Why the Lawyer Representing You in Your Divorce Is So Concerned About Retirement Plans
Robert Treat, Esq.
Your Lawyer Is Looking Out For You
From a basic perspective, your attorney's job is to help you understand your rights and obligations and the practical considerations surrounding them, to assert your position and seek a result advantageous to you consistent with honest dealing, to negotiate on your behalf and reconcile the divergent interests of the parties, and to maintain communication adequately to achieve these results. In the context of retirement plans, this means your attorney might need to interview both parties and obtain account statements and other records from the parties or the retirement plan administrators or custodians. This might be done by informal requests, or by more formal means such as interrogatories, depositions or subpoenas. Accordingly, your attorney might invest quite a bit of time learning about the various retirement plan benefits and what rights you and your former spouse may have to such benefits. Obtaining complete and accurate data takes time, and repeated follow up is often necessary. The psychological dynamics in divorce can be difficult to say the least, but try not to get annoyed or suspicious by your own attorney's focus on retirement plans. Your attorney simply needs to know all about the retirement plans of the parties in order to ensure that you get a fair shake.
Retirement Plans Are A Big Deal
Retirement Plans are commonly among the largest assets subject to division upon divorce. Indeed, retirement plans are often the single largest asset. Retirement benefits that accrue during the marriage are part of the marital estate, whether such retirement benefits are in your name, or your former spouse's name. Because the combined retirement benefits are commonly quite substantial and subject to division upon divorce, they are normally a large part of the property settlement.
Many Retirement Plan Benefits Are Complicated
Once in a while the division of a retirement plan is simple, but most of the time there are things to consider that we don't think about every day. Even for the simpler plans such as 401(k) plans, the issue of outstanding loans can make the division of the plan problematic. For more complex plans such as pensions, there is more to consider than just the basic accrued benefit. There are survivor benefits, early retirement benefits, post-retirement cost-of-living adjustments, and disability benefits that must be considered. Determining which of these benefits to share with the non-employee spouse, and in what amounts, can be difficult, especially since there are various ways to define how much of the pension is the "marital portion."
If your attorney cannot obtain the information about the retirement plans, she or he will not be in a good negotiating position with regard to the plans. Further, there may be benefits that have not been considered, and accordingly, the QDRO might not meet the intent of the parties as well as it could have. It is very important to cooperate with your attorney, and be diligent in obtaining information from the other side and from the various plan administrators.
The fact that retirement plans are complicated is exacerbated by the fact that most people think they are simple. This misconception leads to delays in discovery, improper expectations and disappointment. You need only read a Summary Plan Description (SPD) for any retirement plan (even a plan that is not very complex) to realize that they are complicated, highly regulated, difficult to assign assets.
The Judgment Of Divorce May Order The Sharing of Benefits, But An Additional Court Order Is Necessary To Actually Divide The Retirement Plan
Federal Law imposes strict requirements on retirement plans when it comes to the assignment of benefits. A court order that meets these requirements is called a Qualified Domestic Relations Order ("QDRO"). Government sponsored retirement plans are divided to court orders similar QDROs, but for purposes of this article the term QDRO is used. Even a well drafted Judgment of Divorce will not meet all the requirements, though it is technically possible. Commonly the attorneys will hire a retirement plan expert, who specializes in divorce litigation support and QDRO preparation. Your attorney might inform you that this will be necessary, just as it might be necessary to hire an expert to value a business or give medical testimony.
Timing Is Everything
While the divorce is pending, your attorney might want to obtain a restraining order preventing distributions from the retirement plans in question, such Order to be sent to the various plan administrators. This prevents the premature withdrawal of funds that were supposed to be assigned by QDRO, whether intentional or unintentional.
It is extremely important that the QDRO be entered in court and sent to the plan administrator as near to the date the Judgment of Divorce as possible. This is because the death, termination of employment or remarriage of the participant can have profound effects on the non-employee spouse's right to benefits. It is quite commonly very difficult or impossible to obtain the intended benefits if much time passes between the date of divorce and the date the QDRO is finally prepared.
For example, if the plan administrator did not receive the QDRO, and the participant dies, the new spouse might get 100% of the survivor benefits under the Plan, leaving the former spouse without the awarded portion of the benefit, and without any portion of the survivor benefit. Also consider the case where the plan administrator never received the QDRO, and the participant remains single, retires and commences pension benefits. In this case the normal form of benefit is generally a single life annuity for the participant's lifetime, and while a portion of the benefit can be paid to the former spouse, all benefits would stop when the participant dies, with no further payments of any kind payable to the former spouse.
Consider yet another case where a specific dollar amount was to be assigned from a 401(k). Presume in this case that the 401(k) was from a previous employer and no contributions have been made to the plan since the divorce. If the account value has decreased substantially, there may not be enough in the 401(k) to satisfy the award that should have been effectuated by a QDRO back when the divorce was final.
Another example is where there has been substantial growth in a 401(k). The former spouse was to receive 50% of the value on the date of divorce, adjusted by gains and losses attributable thereto from the date of divorce until distribution. The investment return has been good - around 15% per year, and just five years later what would have been a $50,000 award has grown to be over $105,000. While $105,000 is the correct amount to assign, the participant might have a harder time parting with the larger amount, even though the $55,000 growth is attributed to the former spouse's award. The former spouse might get the same result with better cooperation from the participant-spouse if the QDRO were done at the time of divorce and the funds were invested in the former spouse's own IRA with the same or similar investments. Another timing problem arises when the QDRO assigns the marital portion of a defined contribution plan such as a 401(k). If the marriage was a number of years ago, the plan administrator might not have the data necessary to calculate the date of marriage value. If the parties cannot find the information, previous retirement plan record keepers might be sought out, but it is possible that the date of marriage value might never be discovered. This is no one's fault, but this problem should not be discovered at the last minute, and parties and counsel should set about finding this information early in the divorce process in order to avoid a divorce that is complete except for one item that cannot be done - the proper division of the marital portion of the 401(k).
