David Salter and Gerry Wendrovsky ()
It is well established in New York that in the determination of parties’ rights in a divorce action, marital property is “all property acquired by either or both spouses during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action.” DRL 236[B][c]. Accordingly, pension rights earned during a marriage “are properly considered marital property subject to equitable distribution.” Olivo v. Olivo, 82 N.Y.2d 202, 207 (1993); Majauskas v. Majauskas, 61 N.Y.2d 481; Dolan v. Dolan, 78 N.Y.2d 463, 464-65; Berardi v. Berardi, 54 A.D.3d 982, 985.
In most instances, there are two basic methods available for the distribution of pension benefits—either the non-titled spouse presently would receive a lump sum discounted for present value, or a future periodic distributive award premised upon his or her share of the benefits which the titled (employee) spouse will receive in the future. Bianco v. Bianco, 21 A.D.3d 918 (2d Dept., 2005) (citing Majauskas, supra).
In the latter instance, such a distributive award would be memorialized in a qualified domestic relations order (QDRO). See generally Mesholam v. Mesholam, 11 N.Y.3d 24 (2008); Kazel v. Kazel, 3 N.Y.3d 331 (N.Y. 2004).1
Once a pension plan administrator has approved the form of the QDRO (see generally Sione B. v. Doug B., 2016 N.Y. Misc. LEXIS 1760) and the QDRO and judgment signed by the court, the future distribution by the plan is “administratively handled, without the parties having any further input or impact on the payments, and without any need for further court input.” Pickard v. Pickard, 33 A.D.3d 202 (1st Dept. 2006).
However, what happens when a New York matrimonial litigant’s pension benefits are foreign, administered by a plan administrator outside the jurisdiction of a New York court?
We have recently addressed this issue, in collaboratively representing the interests of a former U.K. national who emigrated with the non-titled spouse to the United States, maintained residence in New York, and had earned substantial deferred compensation from a company doing business in the United Kingdom. It must be remembered that the U.K. comprises three separate legal jurisdictions: (1) England and Wales, (2) Scotland and (3) Northern Ireland. Each has its own legal system and statutory framework. It is assumed for the rest of this article that the foreign pension is based in England and Wales.
There is no viable option available to ensure that a court in England and Wales would give comity to a QDRO issued by a New York (or other state) court. David Salter, Note, “Can’t Get No Satisfaction: Practical Solutions to Dividing and Enforcing Alternate Payee’s Rights to United Kingdom Defined Benefit Plan Distributions When Divorced in the United States,” J. Am Academy Matrimonial Lawyers, Vol. 23, 2010, pp. 349-54. English pension schemes will only “implement pension ‘sharing’ orders [U.K. Matrimonial Causes Act 1973, §21A] made by an English court and will not implement pensions split and provided for in a qualified domestic relations order (QDRO).” David Salter, “Qdros and English Pensions: Further Thoughts,” J. Am Academy Matrimonial Lawyers. In short, it could be posited that there is no purpose in obtaining a QDRO where the pension concerned is administered in England and Wales.
And so, what are the other options? From the writers’ experience, the initial alternative discussed, in attempting to address our client’s dilemma, was of offsetting the deferred compensation against the other available marital property subject to equitable distribution. In this instance, there were insufficient other assets. Moreover, in consulting with colleagues and other practitioners, the specific facts presented, of insufficient other property to allow for the offsetting, had not been encountered.
On the one hand, it is now possible, after April 6, 2015, under the [English] Taxation of Pensions Act 2014, to gain access to the entire fund of certain English pension schemes (money purchase/defined contribution schemes) providing the titled spouse is aged 55 years or over. However, there would be significant tax implications in accessing the fund in this manner.
Some parties may be obliged to consider waiting for the titled spouse to draw benefits under the English pension so that maintenance (alimony) payments could be made from the pension in favor of the non-titled spouse. This is, of course, an unsatisfactory solution; for example, the titled spouse may predecease the non-titled spouse.
Another alternative we considered was the possibility, having obtained the consent of the other party, of transferring (part of) the U.K. pension to a U.S. pension arrangement against which the QDRO could be implemented, by way of “overseas pension arrangements recognized by English law including a Qualifying Recognised Overseas Pension Schemes (QROPS),2 a Qualifying Non-U.K. Pension Scheme (QNUPS),3 and an Off-Shore Employer Finance Retirement Benefit Scheme (EFBRS).” Salter, “Can’t Get No Satisfaction,” supra, at pp. 353, 354.
Unfortunately, through more than several months of research, discussion, and exchanges with counsel for the other party, it became clear that these alternative “pension schemes” were not readily workable in the particular circumstances presented, imposed potential financial and taxation risks, or were uncertain at best. Indeed, “not all English pensions are amenable to a foreign transfer. Any such transfer will require speciali[zed] financial advice and will clearly have significant implications for the pensioner which go beyond the implementation of a QDRO.” Id.
