Dennis v. Fire & Police Employees' Retirement System

RAKER, J. Appellants, both former Baltimore City police officers, ask this Court to determine whether payments of deferred retirement option plan (“DROP”) retirement benefits from the Baltimore City Fire and Police Employees’ Retirement System (“the Retirement System”) are “pension” payments within the meaning of the Qualified Domestic Relations Orders (“QDROs”) entered in appellants’ divorces, entitling the appellee spouses to a portion of the DROP payments in accordance with the terms of the QDROs. We shall hold that the DROP payments are “pension” payments under the QDROs, and that consequently the appellee spouses are entitled to their shares of the DROP payments under the QDROs. I. Appellants, Elmer Dennis and Edmund Lubinski, are retired Baltimore City police officers. Appellees Catherine Dennis and Edna Sullivan are the former spouses of Elmer Dennis ⁶⁴³ and Edmund Lubinski, respectively.

The Retirement System and the Mayor and City Council of Baltimore are also appellees in this action. Lubinski and Sullivan were divorced by a Judgment of Absolute Divorce entered on February 22, 1990. The judgment was entered in accordance with an agreement reached by the parties. It provided as follows: “IT IS FURTHER ORDERED, in accordance with the aforesaid Agreement of the parties, that this is a qualified Domestic Relations Order as defined in the Retirement Equity Act of 1984, as from time to time amended, and, in accordance therewith, the civil pension known as the FIRE AND POLICE EMPLOYEES RETIREMENT SYSTEM OF THE CITY OF BALTIMORE ... is the civil pension which is subject to this order.

The participant in the pension is the Defendant/Counter-Plaintiff, EDMUND LUBINSKI ... The alternate payee is the Plaintiff/Counter-Defendant, EDNA J. VENAZI ... The Plaintiff/alternate payee’s equitable interest in said pension is hereby declared to be fifty percent (50%) of the ‘marital share’ of said pension benefits, the marital share being that fraction of the benefit whose numerator shall be the number of months of the parties’ marriage, during which benefits were being accumulated, up to and including January 18, 1990, which number is 306, and whose denominator shall be the total number of months during which benefits were accumulated prior to the time when the payment of such benefits shall commence. The Plaintiff/Counter-Defendant ... shall receive fifty percent (50%) of the aforesaid marital share of any payments made from the pension to the participant, including any death benefits, if, as, and when, such payments are made.” (emphasis added).

Elmer Dennis and Catherine Dennis were divorced by a Judgment of Absolute Divorce entered on June 7, 1993. The judgment was apparently entered by the court without the ⁶⁴⁴ agreement of the parties. 1 The judgment contained a provision similar to that in the Lubinski judgment: “AND IT IS FURTHER ORDERED, that this is a Qualified Domestic Relations Order as defined in the Retirement Equity Act of 1984, as amended from time to time, and in accordance therewith, the Civil Pension known as the Baltimore City Fire and Police Employees’ Retirement System ... is the pension which is subject to this Order. The participant in the pension is the Plaintiff, Elmer Dennis, Jr. ... The alternate payee is the Defendant, Catherine J. Dennis ...

The Defendant/Alternate Payee’s equitable interest in said pension is hereby declared to be fifty percent (50%) of the ‘marital share’ of said pension benefit, the marital share being that fraction of the benefit whose numerator shall be the number of months of the parties’ marriage during which benefits were being accumulated, which number is 345, and whose denominator shall be the total number of months during which benefits were accumulated prior to the time when the payment of such benefits shall commence. The Defendant, Catherine J. Dennis, shall receive fifty percent (50%) of the aforesaid marital share of any payments made from the pension to the participant if, as, and when such payments are made.” (emphasis added). Elmer Dennis began work at the Baltimore City Police Department on September 24, 1964, and Lubinski began work at the Department on January 24, 1963. Both began participation in the DROP on August 1, 1996, and ceased participation on July 31, 1999.