What if the participant retires and withdraws all his funds before the Plan Administrator gets the QDRO? The Plan cannot be forced to also pay the former spouse. Now the parties are back in court, and the former spouse has to try to get the awarded amount from a different asset, if any such asset exists.
The above examples are just a few of the ways that division of retirement plans can go wrong if not done timely. It takes the timely cooperation of the parties and their attorneys, together with good discovery and communication with the Plan Administrators and any other professionals who are to be consulted, in order to properly divide retirement plans. Your lawyer understands that timing is important, and your cooperation is needed in order to protect your rights.
Some Retirement Plans Can't Be Divided
There are a few retirement plans offered by employers that cannot be divided even if the judgment of divorce says the parties shall divide them. These plans are usually called non-qualified deferred compensation plans, some of which can be divided by court order, and some of which cannot. Your attorney needs to know whether or not the particular plan can be divided by a "QDRO type" court order, because if it cannot, he or she needs to factor it into the settlement some other way, perhaps by offset against another asset and/or present value calculation, or by sharing of benefits in the non-qualified deferred compensation plan when they are eventually paid to the participant.
In conclusion, your attorney needs your cooperation while the sometimes lengthy process of retirement plan division is completed. Retirement plans are normally the largest or second largest asset to be divided, and your attorney wants to make sure your rights are protected. Retirement plans are complicated and very technical, so your attorney might need to do a lot of discovery and hire an expert to assist in understanding how the retirement plans are to be divided, and to prepare the appropriate court orders dividing the plans. Most retirement plans can be divided by a court order called a QDRO, which is a court order in addition to the judgment of divorce. The division of retirement plans must be done timely in order to prevent any one of a number of problems that can arise.
Survivorship Considerations When Dividing Military Retired Pay And Railroad Pensions By Court Order
Robert Treat, Esq.
This article is the fourth and last installment in the series of articles on survivor benefits. It discusses the survivor benefits for former spouses of military service members and railroad employees. The previous three articles addressed survivorship benefits for ERISA pensions, State and Municipal pensions and Federal pensions. The four articles together provide an overview of the key survivorship considerations for most retirement plans.
Military Survivor Benefit Plan (SBP)
Eligibility In General: The only way to ensure a former spouse receives a benefit after the death of the member is by designating the former spouse as the beneficiary of the SBP. Retired and retirement-eligible service members, both active duty and Guard or Reserve members may elect the SBP for a spouse, former spouse or dependant children. The SBP may not be divided between the former spouse and current spouse; only one can receive the SBP. Election of former spouse SBP coverage terminates existing SBP coverage, and such election is irrevocable unless a court order or former spouse consent instructs otherwise. The current spouse or children may receive the SBP after the death of the former spouse.
Remarriage: If the Former Spouse remarries before age fifty-five, SBP coverage automatically ends. The former spouse SBP coverage can be reinstated if the Former Spouse's subsequent marriage terminates for any reason.
Duty Status: A former spouse who married the member after the member retired is not eligible for SBP coverage unless the former spouse was married to the member for at least one year or is the parent of one or more of the member's children. The election of SBP coverage for married active duty members must be made before retirement.
How The Election Is Made: The SBP election must be made within the one-year period from the date of the Order awarding the former spouse survivor benefits. This Order is normally the judgment of divorce. If the election is overlooked, however, and not made within one year of the judgment, the election can be made after another court order awarding SBP benefits. The member is required make the election. To ensure coverage, the former spouse should submit a Deemed SBP Election Notice - in the form of a letter, together with a certified copy of the court order creating the right to the SBP, to the Department of Financial and Accounting Services (DFAS).
Amount and Commencement
The amount of the SBP is 55% of the designated base amount, such base amount ranging from a minimum of $300 up to the member's full retired pay. The percentage drops to 35% when the beneficiary reaches age 62 due to eligibility for Social Security. If the member wishes for the 55% rate to continue, the member may elect a Supplemental Survivor Benefit Plan (SSBP).
The court order awarding the former spouse SBP coverage should specify when the SBP would be paid in the event the member dies before age 60. The time may be when the member dies, or when the member would have attained age 60.
The cost of the SBP varies, but is generally 6.5% of the designated base amount for members who entered the service after March 1, 1990. The premium is deducted from the member's gross retirement pay before it is divided between the parties, effectively dividing the cost proportionately. DFAS will not honor a clause allocating the entire cost to a former spouse. If the former spouse is to bear the cost of the SBP, the court order awarding the SBP could specify reimbursement to the member, or, if the former spouse is also to receive a portion of the member's retired pay, the percentage of the amount of such retired pay to be assigned to the former spouse could be reduced.
Railroad Retirement Pension Survivor Benefits
Railroad retirement benefits are comprised of two basic parts and three additional parts. The basic parts are the Tier I and Tier II benefits. The additional parts are the Vested Dual Benefit Payment, the Supplemental Annuity and the Overall Minimum Increase. The Tier I benefit is not divisible by court order as it is the railroad worker's equivalent of Social Security. The Tier II benefit and the additional benefits are divisible by court order.
Though Tier I benefits are not divisible by court order, the former spouse might be eligible for a survivor annuity from Tier I. There are no survivor benefits for Tier II or other benefits, even though they are divisible by court order. The former spouse's share of the divisible benefits will simply cease if the employee predeceases the former spouse.
