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Docket Number

No. 01CA2359.

Attorney(S)

Donald W. Belveal, Canon City, Colorado, for Appellant Law Office of J.E. Losavio, J.E. Losavio, Karen L. Sims, William J. Culver, John K. Priddy, Pueblo, Colorado, for Appellee

Judges

Opinion by JUDGE DAVIDSON

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Smart Summary

Summary of Opinion — In re the Marriage of Michele N. Hansen

Factual and Procedural Background

Michele N. Hansen (wife) appealed from the permanent orders entered in the dissolution of her 23-year marriage to Peter E. Hansen (husband). During the marriage husband, an employee of the Department of Corrections, was placed on full disability under the Public Employees' Retirement Association (PERA). He was 45 years old with 12 years of service and had elected the "cobeneficiary plan," naming wife as beneficiary to receive full lifetime benefits after his death. The parties had agreed after mediation to an equal division of the PERA benefits but left to the trial court the classification of those benefits as either spousal maintenance or property division. The trial court held that the PERA disability benefit compensated for loss of future income and was not marital property, found that wife met the need threshold for permanent spousal support, and treated wife’s share of the PERA benefit as maintenance (not terminable by remarriage, though subject to possible modification). The trial court also addressed the potential effect of husband changing his PERA beneficiary.

Legal Issues Presented

Whether a PERA disability benefit paid prior to normal retirement age constitutes marital property subject to division.
How portions of PERA disability benefits should be characterized once the disabled employee reaches age 65 (i.e., which portion, if any, becomes marital property attributable to service prior to disability).
Whether wife’s share of the PERA benefit should be characterized as spousal maintenance or as a property division, and the effect of any recharacterization on maintenance and property division determinations.
Whether wife is entitled to a share of the PERA death benefit and whether husband can designate or change the beneficiary with respect to any portion that is marital property.

Arguments of the Parties

Appellant (Wife)'s Arguments

Wife contended the trial court erred in determining the PERA disability benefit was not a marital asset.
Wife argued that because husband contributed to his PERA pension during the marriage, the disability benefit he received prior to normal retirement age was analogous to proceeds from a private disability annuity purchased with marital funds and therefore should be subject to division.
Wife additionally argued that the disability benefit should constitute marital property once husband reached what she described as his normal retirement age (which she calculated to be approximately age 58, based on age-plus-service eligibility rules).