Both continued to work at the Department after participating in the DROP, with Elmer ⁶⁴⁵ Dennis retiring on September 2, 2002, and Lubinski retiring on February 9, 2001. The Retirement System notified appellants by letter dated January 20, 1999, that it intended to treat payments of their DROP benefits as subject to division between them and their spouses in accordance with the formula specified in their QDROs. In response, appellants, along with other Baltimore City police officers, filed a Complaint in the Circuit Court for Baltimore City, seeking injunctive relief. This Complaint, the subject of a previous appeal to this Court, Brown v. Retirement System, 375 Md. 661 , 826 A.2d 525 (2003), set out the facts relating to this Complaint as follows: “Petitioners filed in the Circuit Court for Baltimore City on June 29, 1999, a Complaint for Declaratory and/or Injunctive Relief, seeking a declaration that their benefits under the City’s Deferred Retirement Option Plan (‘DROP’) are not marital property and should be disbursed solely to them.

On April 19, 2000, petitioners filed an Amended Complaint for Declaratory and/or Injunctive Relief, joining their former spouses as necessary parties under Maryland Rule 2-211. Respondents argued that the Circuit Court lacked jurisdiction to determine marital property and that the ex-spouses were entitled to a share of petitioners’ DROP benefits. Motions by both sides for summary judgment were denied.” “In lieu of testimony, the Circuit Court received the parties’ trial briefs, stipulations, and documentary evidence and heard oral argument in April 2001. Respondents asked for a dismissal of the amended complaint and a judgment that petitioners be required to pay DROP benefits to their former spouses in accordance with the orders in the divorce proceedings.

In a written order issued April 11, 2001, the Circuit Court dismissed, with prejudice, the petitioners’ complaint, but quixotically ordered the Retirement System to ‘treat all DROP benefits as ordinary pension benefits for ⁶⁴⁶ the purposes of payments pursuant to the parties’ Judgments of Divorce.” “Petitioners noted a timely appeal to the Court of Special Appeals. In an unreported opinion, that court affirmed the trial court’s determination that the DROP should be treated as an ordinary pension benefit for the purposes of payments pursuant to the parties’ judgments of divorce. The officers filed a petition for a writ of certiorari, and we granted the petition.” Id. at 665, 668-69 , 826 A.2d at 527-30 (footnotes omitted). In Broum, we held that the Circuit Court erred in reaching the merits of the Complaint, as the petitioners had failed to exhaust their administrative remedies.

Id. at 673-74 , 826 A.2d at 532-33 . Consequently, we vacated the judgment of the Court of Special Appeals, and remanded with instructions to vacate the lower court judgments and dismiss the case. Id. at 674-75 , 826 A.2d at 533 . After our decision in Brown , appellants filed claims with the Fire and Police Employees’ Retirement System Board of Trustees (“the Board”), challenging the Retirement System’s treatment of their DROP benefits as subject to division under their QDROs.

Pursuant to Article 22, § 41 of the Baltimore City Code (2000), a hearing was held on appellants’ claims on August 28, 2003. The Board then denied their claims, concluding that “[t]he DROP benefit is an integral part of the [Retirement System] benefit scheme” and that appellants’ “DROP accounts must be assigned to their ex-spouses under their deferred division divorce decrees.” Appellants then filed a Petition for a Writ of Mandamus and Complaint for Declaratory Relief and/or Petition for Judicial Review in the Circuit Court for Baltimore City. Appellants sought judicial review of the Board’s decision pursuant to Md. Rule 7-202, a declaratory judgment that appellants’ DROP benefits should be disbursed in full to appellants, and a writ of mandamus ordering the Board to so disburse their DROP benefits. After the appellee spouses intervened in the action, the parties filed cross-motions for summary judgment.

Rul ⁶⁴⁷ ing on these motions, the court declared that “the DROP is subject to the deferred division stated in the parties’ Judgments of Divorce as a matter of law,” affirmed the decision of the Board of Trustees of the Retirement System, and denied appellants’ petition for a writ of mandamus. The appellants then noted timely appeals to the Court of Special Appeals. We granted appellants’ petition for a writ of certiorari prior to decision in the Court of Special Appeals. Dennis v. Fire Retirement, 387 Md. 465 , 875 A.2d 769 (2005).

II

In Brown , we detailed the operation of the Retirement System and the DROP as follows: “The Retirement System is a governmental pension plan offered by Baltimore City and is codified in Baltimore City Code (2000 Supp.) Article 22. The Retirement System provides several different types of benefits, including service retirement benefits, line-of-duty disability benefits, line-of-duty death benefits, ordinary disability benefits, and ordinary death benefits. Membership in the Retirement System is mandatory for all police employees as a condition of employment. § 31(1). The Retirement System is funded by the mandatory contributions of its members, by the contributions of Baltimore City, and by the System’s investment earnings.