The Tier I survivor annuity for former spouses is automatic, and no court order is necessary. It is called the Divorced Spouse Annuity, and it is payable only if the former spouse satisfies strict eligibility criteria:
The railroad employee is age 62 or older and currently receiving a Railroad Retirement employee annuity; and
The divorced spouse is at least age 62 if applying for a reduced Divorced Spouse Annuity, or at least age 65 if applying for an unreduced Divorced Spouse Annuity; and,
The parties are divorced; and,
The parties were married for at least ten years immediately before the divorce was final; and,
The divorced spouse is not currently remarried; and,
The divorced spouse is not entitled to a Social Security benefit based on his or her own earnings, the amount of which before any reductions is greater than the maximum amount to which she or he would be entitled as a divorced spouse annuitant, and,
The divorced spouse is not entitled to a spouse annuity, remarried widow(er)'s annuity or surviving divorced spouse annuity on a different Railroad Retirement Board claim number, the net monthly rate of which is greater than the amount to which he or she would be entitled as a divorced spouse annuitant; and,
The divorced spouse has stopped all work for pay for an employer covered by the Railroad Retirement Act (RRA) and given up all rights to return to such service.
However, even if the above eight criteria are met, the Divorced Spouse Annuity will not be payable in any month where:
The divorced spouse works for an employer covered by the Railroad Retirement Act; or,
The employee annuity on the same Railroad Retirement Board claim number is not payable; or,
The divorced spouse is entitled to an employee annuity on his or her own earnings record that exceeds the Divorced Spouse Annuity.
The military SBP for former spouses is available pursuant to court order, but the differences from survivor annuities provided by private sector employers warrant attention. The main differences are the eligibility requirements and the process to designate the former spouse as the surviving spouse.
For Railroad Retirement benefits, no survivor benefits can be awarded by court order. Under limited circumstances, where the former spouse meets the age requirement and does not have Social Security benefits or railroad benefits making him or her ineligible, he or she can apply for an automatic Divorced Spouse Annuity.
Survivorship Considerations When Dividing Federal Pension Plans By Court Order
Robert Treat, Esq.
This article is the third installment in the series of articles on survivor benefits. It discusses the survivor benefits for former spouses of members in the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS).
Survivor Benefits under FERS and CSRS
Eligibility And Amount Of Former Spouse Survivor Annuity
Survivor annuities are available for former spouses under both Plans, and the term used to describe this survivor annuity is "former spouse survivor annuity." The alternate payee must have been married to a participant who has at least 18 months of creditable service. A former spouse can have a former spouse survivor annuity up to 50% of the participant's entire benefit under FERS, and up to 55% of the participant's entire benefit under CSRS. Defining the amount of the survivor benefit involves the use of terms of art that are unique to FERS and CSRS, such as "maximum survivor annuity," "prorata share," "gross annuity," "self only annuity" and "net annuity." The Court Order Acceptable for Processing (COAP), which is the name of the Order effectuating the division of the plan, can specify any amount, as long as the amount is clearly calculable to the Office of Personnel Management (OPM).
Commonly a former spouse will be assigned the maximum survivor annuity or a prorata share. When assigning the maximum survivor annuity the COAP can further specify that such amount will be adjusted downward to a prorata share if the participant remarries before or after retirement. Prorata share means a fraction of the maximum survivor annuity allowable, such fraction having a numerator which is the number of months of federal civilian and military service that the participant performed during the marriage, and a denominator which is the total number of months of federal civilian and military service performed by the participant as of the date of death of the participant. In other words, the prorata share is the amount of the maximum survivor annuity attributable to the period of the marriage. Note that it is not necessary to specify the maximum survivor annuity in the COAP as a means to preserve the participant's right to ensure the maximum survivor annuity is available. If the participant remarries, he or she can notify OPM that a survivor annuity is also desired for the new spouse.
Cost of Former Spouse Survivor Annuity
When considering who will pay the cost of the former spouse survivor annuity, it is common for the parties to agree that they shall share the cost proportionally, though OPM will allow allocation of the cost as the parties wish, as long as such allocation is clearly calculable from the language in the COAP. The cost of the former spouse survivor annuity is paid by reducing the amount of the basic pension annuity. The terms self only annuity, gross annuity and net annuity are used in the section of the COAP that defines the alternate payee's basic pension award, but these terms also bear on the allocation of the cost of the former spouse survivor annuity.
Presume 50% of the entire pension is to be divided. If the COAP specifies that the alternate payee is entitled to 50% of the Participant's self only annuity, the alternate payee will be assigned 50% of the pension before being reduced by the cost of the former spouse survivor annuity; therefore, if the parties are to share the cost of the former spouse survivor annuity, the section of the COAP addressing the former spouse survivor annuity should specify that the cost shall be shared proportionally.
Again presume 50% of the entire pension is to be divided. If the COAP specifies that the alternate payee is entitled to 50% of the Participant's gross annuity, the alternate payee will be assigned 50% of the pension after being reduced by the cost of the former spouse survivor annuity; therefore, if the parties are to share the cost of the former spouse survivor annuity, the section of the COAP addressing the former spouse survivor annuity should specify that the alternate payee's share of the pension assigned earlier in the COAP shall not be reduced by the cost of the former spouse survivor annuity. This also holds true if the COAP specifies that the alternate payee is assigned 50% of the net annuity. Note however, that net annuity means the participant's entire benefit reduced by not only the cost of the former spouse survivor annuity, but also by any debt owed to the United States, and deductions for health benefits, life insurance, Medicare premiums and state and federal income tax withholding.
Potential Pitfalls And Important Facts
Note that if the alternate payee remarries before the alternate payee's age 55, the alternate payee loses the right to the former spouse survivor annuity, unlesss the alternate payee was married to the participant for at least 30 years. Further note that the assignment of a former spouse survivor annuity does not bear on any lump sum death benefits otherwise payable, nor does it bear on the child survivor annuity.