Respondent / Trial Court Position and Relevant Factual Contentions

The trial court had determined the PERA disability benefit compensated for loss of future income and therefore was not marital property prior to age 65, and treated the wife's share as permanent maintenance.
The parties informed the court that husband could not designate multiple PERA beneficiaries, and the court recognized husband's entitlement to change the PERA beneficiary, while ordering that wife continue to receive the same amount of spousal maintenance even if a beneficiary change reduced the PERA benefit.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
In re Marriage of Peterson, 870 P.2d 630 (Colo.App. 1994)	Police disability pension does not constitute marital property where it compensates for lost future earnings; analogy to social security, workers' compensation, and VA benefits and statutory prohibitions on alienation.	Used as primary authority to support the rule that disability benefits compensating for loss of future earnings generally are not marital property; court declined to depart from Peterson for PERA disability benefits prior to age 65.
In re Marriage of Smith, 817 P.2d 641 (Colo.App. 1991)	Workers' compensation award is marital property only to the extent it compensates for lost marital wages or for medical and related expenses incurred during the marriage.	Referenced to distinguish compensation that replaces lost past wages/expenses from compensation for future lost earnings, supporting nonmarital characterization for future-earnings replacement.
In re Marriage of Breckenridge, 973 P.2d 1290 (Colo.App. 1999)	Workers' compensation award is not marital property to the extent it compensates for post-dissolution loss of earning capacity, even if injury occurred during the marriage.	Referenced to support the proposition that benefits compensating for post-dissolution loss of earning capacity are not marital property.
In re Marriage of Simon, 856 P.2d 47 (Colo.App. 1993)	Proceeds from a private disability insurance policy acquired with marital funds during the marriage are subject to division because they are not excluded from the statutory definition of marital property.	Used as a contrast to public disability benefits: private disability proceeds are divisible when purchased with marital funds, unlike certain public disability benefits.
In re Marriage of Kelm, 912 P.2d 545 (Colo. 1996)	General statement that the issue whether pension benefits are marital property is well settled.	Cited as background authority establishing that pension characterization principles are settled law for analysis of PERA benefits.
In re Marriage of Grubb, 745 P.2d 661 (Colo. 1987)	General pension characterization precedent.	Referenced together with Kelm as part of the settled law on pension benefits and marital property.
In re Marriage of Nordahl, 834 P.2d 838 (Colo.App. 1992)	PERA is a defined benefit plan accumulated in part through employee contributions.	Used to describe the nature of PERA benefits as a defined benefit plan relevant to characterization analysis.
State Penitentiary v. Toothaker, 832 P.2d 1009 (Colo.App. 1991)	Discussion that portions of disability retirement benefits attributable to service (or unearned service credit) have different characteristics; distinguishes disability-based portions from retirement-based portions.	Applied to conclude that after age 65 portions of the PERA benefit become more akin to retirement benefits and that the portion attributable to years of service prior to disability constitutes marital property at age 65, while the unearned service-credit portion linked to disability remains separate.
In re Marriage of Antuna, 8 P.3d 589 (Colo.App. 2000)	Property division and maintenance issues are inextricably intertwined.	Relied upon to instruct that, because a portion of the PERA benefit is marital property, the trial court must reconsider both property division and maintenance on remand.
In re Marriage of Payne, 897 P.2d 888 (Colo.App. 1995)	Guidance on whether a spouse is entitled to a share of a pension/retirement death benefit.	Referenced to require the trial court on remand to reconsider wife's entitlement to a share of the PERA death benefit now that a portion of the PERA benefit is marital property.
In re Marriage of Lee, 781 P.2d 102 (Colo.App. 1989)	Consideration of a pensioner's ability to designate a new beneficiary where marital property interests are involved.	Referenced to permit the trial court on remand to consider evidence and argument concerning characterization of the death benefit and husband's ability to designate a new beneficiary.

Court's Reasoning and Analysis

The court conducted a multi-step analysis grounded in statutory provisions governing PERA and established case law distinguishing disability benefits that replace future earnings from retirement or property benefits.

The court began with the established rule that benefits compensating for loss of future earnings are generally not marital property, citing In re Marriage of Peterson and related authorities distinguishing such benefits from divisible marital property.
The court examined the statutory nature of PERA disability benefits. PERA is a defined benefit plan and the disability retirement benefit amount is determined by statute and a formula projecting service credit up to age 65 (not tied directly to the employee's actual contributions).
Because PERA disability benefits prior to age 65 are intended to replace future earnings for an employee who is permanently unable to perform his job and is not eligible for normal service retirement, the court agreed with the trial court that such pre-65 PERA disability benefits replace future earnings and therefore do not constitute marital property.
The court distinguished the post-65 scenario: once the disabled employee reaches age 65 benefits are paid for life and are more akin to retirement benefits. The court concluded that at age 65 the portion of PERA benefits attributable to years of service prior to disability becomes marital property, while the portion representing unearned service credit attributable to the disability remains separate property. This conclusion was supported by State Penitentiary v. Toothaker and related discussion.
Applying that framework to the facts here: although husband received a maximum 50% benefit at disability (based on disability formula) and had 12 years of service at that time (which would have yielded 30% at age 65 based on actual service), the court concluded that after age 65 sixty percent of the benefit (12 of 20 projected service years) is attributable to actual service and thus constitutes marital property, while forty percent (8 of 20 years) remains tied to disability and is separate property.
The court rejected wife's alternative argument that the disability benefit should be characterized as marital property once husband reached an age (approximately 58) at which age-plus-service would meet service-retirement eligibility (§ 24-51-602(1)(c)), explaining that because husband was placed on disability and did not seek retirement based on actual service, that statutory provision was not dispositive here.
Because the trial court had made property division and maintenance determinations based on the erroneous characterization of the PERA benefit as entirely separate property, the court held that those determinations must be reconsidered on remand. The court also directed reconsideration of wife’s entitlement to any PERA death benefit and whether husband may change beneficiaries with respect to any marital portion.

