’s projected monthly benefit at normal retirement
age based on the items in the above illustration:
Annual rate of accrual;1.8181% (1/55) multiplied by Final Average Pay:
$68,000.00 multiplied by 34 years of credited service = $42,036.34 or monthly
$3,503.03.
(1.8181% X $68,000.00 X 34) ÷ 12 = $3,503.03
Step II
Multiply Step I projected benefit by the following Coverture Fraction
Numerator:
marital time while accruing up to disablement
Denominator:
all years projected to normal retirement age
Numerator:
Denominator:
19 years
34 years
Based on this numerator and denominator the Coverture Fraction is 55.88%.
Multiplying the Step I benefit by the Step II Coverture Fraction produces the
following benefit:
55.88% multiplied by $42,036.34 = $23,490.90 (monthly $1,957.57)
This is the marital part of the participant’s spouse’s projected benefit.
Step III
Multiply the benefit computed at Step II, by the percentage awarded to the nonparticipant spouse. For purposes of this writing assume 50%.
Thus, $1,957.57 (Step II benefit) multiplied by 50% = $978.79
Under the Sternesky calculation Jane Jones will receive each month: $978.79.
This represents Jane’s marital share of the participant spouse’s monthly nondisability benefit assuming marital service of nineteen years and a projected total
of thirty-four years of service.
TROYAN METHOD:
Compute the participant-spouse’s monthly accrued benefit as of the date of
disablement, based on the Plan’s formula, but using only the “marital years of
service”. Then give the non-participant spouse his or her equitable share
(assume 50%).
Based on the above statistics the non-disability monthly pension would be:
(1.81818% X $68,000 X 19) ÷ 12 = $1,957.57(monthly)
To the non-participant spouse: $1,957.57 X 50% = $978.79
To those more math comfortable it is a single step calculation:
(1.81818% X $68,000 X 19)/12 = $1,957.57 X 50% = $978.79
That’s all! The Troyan method is quick, accurate and computes a result that is
identical to the more complex Sternesky method.
IS THE FORM OF DISABILITY A FACTOR IN THE STERNESKY FORMULA?
At this point, the reader is alerted to the fact that both NJTPAF and NJPERS
have two forms of disability retirement.
The two forms of Disability Retirement:
1. Ordinary Disability Retirement
2. Accidental Disability Retirement
The disability retirement benefits for the respective forms of disability are
identical. However, the Accidental Disability Retirement Benefit is substantially
greater.
For purposes of Sternesky calculations, the form of disablement is
relevant. This article is limited to a discussion of “Accidental Disability
Retirement”. Due to the substantially less generous formula for “Ordinary
Disability Retirement” it is possible for the participant’s monthly accrued benefit to
be greater than her or his Ordinary Disability Retirement benefit. Consult Troyan
for calculations regarding “Sternesky” Ordinary Disability Retirement benefit
calculations.
ATTORNEY ALERT:
What has been illustrated herein allows the practitioner to compute the nondisability benefit that is to be used for Deferred Distribution Settlements of
Defined Benefit Plans. It is essential to recognize that the Sternesky decision
dealt with known factors. In most of your matters the participant-spouse is not
disabled at the time the case is settled. In order to make a Sternesky
calculation for immediate insertion into a Domestic Relations Order the
participant-spouse must be at or beyond the point of actual disablement.
Prior to actual disablement the factors required to compute the participant’s
benefit are unknown, thus, it is not possible for a Sternesky formula to be
inserted into a pre-disablement Domestic Relations Order. Any Domestic
Relations Order based on “projected” or “Hypothetical” data will be rejected by
virtually all Retirement Systems due to the inability of a Plan Administrator to
compute the benefit based on such data. When the participant-spouse is not
disabled at the time of divorce, Sternesky requires a two-step Domestic Relations
Order process to assure all parties that pension benefits resulting from the
subsequent “Accidental” disability retirement of the participant-spouse will be
equitably apportioned between the spouses through application of the Sternesky
formula.
Anticipatory Language.
At the time of divorce the practitioner recognizes the possibility of the participantspouse’s retirement for disability and inserts language into the Property
Settlement Agreement that can be taken virtually verbatim and inserted into a
successor Domestic Relations Order (based on known facts ascertained
subsequent to the actual disablement of the participant).
The first step in this process is to insert language into a Property Settlement
Agreement that anticipates the participant-spouse’s retirement for disability and
provides language that once the date of disablement and salary at that future
time are known can be incorporated into a superseding Domestic Relations
Order.
To meet the requirements of Sternesky requires one anticipatory Property
Settlement Agreement and two Domestic Relations Orders. The first Domestic
Relations Order will be issued at the time of divorce. If no disablement occurs
then a second Order is not drafted. If disablement occurs then the Property
Settlement Agreement has been so crafted as to facilitate a prompt and
uncontested superseding second Domestic Relations Order.
FOR CALCULATION AND DRAFTING SUPPORT CONTACT
TROYANINC.COM