An alternate payee's share of the pension benefit stops at the death of the participant; therefore the former spouse survivor annuity is the only way to ensure a lifetime stream of income for the alternate payee. Note however, that no matter how well drafted the COAP is, there is a possibility that an alternate payee will not get a benefit, under CSRS. This happens if the parties divorce, the participant subsequently terminates civil service employment, and then dies without having commenced pension benefits. Hubbard v. Office of Personnel Management (247 F.3d 1236), (U.S. Ct. App. July 9, 2001).
The regulations for dividing FERS and CSRS by court order can be found in the Code of Federal Regulations at 5 C.F.R. 838. The main federal statute relating to survivor annuities under FERS and CSRS is in the U.S. Code at 5 U.S.C. 8341.
In summary, the determination of the amount and cost allocation of a former spouse's survivor annuity involves careful consideration of the terms of art unique to FERS and CSRS. Timing of an alternate payee's remarriage, and a participant's termination of service and commencement of benefits are important potential pitfalls of which to be conscious.
The next QDRO Corner Article will be the last installment in this series on survivor benefits, and will address Military and Railroad pensions.
Survivorship Considerations When Dividing State Of Michigan Pension Plans By Eligible Domestic Relations Order
Robert Treat, Esq.
Similar to public sector plans governed by the Employee Retirement Income Security Act (ERISA) and divisible by Qualified Domestic Relations Orders (QDROs), State of Michigan defined benefit pension plans, which are governed by Public Act 46 of 1991, MCL 38.1701-38.1711 (the EDRO Act) and divisible by Eligible Domestic Relations Orders (EDROs), provide for preretirement and postretirement survivor annuities. However, there is considerably less flexibility in specifying the amount of the survivor annuities payable to the former spouse.
In addition to an award of a portion of the basic accrued benefit, an EDRO can designate the employee's former spouse as the surviving spouse for a portion of the preretirement survivor annuity. This would provide an income stream to the former spouse-alternate payee if the plan participant died before benefits to the alternate payee commenced.
The postretirement survivor annuity provides an income to the alternate payee if the participant dies after benefits commence, and if the alternate payee's benefit is based on the participant's lifetime. If the alternate payee's benefit is based on the alternate payee's lifetime, the participant's death will not affect the alternate payee's continued right to receive his or her benefit, and the postretirement survivor annuity is not necessary.
How The Preretirement Survivor Annuity Operates In EDROs
The preretirement survivor annuity works the same for all four State of Michigan defined benefit pension plans. The EDRO can specify that if the participant predeceases the alternate payee, such alternate payee will be treated as the surviving spouse and receive a preretirement survivor annuity in the amount of the entire portion being shared by the participant and alternate payee, but no larger than the amount that would be payable to a survivor. This means the alternate payee may well receive more if the participant predeceases him or her before benefits commence, than the alternate payee's awarded portion of the pension. This is the only level of survivor benefit allowed, so an attempt to specify another amount will cause the EDRO to be rejected. If the alternate payee predeceases the participant before the alternate payee commences benefits the participant's benefit will be restored to its full amount.
How The Postretirement Survivor Annuity Operates In EDROs
The postretirement survivor annuity treated differently for the four State of Michigan pensions, which are the Michigan Judges Retirement System, the Michigan Public School Employees Retirement System, the Michigan State Employees' Retirement System, and the Michigan State Police Retirement System. The post retirement survivor annuity is not available for the Michigan State Police Retirement System because the only form of benefit available to alternate payees is a single life annuity ending upon the death of either the participant or the alternate payee. For the other three plans the postretirement survivor annuity operates according to the form of payment specified in the EDRO. For the Judges Retirement System the only form of benefit that provides for the postretirement survivor annuity is the 50% Joint Survivor Option. This means that one-half of the shared portion will be paid to the party who survives the other. If the alternate payee's share of the pension is 50%, the alternate payee's postretirement survivor annuity will be the same dollar amount. For the School Employees Retirement System and the State Employees Retirement System, the forms of benefit that provide for a postretirement survivor annuity are the 50%, 75% and 100% Joint Survivor Options. The specified percentage of the shared portion of the pension would be payable to the survivor. If the alternate payee predeceases the participant before benefits commence, the alternate payee's benefit will revert to the participant as if the Joint Survivor Option had not been elected.
Different Rules If The Participant Has Retired
Note that the above rules apply to EDROs, and EDROs can only issue when the participant has not yet retired. If the participant is already retired and commenced benefits the rules are different. The nomenclature changes. The Order is no longer called an EDRO. Rather, it is simply called a Domestic Relations Order (DRO). The retired employee is referred to as the retirant and the former spouse is referred to as just that, the former spouse.
In addition to different nomenclature, the survivorship rules are different. The preretirement survivor annuity no longer applies, since the participant has retired. If the alternate payee was married to the participant at the time of retirement, the alternate payee will remain as the sole surviving spouse unless the DRO removes the alternate payee as designated surviving spouse. If the former spouse is removed as designated surviving spouse, the DRO or Judgment of Divorce containing certain specific language may change a joint survivor option that was chosen at retirement to straight life . Note that the spouse who was married to the participant on the participant's retirement date can be removed as surviving spouse, but no new surviving spouse can be designated.
The participant may have chosen a straight life option upon retirement. If this is the case there is no postretirement survivor annuity available.
A Word About Municipal Defined Benefit Plans
Municipal defined benefit plans are also subject to the EDRO Act. Most municipal plans generally follow the state's example for EDROs and DROs with respect to survivor benefits.