Holding and Implications

HOLDING: The judgment of the trial court is reversed and the case is remanded with directions.

Direct consequences and instructions to the trial court:

The court must recharacterize sixty percent of husband's PERA benefit payable after age 65 as marital property (representing the portion attributable to actual years of service prior to disability).
On remand the trial court must reconsider the entire property division and the maintenance award in light of the recharacterization (citing that property division and maintenance are inextricably intertwined).
The trial court must also reconsider whether wife is entitled to a share of the PERA death benefit and may consider additional evidence and argument regarding characterization of the death benefit and husband's ability to designate a new beneficiary.
The opinion reverses and remands for further proceedings consistent with the court's analysis; no further rulings or broader changes in law are announced beyond application of the cited authorities to the facts presented.

Disposition: Judgment reversed and case remanded for further proceedings consistent with this opinion.

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In re the Marriage of Michele N. Hansen, Appellant, and Peter E. Hansen, Appellee.

Opinion by JUDGE DAVIDSON

Michele N. Hansen (wife) appeals from the permanent orders entered in conjunction with the dissolution of her twenty-three-year marriage to Peter E. Hansen (husband). We reverse and remand.

During the marriage, husband, who was an employee of the Department of Corrections, was placed on full disability provided by the Public Employees' Retirement Association (PERA). He was forty-five years old and had twelve years of service. He elected the "cobeneficiary plan" option, which entitled wife, as the named beneficiary, to receive full lifetime benefits after his death. Husband also receives Veterans Administration disability benefits, which are not at issue in this appeal.

The parties agreed after mediation to an equal division of the PERA benefits, but left the classification of such benefits as spousal maintenance or property division to the trial court.

After a hearing, the trial court determined that husband's PERA disability benefit compensated him for loss of future income and was not a marital asset subject to distribution between the parties. The court also found that wife met the threshold of need and was entitled to an award of permanent spousal support. Thus, the court classified wife's share of the PERA disability benefit as maintenance that would not be terminated by wife's remarriage. However, the court found that husband could seek modification of such maintenance upon wife's remarriage, depending on the circumstances.

The court was initially inclined to rule that wife should continue to receive half of the PERA benefit after husband's death and that the balance should pass to his estate. However, after the parties informed the court that husband could not designate multiple beneficiaries, the court concluded that husband was entitled to change the PERA beneficiary. The court ruled, however, that wife was to continue to receive the same amount of spousal maintenance, even if a change of beneficiary reduces husband's benefit.

Wife first contends that the trial court erred in determining that the PERA disability benefit did not constitute a marital asset. We agree in part.

Generally, a spouse's post-dissolution earnings are not marital property, and benefits compensating for loss of those earnings are not subject to division. In re Marriage of Peterson, 870 P.2d 630 (Colo.App. 1994) (police disability pension does not constitute marital property based, in part, on analogy to social security, workers' compensation, and Veterans Administration benefits and, in part, on statute creating such benefits and prohibiting their alienation); In re Marriage of Smith, 817 P.2d 641 (Colo.App. 1991) (workers' compensation award is marital property only to the extent it compensates for lost marital wages or for medical care and other related expenses incurred during the marriage);see also In re Marriage of Breckenridge, 973 P.2d 1290 (Colo.App. 1999) (workers' compensation award is not marital property to the extent it compensates for post-dissolution loss of earning capacity, even if the compensable injury occurred during the marriage).

In contrast, the proceeds from a private disability insurance policy acquired with marital funds during the marriage are subject to division because they are not excluded from the statutory definition of marital property. In re Marriage of Simon, 856 P.2d 47 (Colo.App. 1993).

Wife argues that because husband contributed to his PERA pension during the marriage, the disability benefit he received prior to normal retirement age is analogous to the benefit received from a private disability annuity purchased during the marriage with marital funds.

The issue whether pension benefits are marital property is well settled. See In re Marriage of Kelm, 912 P.2d 545 (Colo. 1996); In re Marriage of Grubb, 745 P.2d 661 (Colo. 1987).

