Disability Pensions - A Problem for Equitable Distribution

Disability benefits, compensation paid workers who become disabled as a result of work or accidents on the job in the form of a pension, can be difficult to classify and divide in a divorce.

Courts are divided about whether disability payments are marital or separate property. Viewed one way, disability benefits appear to be separate property since they are compensation for a personal injury, which involves damage to a person and his or her self-esteem as well as pain and suffering. Viewed another way, they are a fringe benefit of employment that transpired during a marriage, and injuries that happened as a result of efforts in support of an economic unit, that is, the marriage. Courts holding that disability benefits are marital property generally focus on them as a form of deferred compensation, or they cite the absence of legislative law specifically excluding them distribution. Courts ruling that the benefits are separate property seem guided by the personal nature of the reason for them.

In a divorce the worker spouse typically portrays all payments, even those received after normal retirement age, as income replacement and hence separate property, while the other spouse asserts that the payments are the onset of retirement and hence marital property.

Increasingly, some courts do what is termed a "purpose analysis," separating the disability benefits into a retirement component, which is marital, and disability component, which is separate "except to the extent that the benefits serve to compensate the marital partnership for lost earnings during the marriage."

Normally, the disability provisions of a defined benefit pension plan are unique to the plan, and some plans describe the disability pension as a regular pension when the participant attains a normal retirement age. The court, to determine the marital portion of a disability pension, needs to know the age and service requirements of the disability pension compared to the age and service requirements of a normal pension; the amount and duration of the disability payments, and the factor of what is called "future service" in any calculation of benefits, that is, "the extent to which the disability pension is paid in lieu of retirement benefits."

Sometimes, however, disability benefits are paid only after the employee waives retirement benefits. In cases where the party waives retirement in favor of disability, courts have considered the difference between the former and the latter, ruling that anything above what the party normally would have received is the "true disability component." In this way, the retirement benefit portion of the benefit can be treated as it would in any divorce action. In cases where the classification of benefits is open to argument, the burden of proof is generally on the spouse arguing that the property is separate.

Although the treatment of the disability component is mixed, a significant number of courts treat it as separate property when the payment is due after the date of the classification of assets. In other words, disability payments are separate property because they are seen as a substitute for lost wages.

In general, courts are equally divided about the classification of private disability insurance as they are about employer-provided disability insurance. Private disability insurance, however, may raise another consideration since it is generally purchased with marital funds and hence may be arguably marital property.

Authored By: Theodore K. Long, Jr., President, Pension Appraisers Online, Inc.

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