The Municipal Employees' Retirement System (MERS), however, uses the 100%, 75% and 50% Joint Survivor Options differently. It applies the percentage to the alternate payee's share only, and not to the entire shared portion. For example, the 100% Joint Survivor Option would pay the alternate payee 100% of what the alternate payee received before the participant died, whereas the state plans would pay 100% of the entire shared portion.
Counties and cities that have defined benefit plans other than MERS generally follow the example set by the State of Michigan pension plans. Most counties have very similar EDRO and DRO requirements that differ slightly from the state's format and phraseology. Many cities also have similar requirements, which vary slightly from those of the counties and the state. In summary, the preretirement survivor annuity is available under state and municipal plans, but the amount is 100% of the portion of the pension being shared, and the state will not allow any other amount. The postretirement survivor annuity is available by electing a Joint Survivor Option, which is available in all plans except the State Police pension. The rules are different if the participant is already retired, and such rules should carefully be considered when negotiating the terms to be included in the judgment. MERS treats the various joint survivor percentages differently than other plans. Counties have similar requirements, as do cities, and the state, county, and city requirements vary slightly.
The next installment in this series of articles on survivorship considerations will address federal plans such as the Federal Employees Retirement System (FERS), the Civil Service Retirement System (CSRS), Military Retired Pay (military pensions) and Railroad pensions.
Survivorship Considerations When Dividing ERISA Defined Benefit Retirement Plans By Qualified Domestic Relations Order
Robert Treat, Esq.
Survivor benefits are easily dealt with for defined contribution plans such as IRC Section 401(k), 403(b) and 457 plans. The Qualified Domestic Relations Order (QDRO) need only specify that the alternate payee shall be the beneficiary for the amount awarded if the participant dies before the plan segregates the award for the alternate payee. For defined benefit plans, however, survivorship rights are the most difficult aspect of domestic relations orders that divide such plans. Under certain, limited circumstances there may not be a survivor benefit available. The amount of the survivor benefit can usually be specified in the QDRO. This article explains the availability and amount of survivor benefits for defined benefit plans under the Employee Retirement Income Security Act of 1974, as amended (ERISA). It is one in a series of articles addressing survivor benefit considerations upon divorce. Future articles will address survivor benefits of Michigan State and Municipal pensions, Federal Government pensions, Military pensions and Railroad pensions.
What survivor annuities are payable?
The relevant section of ERISA is 29 U.S.C. 1055. Section 1055 (a) states that plans must provide for Qualified Preretirement Survivor Annuities (QPSAs) and Qualified Joint Survivor Annuities (QJSAs) for surviving spouses of vested participants who die before the annuity starting date. The purpose of section 1055 is the financial security of surviving spouses, and its effect is that there will always be a benefit paid for the joint lives of the participant and surviving spouse, unless the survivor annuities are waived by the participant with the consent of the spouse.
When are the QPSA and QJSA payable under ERISA?
For QDRO purposes, the section 1055 requirements are deemed to have been fulfilled if the parties were married for one year, and a former spouse may be designated as the surviving spouse for the QPSA, the QJSA or both. In the absence of a QDRO, 29 U.S.C. § 1055(f) provides that the plan must pay the QPSA and QJSA to the current spouse if she or he was married to the participant for the one year ending on the earlier of the annuity starting date or the date of the participant's death. If the parties marry less than one year before the annuity starting date, the survivor annuities are still payable if the current spouse was married to the participant for a one year period ending on or before the participant's death. If there is no QDRO and the would be survivor does not meet the section 1055(f) marriage requirements, the provisions of the particular retirement plan will determine whether either survivor annuity is payable.
ERISA provides that an alternate payee under a QDRO may be a spouse, former spouse, child or other dependant, that the QDRO must be issued pursuant to a domestic relations matter, and its purpose must be for property, spousal support or child support. QDRO survivorship considerations, however, only apply to former spouses, and in some situations, spouses. A QDRO can designate a divorced spouse as the designated spouse for all or part of the QPSA, the QJSA or both.
Should the QDRO provide for the QPSA, the QJSA or both?
The method of division will determine whether you need the QPSA, the QJSA or both. The two methods of division are the "separate interest" approach and the "shared payment," also known as the "shared interest" approach.
Under the separate interest approach, the alternate payee's benefit is based on the alternate payee's lifetime, and once the alternate payee commences benefits, payments will continue for the alternate payee's lifetime; therefore the QJSA is not necessary under the separate interest approach. As explained below, the QPSA is usually still necessary. The separate interest approach may only be used if the benefit is not yet in pay status. While the separate interest approach has the appeal of not requiring the QJSA, which can be expensive , you may want to use the shared payment approach if you represent the alternate payee and are dividing certain plans. This is because some plans limit the division of ancillary benefits such as early retirement subsidies and/or post-retirement cost-of-living adjustments when the separate interest approach is used.
Under the shared payment approach, the alternate payee's benefit is based on the participant's lifetime, and payments of the entire accrued benefit end upon the death of the participant; therefore the QJSA is necessary. Another distinctive feature of the shared payment approach is that the alternate payee's benefit will revert to the participant if the alternate payee predeceases the participant either before or after benefits commence; whereas under the separate interest approach the benefit will only revert to the participant if the alternate payee predeceases the participant before benefits commence. Some plans will not allow the reversion at all under the separate interest approach. One other consideration is the possibility that when the QDRO provides for a QJSA for the marital portion of the pension, the plan will mandate that the entire pension be paid as a Joint Survivor option. This means there is the possibility that the portion of the QJSA not allocated to the alternate payee will be wasted if the participant does not remarry.
The QDRO should almost always provide for a QPSA, unless otherwise agreed. The exceptions are:
1) when the benefit is already in pay status (the preretirement period has passed, so no preretirement survivor annuity is necessary), and
2) when a particular plan assigns the alternate payee's benefit as a "totally segregated" interest.