All benefit-funding assets are held under the Retirement System’s name and are managed by a Board of Trustees. The Board establishes rules and regulations for the administration of the Retirement System’s funds and for the transaction of its business. § 33(g). “The Retirement System was amended in 1996 to add the DROP, effective July 1, 1996. § 36B. Members with at least twenty years of service under the Retirement System may elect to participate in the DROP for a maximum of three years. Eligible members who do not participate in the DROP may either retire and collect pension benefits, or continue to work and accrue service credit which will be used to calculate their retirement income. ⁶⁴⁸ “The DROP consists of three components: (1) An amount equal to the annual retirement allowance (or prorated annual retirement allowance for partial years) the member would have received if he had retired from service at that time and actually begun receiving his maximum retirement allowance; (2) An amount equal to the mandatory contributions the member is required to make to the Retirement System for his retirement benefits; and, (3) Interest at 8.25% compounded annually until the member actually retires. § 36B(d). “All mandatory contributions to the DROP are paid to the Board and commingled with all other contributions to the Retirement System.

No actual separate account is established, and no funds are segregated. The Retirement System is a tax-qualified plan under the Internal Revenue Code. See [I.R.C.] § 401(a) et seq. (2000).

All DROP payments are reported to the IRS on Form 1099R as having been paid from the Retirement System. ¹* “During the period of DROP participation, the Member’s regular pension is ‘frozen,’ i.e., the Member will not acquire new service credit toward the regular pension. At the conclusion of the DROP period, the Member’s regular service retirement benefit remains the same as when he or she entered the DROP. Various forms of additional service credits and a bonus accrual can be earned after participating in the DROP. “Distribution of the DROP benefit depends on how and when the Member retires. If the Member elects an ordinary retirement, he or she may receive the DROP benefit as a lump sum or as part of the regular monthly annuity payment.

No part of the DROP benefit is payable in the event of a line-of-duty disability or a line-of-duty death. In such cases, the Member or the qualifying beneficiary re ⁶⁴⁹ ceives only the benefit otherwise payable under the Retirement System. § 86B(k) and (i).” Brown, 375 Md. at 665-67, 826 A.2d at 528-29 . 2 The “various forms” of additional benefits that a Member can receive by staying in service after participating in the DROP are dependent upon how long the Member stays in service after participating in the DROP. If a Member retires or terminates services immediately after participating in the DROP, the Member is entitled to the “Basic DROP Retirement Benefit.” § 36B(e). The Basic DROP benefit consists of three components: (1) the ordinary service retirement allowance the Member would have received if he had retired at the time he started participating in the DROP; (2) the amount in the Member’s DROP account at the time of retirement; and (3) “the balance in the member’s Annuity Savings Fund subaccount accumulated under subsection (c).” Id.

The Annuity Savings Fund subaccount consists of the Member contributions to the Retirement System that are required under § 36(h) for Members who are not in the DROP and are earning service credit. § 36B(c)(l). DROP participants are required to make these payments while participating in the DROP even though they are not earning service credit, and the payments into the Annuity Savings Fund subaccount are credited with interest at the same rate as funds accumulated in the Member’s DROP account. Id. If a Member continues in service for less than eighteen months after ending participation in the DROP, then the Member is entitled to the “Intermediate DROP Retirement Benefit.” § 36B(f).

The intermediate benefit consists of the basic DROP benefit under § 36B(e), plus one main additional component. The intermediate benefit differs from the basic benefit because it also provides a Member “3.5% of the member’s ‘average final compensation’ ... for each year of service credit, not to exceed 18 months, earned by the member ⁶⁵⁰ through continuous employment immediately following the end of the DROP participation period.” § 36B(f)(2). 3 If a Member participates in the DROP and then continues in service for eighteen or more months afterwards before retiring, the Member is entitled to receive the “Full DROP retirement benefit.” § 36B(g). The full DROP benefit provides the recipient with the same benefits as provided by the basic DROP benefit, plus two additional benefits. First, the recipient of the full benefit receives the full ordinary retirement benefit provided by § 34(b) for the years served after terminating participation in the DROP program.

