COURT OF APPEALS OF VIRGINIA
Present: Judges Baker, Willis and Annunziata
Argued at Alexandria, Virginia
MICHAEL KAY MANN
OPINION BY
v. Record No. 0342-95-4 JUDGE ROSEMARIE ANNUNZIATA
MAY 21, 1996
AFAF KANAZEH MANN
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Quinlan H. Hancock, Judge
Lauren E. Shea (Sherman, Meehan & Curtin,
P.C., on briefs), for appellant.
Philip F. Hudock for appellee.
The parties, Afaf Kanazeh Mann ("wife") and Michael Kay Mann
("husband"), were divorced by entry of a final decree, which
included an equitable distribution of the parties' assets. Among
the assets distributed were two retirement plans in which the
husband participated through his employer. The court awarded the
wife forty percent of the marital share of each of the two plans.
On appeal, the husband contends that the court overstated the
value of the "marital share" of his defined contribution plan,
referred to as the Performance Sharing Plan ("PSP"), by failing
to treat as separate property the income earned passively during
the marriage on the amount of his premarital contributions to the
plan. 1 The distribution of the defined benefit plan is not at
issue. For the reasons that follow, we reverse.
1
The wife filed a cross-appeal, the disposition of which
is addressed in a separate memorandum opinion.
A defined contribution plan is comprised of funds held in
an account established by the employee through his employer. A
defined contribution plan is one in which "the employee and the
employer both make contributions to a retirement plan account,
and the employee's benefits are expressed in terms of the present
balance in his account." Brett R. Turner, Equitable Distribution
of Property § 6.02 (2d ed. 1994); see also Defined Contribution
Plans, Equitable Distribution Journal Vol.13, No.1, at 1-6 (Jan.
1996). 2 By contrast, a defined benefit plan defines an
employee's benefits "as a certain amount per period of time."
Id. Thus, upon retirement, a defined contribution plan gives an
employee the funds remaining in his plan account, while "a
defined benefit plan gives the employee a specific periodic
benefit." Id.
Here, the parties stipulated that husband's PSP was worth
$23,370 when the parties married and $163,467 when they
2
Under the Internal Revenue Code, "the
term `defined contribution plan' means a plan
which provides for an individual account for
each participant and for benefits based
solely on the amount contributed to the
participant's account, and any income,
expenses, gains and losses, and any
forfeitures of accounts of other participants
which may be allocated to such participant's
account." Types of defined contribution
plans include tax-qualified profit-sharing
plans, stock bonus plans, and 401(k) plans.
IRAs (Individual retirement accounts) are
also defined contribution plans, although
they are not tax-qualified plans.
Equitable Distribution Journal, supra, at 1-2 (citation omitted).
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separated. Based on these figures, the court classified
husband's $23,370 pre-marital contribution as separate property.
Although husband's accounting expert testified that the value of
the husband's pre-marital contributions had grown to $61,097
during the marriage as a result of earnings attributable solely
to those funds, the court declined to classify as husband's
separate property the income passively earned on his $23,370
pre-marital contribution. The court determined the "marital
share" of the PSP was $140,097 (i.e., $163,467 minus $23,370)
rather than, as husband contended, $102,370 (i.e., $163,467 minus
$61,097).
Husband contends classification of the PSP is controlled by
Code § 20-107.3(A) and its tracing provisions. 3 Wife concedes
3
Code § 20-107.3(A) provides, in part:
(1) Separate property [includes] all
property, real and personal, acquired by
either party before the marriage . . . .
Income received from separate property during
the marriage is separate property if not
attributable to the personal effort of either
party. . . .
(2) Marital property [includes] . . . (ii)
that part of any property classified as
marital pursuant to subdivision A 3 . . . .
All property including that portion of
pensions, profit-sharing or deferred
compensation or retirement plans of whatever
nature, acquired by either spouse during the
marriage, and before the last separation of
the parties . . . is presumed to be marital
property in the absence of satisfactory
evidence that it is separate property. . . .
(3) The court shall classify property as part
marital property and part separate property
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that, under Code § 20-107.3(A), passive income earned by or on
separate property remains separately classified. However, she
contends that retirement plans are not subject to the same
classification and distribution rules applicable to
non-retirement plan assets, because retirement plans are treated
as a unique species of property under Virginia's equitable
distribution law. See Code § 20-107.3(G); Keyser v. Keyser, 7
Va. App. 405, 412, 374 S.E.2d 698, 702 (1988). For this reason,
she argues that husband's theory has no basis under Virginia law.
4
Indeed, the issue is one of first impression in Virginia.
(..continued)
as follows:
* * * * * * *
b. In the case of any pension,
profit-sharing, or deferred compensation plan
or retirement benefit, the marital share as
defined in subsection G shall be marital
property.
* * * * * * *
d. When marital property and separate
property are commingled by contributing one
category of property to another, resulting in
the loss of identity of the contributed
property, the classification of the
contributed property shall be transmuted to
the category of property receiving the
contribution. However, to the extent the
contributed property is retraceable by a
preponderance of the evidence and was not a
gift, such contributed property shall retain
its original classification.
4
However, we note that husband's theory of classifying as
separate the income earned passively by his separate contribution
has been accepted in other equitable distribution jurisdictions.
See Equitable Distribution Journal, supra, at 4-5; Thielenhaus
v. Thielenhaus, 890 P.2d 925, 929-30 (Okla. 1995); White v.