This second exception only applies if the QDRO uses a separate interest approach, and the plan regards the alternate payee's separate interest as being totally segregated from the participant's benefit. Normally the QPSA will be necessary even when the separate interest approach is used, but if the plan treats the separate interest as a totally segregated benefit, the benefit will be paid to the alternate payee irrespective of when the participant dies. If the plan has adopted the totally segregated approach, the QDRO need only state that the death of the participant shall not affect the alternate payee's right to receive the alternate payee's benefit, and need not provide for a QPSA. In this scenario the totally segregated separate interest is deemed to be the QPSA. Simply put, the QPSA is always necessary unless the benefit is in pay status, or you are using the separate interest approach and the plan views a separate interest as a total segregation of the alternate payee's benefit, and the QJSA is only necessary when the QDRO uses the shared payment approach.
What should the QDRO say about the amount of the QPSA and/or the QJSA?
Once you have determined which survivor annuities to award in the QDRO, the issue becomes how much of the QPSA and/or QJSA the alternate payee should receive. Generally the alternate payee should receive that portion attributable to the period of the marriage between the participant and alternate payee. Thus, each surviving spouse would receive at least the portion of the survivor annuity attributable to the period of his or her marriage to the participant. Other amounts can be negotiated, however, and the amount can vary from the entire survivor annuity to none of it. Sometimes the parties will negotiate for the amount of the survivor annuity to be that amount the alternate payee would have received had the participant lived. If the QDRO is providing for both the QPSA and the QJSA, you will generally use the same language to define the amount of the QJSA as you use to define the amount of the QPSA, e.g. the amount attributable to the period of the marriage.
It is important to note that the amount of the survivor annuity will be based only on the basic accrued benefit, and early retirement subsidies and/or early retirement supplements are not a factor. Early retirement benefits are a distinctly separate, additional benefit. An alternate payee can receive early retirement benefits only if they are paid to the participant; therefore when the participant dies, early retirement benefits are no longer payable.
One common misconception about determining the amount of the survivor annuity is that the participant and alternate payee should each receive one half of the survivor annuity attributable to the marriage. If you represent the alternate payee, you should remind the opposition that the survivor benefit is meant for survivors, and the deceased participant does not need the survivor annuity. If the alternate payee only receives half of the survivor annuity attributable to the marriage, the remaining portion will go to the subsequent surviving spouse. This means the subsequent surviving spouse will receive the portion of the survivor annuity attributable to his or her own marriage to the participant, and also half of the survivor annuity attributable to the alternate payee spouse. Judgments that have this effect might say something akin to "Wife shall be treated as the surviving spouse for the pre and post retirement survivor annuities for that portion of Husband's benefit assigned to her." While open to interpretation, a strict reading of this clause yields the meaning that Wife's survivor annuity will be the survivor annuity on only one half of the marital portion. As previously stated, the alternate payee should generally be entitled to the portion of the survivor annuity attributable to the marital portion.
Pitfalls typically precipitated by delayed entry and submission of the QDRO
One common pitfall is that the form of benefit chosen at retirement is irrevocable; therefore if the participant chose a life only benefit, there is no survivor benefit payable. This is a problem for the alternate payee who outlives the participant. The problem is not solvable by the QDRO mechanism. Separate arrangements for life insurance may have to be made, and this can be a problem if the participant cannot qualify for life insurance coverage.
Another pitfall is that if a participant dies while single and actively employed, the normal form of benefit is typically a life only benefit, and you face not only the issue of submitting a QDRO after the participant dies, but also the likelihood that the plan will assert that no survivor benefit is payable because the participant was single at the date of death.
Yet another problem arises if the QDRO is not submitted to the plan before a "triggering event", and the participant has remarried. A QDRO that designates a former spouse as surviving spouse will control if the QDRO is received by the plan administrator before the participant dies, or remarries and retires (the triggering events). However, if the QDRO is not received by the plan before the "triggering event(s)", the current spouse might assert a competing claim, or the plan might reject the QDRO.
In summary, defined benefit plan survivor benefits are tricky and the above factors should be considered when preparing a judgment of divorce or QDRO. ERISA provides for mandatory payment of the survivor annuities under certain circumstances, but a QDRO will ensure that they are properly paid if the section 1055(f) requirements are not met or if there is a new spouse. The QPSA should generally be awarded unless the benefit is in pay status or a "totally segregated separate interest" is used. The QJSA is necessary when using the shared payment approach, which is the only method allowed when the participant has already commenced receipt of benefits. There are potential pitfalls if the QDRO is not completed before retirement, remarriage or death of the participant, but entering the QDRO concurrent with the judgment of divorce, or as soon as possible thereafter and immediately submitting it to the plan administrator can eliminate such pitfalls.
The Procedural and Substantive Aspects of Dividing Military Retired Pay by Court Order
Robert Treat, Esq.
One of the most common misconceptions about dividing Military Retired Pay is the presumption that the difference between a division of Military Retired Pay and a division of an Employee Retirement Income Security Act (ERISA) plan is merely one of form. Actually, some of the basic elements are quite different. The division of Military Retired Pay is, in many ways, simpler than the division of qualified ERISA plans, but there are substantive and procedural requirements that are both strictly adhered to, and distinctly different from ERISA plans. Because these requirements are different, they are frequently misunderstood or overlooked.
One common and potentially very costly mistake made with respect to division of Military Retired Pay is the failure of the parties to elect the Former Spouse as the beneficiary of the Survivor Benefit Plan (SBP). This must be done within the one-year period of the date of the Order awarding the Service Member's former spouse such survivor benefits, and there are no exceptions. If the Service Member dies, and the Former Spouse is not elected the beneficiary, the Former Spouse's payments will cease. To avoid this result, the Former Spouse should submit a Deemed SBP Election notice, in the form of a letter, together with a certified copy of the court order creating the right to the SBP, to the Department of Financial and Accounting Services (DFAS) in Cleveland, Ohio.