PERA is a defined benefit plan, accumulated in part through employee contributions. In re Marriage of Nordahl, 834 P.2d 838 (Colo.App. 1992). Under § 24-51-701, C.R.S. 2002, any PERA member with five or more years of earned service credit who becomes permanently unable to perform his or her job and who is not already eligible for a normal service retirement is entitled to apply for disability retirement benefits upon terminating employment. Section 24-51-704, C.R.S. 2002.

However, the amount of the PERA disability benefit is not tied to husband's actual contributions, but is based upon a statutory formula established for all eligible workers. By statute, the disability retirement benefit awarded is equal to the benefit that would have been payable upon reaching sixty-five years of age. The calculation to determine such benefit includes not only earned and purchased service credit accumulated up to the date of disability, but also projected service credit up to sixty-five years of age, not to exceed a total of twenty years of service credit, except in situations not applicable here. Section 24-51-704.

Because an employee receiving a PERA disability benefit must be permanently unable to perform his or her job and not eligible for a normal service retirement, we see no reason to depart from the rule established by Peterson. Therefore, the PERA disability benefit prior to age sixty-five replaces future earnings, and we agree with the trial court that such benefit does not constitute marital property. See also In re Marriage of Breckenridge, supra.

However, after age sixty-five, the PERA disability benefit is paid for the rest of the disabled employee's life, regardless of recovery or work status, subject only to the normal postretirement employment limitations applicable to all service retirees. Nevertheless, the portion representing the unearned service credit attributed to the employee remains based upon the disability. State Penitentiary v. Toothaker, 832 P.2d 1009 (Colo.App. 1991); see also In re Marriage of Peterson, supra (to the extent disability benefits compensate for lost future earnings they are not treated as marital property).

We further conclude, therefore, that regardless of the worker's recovery or work status, once the disabled employee reaches age sixty-five and benefits are paid, those benefits, except for the portion of unearned service credit projected to age sixty-five, are more akin to retirement benefits. Thus, when the disabled employee reaches age sixty-five, the portion of PERA benefits that is attributable to the years of service prior to disability constitutes marital property, and the balance remains separate property. See State Penitentiary v. Toothaker, supra.

Here, once disabled, husband received the maximum benefit of fifty percent of his salary, even though his twelve years of service at that time would have entitled him to only thirty percent of his highest average salary at age sixty-five. After age sixty-five, forty percent (eight of twenty years) of the retirement benefit remains attributable to his disability and continues to represent his separate property, and sixty percent (twelve of twenty years) is based upon his actual service and, therefore, constitutes marital property at age sixty-five. See State Penitentiary v. Toothaker, supra.

However, we reject wife's additional argument that the disability benefit constitutes marital property once husband reaches his normal retirement age, which she construes to be approximately age fifty-eight, when his age plus his actual and projected years of service total eighty.

Wife's argument is based upon § 24-51-602(1)(c), C.R.S. 2002, which is part of the service retirement eligibility statute. It provides that PERA members who are fifty-five years of age or older are entitled to receive service retirement benefits if they have at least five years of service and if their age plus service credit equals eighty years or more. However, because husband did not seek retirement benefits based upon his actual service, but was placed on disability status, we do not view that section as dispositive.

Accordingly, this matter is remanded to the trial court to recharacterize as marital property sixty percent of husband's PERA benefit payable after age sixty-five.

II.

In the permanent orders, both the property division and maintenance award were determined based on the assumption that husband's PERA benefit was his separate property. However, we have determined in Part I that, as to sixty percent of that benefit, this characterization was erroneous. In light of that determination, on remand, the trial court must reconsider the entire property division as well as the maintenance award. See In re Marriage of Antuna, 8 P.3d 589 (Colo.App. 2000) (issues of property division and maintenance are inextricably intertwined).

Furthermore, because a portion of the PERA benefit is marital property, the court also must reconsider its determination whether wife is entitled to a share of the PERA death benefit. See In re Marriage of Payne, 897 P.2d 888 (Colo.App. 1995). In determining this question, the court may consider additional evidence and argument concerning the characterization of the death benefit, as well as husband's ability to designate a new beneficiary. See In re Marriage of Lee, 781 P.2d 102 (Colo.App. 1989).

The judgment is reversed, and the case is remanded for further proceedings in accordance with this opinion.

JUDGE VOGT and JUDGE DAILEY concur.

MARRIAGE OF HANSEN