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This Court has described pensions as constituting an
"unusual type of property," Gamble v. Gamble, 14 Va. App. 558,
565, 421 S.E.2d 635, 640 (1992). 5 However, we find no support
for the view that the legislature intended to exclude retirement
plans, or any other specific type of property, from the overall
equitable distribution scheme. See Banagan v. Banagan, 17 Va.
App. 321, 325, 437 S.E.2d 229, 231 (1993) ("[W]hen pension
benefits comprise a `portion of the pool of marital assets,' they
are clearly contemplated by the `scheme' of Code § 20-107.3,
which is intended to justly distribute the `marital wealth of the
parties.'") (citations omitted).
That scheme is set forth in Code § 20-107.3(A), which
addresses the classification of property, including retirement
plans, as either separate, marital, or part marital and part
separate. The same code section sets forth the "tracing"
provisions applicable to assets which are part marital and part
separate. See Code § 20-107.3(A)(3). Under these tracing
provisions, a retirement benefit which is part marital and part
separate, is classified in accordance with the definition of
(..continued)
White, 521 N.W.2d 874 (Minn. Ct. App. 1994); Getter v. Getter,
627 N.E.2d 1043 (Ohio Ct. App. 1993); Parker v. Parker, 610 So.
2d 719 (Fla. Dist. Ct. App. 1992); Brandenburg v. Brandenburg,
617 S.W.2d 871 (Ky. Ct. App. 1981).
5
Pension benefits are considered unique in that, in most
cases, the pension benefits are "future oriented" and not
"readily susceptible to valuation or distribution at the time of
an evidentiary hearing." Gamble, 14 Va. App. at 565-66, 421
S.E.2d at 640.
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"marital share" set forth in § 20-107.3(G). Code
§ 20-107.3(A)(3)(b). Code § 20-107.3(G)(1) defines the marital
share of a pension as "that portion of the total interest, the
right to which was earned during the marriage and before the last
separation of the parties." That portion is considered "marital
property" under § 20-107.3(A)(3)(b).
Wife contends that the phraseology, "total interest . . .
earned during the marriage," has a clear meaning, requiring the
inclusion as marital property of all funds earned by the PSP
during the marriage, irrespective of the separate nature of the
funds contributed. However, wife's reading of Code
§§ 20-107.3(A)(3)(b) and -107.3(G) ignores the remaining
provisions of the equitable distribution statutory scheme which,
upon proof, treats as separate all other species of separate
property, together with any increases in value passively earned
by or on the separate property during the marriage. See Code
§§ 20-107.3(A)(1), -107.3(A)(3)(a).
When read in context, the provisions respecting the
classification of pension funds compel giving similar treatment
to income passively earned during the marriage from separate
funds contributed to a defined contribution plan. Under Code
§ 20-107.3(A)(2), pension funds are characterized as
"presumptively" marital and only remain so classified in the
absence of satisfactory evidence that the property is separate.
This provision is conceptually equivalent to Code
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§ 20-107.3(A)(3)(d), which provides that separate property
commingled with marital property retains its original
classification if it can be retraced by a preponderance of the
evidence.
Furthermore, the "pro-ration" of the PSP urged by husband is
consistent with the treatment accorded to pension funds held in
defined benefit plans. Under Virginia law, it is well
established that the marital portion of a defined benefit plan is
distinguished from the separate portion by the application of a
fraction, the numerator of which represents the total time the
pensioner is employed during the parties' marriage, and the
denominator of which represents the total time the pensioner is
employed through the date of retirement. See, e.g., Mosley v.
Mosley, 19 Va. App. 192, 198, 450 S.E.2d 161, 165 (1994); Primm
v. Primm, 12 Va. App. 1036, 1037, 407 S.E.2d 45, 46 (1991). The
fraction diminishes the marital share in relation to the number
of years that pre- and post-marital contributions are made. 6
Thus, as applied, the fraction effectively excludes from the
marital share the income earned by pre- and post-marital
7
contributions to the pension.
6
Because there is no fund account to prorate between marital
and separate, the time during which benefits were earned is
prorated instead. See Turner, supra, at § 6.10. Applying such a
fraction to a defined contribution plan could lead to incongruous
results, and such an approach is not generally used. See id. at
n.221. Proration of a defined contribution plan is typically
accomplished by tracing separately contributed funds. See supra,
note 3.
7
The size of the marginal difference will, of course, vary
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Different treatment of a defined contribution plan follows
neither from the nature of the plan, which is characterized by
readily identifiable fund values during the life of the fund, nor
from the language of the statute. The trial court, therefore,
erred in failing to classify as separate the income earned
passively by husband's separate contributions.
In this case, stipulated evidence established the value of
husband's separate contributions made before the marriage.
Expert testimony established the value by which the separate
contributions increased passively. On appeal, wife contends that
the method used by husband's expert to calculate the increased
value of husband's separate contributions at the date of
separation was erroneous. However, wife failed to object to
husband's method of calculation at trial and is, therefore,
procedurally barred from raising the issue on appeal. See Rule
5A:18. 8 Accordingly, the evidence of value presented to the
trial court on this issue stands admitted.
Accordingly, we reverse and remand for entry of an equitable
distribution order consistent with this opinion. Because of the
statutory interplay between equitable distribution and support
awards, the trial court will have to reconsider its support award
(..continued)
according to the size of the fraction.
8
We note that wife's objection at trial addressed only the
issue of whether Virginia law permitted the court to classify as
separate property the income earned passively by husband's
separate contributions, an issue we resolve in favor of husband.
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in light of this opinion.
Reversed and remanded.
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