Other procedural pitfalls are the failure to submit the proper Department of Defense (DD) form, and the failure to send the Order and DD form within 90 days of certification by the court. DD FORM 2293 should be submitted concurrently with the Order to Divide Military Retired Pay to DFAS. The impact of these failures is much less severe than the failure to submit the SBP Election Notice, but they can delay and frustrate the parties and their counsel.
All of the following substantive factors should be taken into account in the settlement negotiations, particularly those that affect the Service Member's and the Former Spouse's eligibility for benefits.
Regarding the survivor benefit, failure to anticipate the effect of remarriage of the Former Spouse can yield an unexpected decrease in the Former Spouse's income. If the Former Spouse remarries before age fifty-five, SBP coverage automatically ends. The SBP coverage can be reinstated if the Former Spouse's subsequent marriage terminates for any reason. If a Former Spouse who is not informed of the "remarriage before age fifty-five rule" does in fact remarry before age fifty-five, and is still married when the Service Member predeceases the Former Spouse, the financial well-being of the Former Spouse can be compromised, and liability issues can develop.
The format of an Order to Divide Military Retired Pay, while addressing the same basic issues as a Qualified Domestic Relations Order (QDRO) for an ERISA plan, is different from a QDRO in several ways. First, Military Retired Pay is an entitlement, not a pension, so ERISA does not apply. Second, the Order is not a QDRO; rather it is a "Court Order to Divide Military Retired Pay" or "Qualifying Military Order" (QMO). Third, the body of law governing the form and substance of a QMO is the Uniformed Services Former Spouse Protection Act (USFSPA), 10 U.S.C. §1408. Using the legal citations that are used in a QDRO will cause the QMO to be rejected. This does not mean, however, that state law is irrelevant. For example, whether certain benefits are divisible, such as the Voluntary Separation Incentive (VSI) and the Special Separation Benefit (SSB), varies from state to state.
The QMO should address the SSB and VSI issues mentioned above. These are benefits that would be paid early, and in lieu of the normal Military Retired Pay. The Order should also address the possible reduction of benefits due to receipt of disability pay. The failure to address how the Former Spouse's benefit is affected by any waiver of Military Retired Pay due to receipt of disability pay can cause substantial reduction in the Former Spouse's benefit.
The Service Member's eligibility for Retired Pay and the Former Spouse's eligibility to receive a share of it are strictly adhered to, and are more difficult to satisfy than for ERISA plans. A Service Member must have at least twenty years of creditable military service to receive Retired Pay, and a Former Spouse must have been married to the Service Member for ten of those years. This is informally called the 10/10 rule. Nine years and 364 days are not enough. There are no exceptions. The court can still award a portion of the retired pay if the 10/10 rule has not been met, but DFAS will not honor a court order instructing it to pay the member's former spouse directly. Rather, the member will have to pay the former spouse, and this can affect the income tax aspect of the division.
Finally, the nomenclature used in QMOs is slightly different than that of ERISA plan orders. Where ERISA orders refer to participants, alternate payees, and accrued benefits, QMOs use the terms member, former spouse, and retired pay, respectively.
There are certain items that require close attention. In discovery, it should be verified that the Member is or will be eligible for Retired Pay and that the 10/10 rule is satisfied. Counsel should be clear on whether VSI, SSB and disability pay will be divided. The SBP election, if intended, should be done immediately after the divorce is final, and close attention should be paid to the timing of the submission of the Military Order and its accompanying DD Form 2293. The legal citations and nomenclature are different than those for a QDRO. For more on Military Retired Pay, you can visit the DFAS website at http://dfas.mil.
Future QDRO Corner articles may include Q & As, so if you have questions, please email them to Bob.Treat@qdroxpress.com, or fax them to (248) 223-0903.
Dividing Defined Contribution Retirement Plans By Qualified Domestic Relations Order (QDRO)
Robert Treat, Esq.
Retirement Plans are divided into two broad categories; defined contribution plans, such as IRC § 401(k), 403(b), and 457 plans, and defined benefit plans. Defined contribution plans have an account balance that is known at any given time. Defined benefit plans generally do not have an account balance, but will pay a monthly benefit that is determined when the participant retires. This article discusses the issues involved in dividing defined contribution plans pursuant to divorce or separate maintenance. The basic issues are: how to define the marital portion, treatment of earnings on the alternate payee's assigned amount, treatment of outstanding loans from the plan, and contributions made after the date of division but attributable to periods prior to such date. Also discussed are: considerations when assigning 100% of the plan, certain non-ERISA plans, and distribution rules.
The term martial portion is not self-explanatory. Commonly, the account balance on the date of marriage is subtracted from the account balance on the date of divorce, but there is the potential issue of appreciation on the premarital account balance. The case law and statutes tell us that generally, passive appreciation will not be divided unless pursuant to the needs test under MCL 552.23, but if the participant is actively involved in the management of the retirement fund, as in most defined contribution plans, the appreciation is not passive and would be divided. Frequently, the current record keeper will not have adequate records to access the account balance on the date of marriage, and in such cases the parties must supply the data or stipulate to a negotiated amount if the data cannot be obtained.
Earnings (gains and losses) attributable to the alternate payee's assigned amount are commonly applied to such amount, unless it is the intent for a flat dollar amount to be assigned to the alternate payee irrespective of fluctuations in the securities markets. The difference in the flat amount versus the earnings adjusted amount can sometimes be extremely large.