Significantly, “[t]he English court may [have been] able to make a pension sharing order following a U.S. divorce, but [would] need to have jurisdiction to do so.” Salter, Can’t Get No Satisfaction, p. 350. Jurisdiction (U.K. Matrimonial & Family Proceedings Act 1984, §15)—the rules are complex—would need to be founded either on either party’s domicile or habitual residence. This clearly was not a “viable option where the instant parties [had] been living in the United States for some time. Salter, “Can’t Get No Satisfaction,” supra, at p. 350.
In sum, the parties to this proceeding possibly bore “a risk that the English [pension] might fall into something of a black hole.” Salter, “Qdros and English Pensions,” supra.
However, a solution was determined by David Salter—namely, an additional basis for establishing the jurisdiction of the English court to make a pension sharing order—based upon the EU Maintenance Regulation.4 The EU Maintenance Regulation regulates the jurisdictional requirements for all maintenance applications in England and Wales. These requirements are incorporated into the primary legislation giving jurisdiction to make a pension sharing order after an overseas divorce (the English Matrimonial and Family Proceedings Act 1984) in §15(1A).
“Maintenance” for this purpose is widely defined to include, for example, lump sums or property adjustment orders to meet maintenance needs and could include a pension sharing order for this purpose. The jurisdictional requirements of the EU Maintenance Regulation are primarily based upon habitual residence and may not, therefore, at first glance appear to solve the problem under discussion.
Article 4 of the EU Maintenance Regulation permits the parties to agree as to a jurisdiction of their choice. However, there must be a connection between the court chosen and the parties, based on habitual residence. It is the remaining jurisdictional provision, Article 7 of the EU Maintenance Regulation, which may come to the assistance of those facing the problems under discussion. It provides for jurisdiction on the basis of forum necessitates, where jurisdiction has not been established under Articles 3-6. The court of a state may, on an exceptional basis, hear the case if the proceedings cannot reasonably be brought or conducted, or be impossible in the state to which the dispute is closely connected (in this instance, New York). The dispute must have a sufficient connection with the member state of the court seised (i.e., England based upon the administration of the pension scheme in this jurisdiction). Under jurisdiction derived from the EU Maintenance Regulation, it is only possible to make a pension sharing order which provides for “maintenance”; it cannot provide for sharing of assets or compensation. It will therefore be useful to recite in the proposed pension sharing order to be submitted, where jurisdiction is based on Article 7, that a pension sharing order is sought for the maintenance needs of the applicant” (emphasis added).
If jurisdiction is established, then the application to the English court is a two-step process, first an application for leave (Matrimonial & Family Proceedings Act 1984, §13) and then the substantive application (Matrimonial & Proceedings Act 1984, §12). Where the application is made by consent, the two steps may be truncated into one.
Once the pension sharing order has been issued by the court, the English pension scheme will have a period of four months in which to implement the pension sharing order from the date upon which it receives all of the required documentation. The precise amount transferred to the non-titled spouse is the specified percentage of the pension at the date chosen by the pension scheme during this four-month period. Unfortunately, it is not possible to transfer a cash amount or a percentage based upon an historic date.
It must also be borne in mind that the valuation methodology used in England and Wales may differ from that adopted in the United States. Finally, the tax implications of where the pension credit (i.e., the amount transferred to the non-titled spouse out of the English pension scheme) is to be invested is a matter of fundamental importance. While it may be possible to transfer the pension credit to a QROPS (see above), the taxing authorities may well tax the transfer from the English pension scheme, if the non-titled spouse does not have sufficient foreign tax credits in the United States. In such a case, a possible solution, on the advice of the party’s tax counsel or consultant, may be to transfer the pension credit to another English-based pension provider, who is willing to assist US residents. In this way, the double taxation treaty between the U.K. and the United States would effectively require the non-titled spouse to only to pay tax in one country or the other.
In conclusion, as borne out from our experience, throughout the entire process, the importance of specialized and expert legal and tax advice cannot be underestimated.
1. This article does not address the validity or efficacy of a QDRO under the Federal Employee Retirement Income Security Act of 1974 (ERISA)[29 U.S.C. §1001 et seq.], or the scope or specific benefits conveyed by a QDRO.
2. Finance Act 2004, §§150(8), 165 and 169 and the Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006, SI 2006/206.
3. Inheritance Tax (Qualifying Non-U.K. Pension Schemes) Regulations 2010, SI 2010/51.
4. Council Regulation (EC) 4/2009 of 18 Dec. 2008 on jurisdiction, applicable law, recognition and enforcement of decisions and co-operation in matters relating to maintenance obligations.