See § 36B(g)(l). Second, the Member receives “1.5% of the member’s ‘average final compensation’ ... for each year of service credit, not to exceed 4 years, earned by the member through continuous employment immediately following the end of the DROP participation period.” § 36B(g)(2).

III

Appellants argue before this Court that payments of DROP benefits are not subject to division under their QDROs because the QDROs fail to reference DROP benefits specifically. They urge us to apply the principles of contract interpretation to the QDROs. Appellants then argue that application of these principles leads to the conclusion they desire, because the DROP is a separate program that provides benefits distinct from the pension benefits payable from the Retirement ⁶⁵¹ System pension plan referenced in appellants’ QDROs. This is confirmed, they argue, by the fact that the DROP program was not offered by the Retirement System until 1996, several years after the appellants’ QDROs were entered.

According to appellants, this fact shows that appellants and the appellee spouses could not have intended to provide for division of DROP benefit payments in their QDROs, which in turn shows that division of DROP benefits was not a term of their agreements as reflected in their QDROs. Appellees argue that the appellants are mistaken in their claim that the DROP is a distinct program from the pension plan offered by the Retirement System. In support, they point to the facts that the statutory provisions governing the DROP program are included in the same section of the Baltimore City Code as the rest of the provisions governing the Retirement System, DROP benefit payments are paid out of the same Retirement System trust fund, DROP participants are required to make the same mandatory contributions to the Retirement System as other Retirement System Members, and finally, that the DROP is treated as part of the Retirement System’s pension plan for federal tax purposes. IY.

We conclude that the payments of DROP benefits from the Retirement System to the appellants are “payments from the [Retirement System] pension” -within the meaning of the appellants’ QDROs because of the particular function that QDROs play under the Internal Revenue Code and related federal statutory provisions. A court order entered in a divorce proceeding that orders the transfer of pension benefits from one spouse to another spouse must meet the federal statutory definition of a QDRO if the transfer is to be respected for federal tax purposes. When, as here, parties enter by consent into a divorce decree purporting to be a QDRO, a reasonable person in the position of the parties would intend the terms of the QDRO that are operative in the federal statutory definition of a QDRO to be used as these terms are used under the federal statute in order to fulfill the parties’ ⁶⁵² intended purpose of creating a QDRO. The operative language identifying the payments that are subject to division in the appellants’ QDROs is such language, and hence, it should be constructed in the same way as under the Internal Revenue Code.

Therefore, as the DROP benefit payments at issue in this case are payments from the Retirement System’s pension plan identified in the QDROs for federal tax and pension purposes, they are subject to division according to the terms of the appellants’ QDROs. A. Qualified Domestic Relations Orders In Rohrbeck v. Rohrbeck, 318 Md. 28, 30-36 , 566 A.2d 767, 768-71 (1989), we explained in detail the statutory genesis and function of QDROs. The provisions governing QDROs were adopted by Congress in the Retirement Equity Act of 1984 (“REA”), Pub.L. 98-397, 98 Stat. 1433 (1984). The QDRO provisions in the REA were enacted in response to the pension anti-alienation provisions added to the Internal Revenue Code and to Title 29 of the United States Code by the Employee Retirement Income Security Act of 1974 (“ERISA”), Pub.L. 93-406, 88 Stat. 829 (1974).

These anti-alienation provisions require that “[e]ach pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” ERISA § 206(d)(1) (codified at 29 U.S.C. § 1056 (d)(1)). They further provide that a pension plan is not a “qualified trust” under I.R.C. § 401 unless the plan “provides that benefits provided under the plan may not be assigned or alienated.” ERISA § 1021(c) (codified at I.R.C. § 401(a)(13)(A)). In addition, ERISA contained an express provision preempting state laws relating to employee benefit plans. See ERISA § 514 (providing that ERISA provisions “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) and not exempt under section 4(b) of this title”) (codified as amended at 29 U.S.C. § 1144 (a)).

The anti-alienation provisions, coupled with the preemption provision, called into question the validity of state court orders entered in domestic relations proceedings transferring pension ⁶⁵³ benefits. In response, Congress amended the Internal Revenue Code and Title 29 to exempt QDROs from the anti-alienation provisions. See REA §§ 104, 204. As amended, the Internal Revenue Code and Title 29 provide that the