Outstanding loans as of the date of division, taken from the plan by the participant may be included in, or excluded from, the calculation of the amount to be divided. Including an outstanding loan will result in a larger amount to be divided and a larger award to the alternate payee. Excluding such a loan will have the opposite effect. A loan, while considered by a participant to be a negative number, is actually considered to be a positive number from the perspective of the plan administrator. This is because the administrator views the loan to the participant as a receivable, which is an asset, not a liability. Presuming the loan was taken during the marriage, one criterion for considering whether to include or exclude loans, is whether both parties benefited from the loan, or just the participant. If both parties benefited, and are to effectively share the debt, the loan should be excluded, because exclusion of the loan will mean a smaller amount to be divided (e.g. plan value $100,000 less loan of $20,000 = $80,000 to be divided). If only the participant benefited, the loan should be included (e.g. all $100,000 to be divided). Note that the inclusion or exclusion of the loan amount in the determination of the amount to be divided is the only way to apply the alternate payee's share of the debt. This is because loans from retirement plans are not assignable, and irrespective of inclusion or exclusion of the loan amount in the amount to be divided, it is the participant who must pay the loan back.
Contributions made to the plan after the date of division, but attributable to periods prior to the date of division are generally due to forfeitures or the timing of employer contributions. Forfeiture occurs when a participant has an interest in a plan that doesn't vest before the participant terminates employment. This forfeited interest is either used to reduce plan costs or it is divided up among all the remaining participants, depending on the terms of the plan. In a plan with only a few participants, the forfeited interest transferred to each remaining participant may be quite large, and if the intent is to divide all contributions attributable to the period of the marriage, the QDRO should provide for the assignment of such contributions. Contributions, other than forfeitures, made after the date of division, but attributable to periods prior to the date of division may also have been made by the plan. For example, the plan might make contributions only quarterly or annually. If the 2004 contribution isn't made until some time in 2005, the alternate payee should probably share in such amount if still married to the participant until December 31, 2004, and the QDRO should so specify.
When assigning 100% of a participant's plan to an alternate payee, it is important to remember that any outstanding loans may not be assigned, and the plan must keep enough assets in the plan to cover any outstanding loans. These retained assets are called loan assets. The QDRO must specify exclusion of the amount of any outstanding loans as of the date of division. If it does not, the plan administrator might reject the QDRO due to insufficient funds to pay the specified amount. For example, if the total plan value is $100,000 at the date of divorce, and there is an outstanding loan of $20,000 on such date, the plan will only be able to distribute $80,000. If the QDRO assigns 100% as of the date of divorce, without specifying exclusion of the loans, the plan administrator might interpret the QDRO as assigning $100,000, and reject the QDRO because there are only $80,000 available for immediate distribution. Most plans default to including loans.
Certain non-Employee Retirement Income Security Act (ERISA) plans are not obligated to honor QDROs, but still do. The term "Qualified Domestic Relations Order (QDRO)" is found only in ERISA, and applies only to ERISA governed plans. While IRC § 457 and 403(b) plans are not ERISA plans, they will usually honor QDROs if the correct Code section (457, 403(b), etc.) is cited and no reference to ERISA is cited. The same goes for "Church Plans." Federal employees have a "401(k) type" plan called the Thrift Savings Plan, which is divisible by a "QDRO type" Order, but it is referred to simply as a "Retirement Benefits Court Order," under 5 U.S.C. §§ 8435(D)(1) and (2), and 8467.
There are some 457 plans that will not honor a QDRO. The City of Detroit Deferred Compensation Plan, for example, is a 457 plan that will not honor a QDRO, and will under no circumstances assign a portion of the plan to an alternate payee. Under the Dept. of Treasury final regulations to IRC § 457, effective July 11, 2003, and applicable to plan years beginning after December 31, 2001, 457 plans may honor QDROs without losing their eligibility for tax deferred status. What this means is that 457 plans may honor QDROs, but they are not forced to. Most 457 plans do honor QDROs.
The distribution rules for defined contribution QDROs relate to timing and taxation. As to the timing of the distribution, plans will usually allow an immediate distribution to an alternate payee, and the alternate payee may roll the assigned amount to an IRA, take it in cash, or do some combination of IRA rollover and cash distribution. Some plans may allow, or force, an alternate payee to leave the funds in the plan. If the alternate payee is allowed to leave the funds in the plan, they will usually not be able to access the funds without penalty until their age 59 ½, once the election to defer distribution is made. Once in a while a plan will require the alternate to leave the funds in the defined contribution plan until the participant's earliest eligibility for retirement under the terms of the plan. Plans are within their rights under ERISA to so require, but the vast majority of defined contribution plans will allow an immediate distribution to the alternate payee.
Regarding the taxation of benefits, alternate payee spouses or former spouses are responsible for the income taxes on any distributions made to them pursuant to a QDRO. IRC § 402(e)(1)(A). In all other cases, the distribution from the plan is taxable to the participant, including distributions for child support. IRC § 402(a). As previously mentioned, an alternate payee who is allowed to take an immediate distribution, may take such distribution in cash. The plan will withhold 20% of any such distribution for federal income tax, but there is no 10% excise tax when an alternate payee takes a distribution from a qualified plan pursuant to a QDRO. IRC § 72(t)(2)(C). This can help an alternate payee who needs cash before they turn age 59 ½.
In summary, the vast majority of defined contribution plans are divisible by QDRO, or a "QDRO type" order. The treatment of premarital balances and the growth on such balances, earnings on the alternate payee's assigned amount, outstanding loans taken from the plan, contributions made to the plan after the date of division that are attributable to periods prior to the date of division, and the distribution rules as applied by the particular plan, should all be addressed in the QDRO. Of course, the judgment of divorce or separate maintenance should also address these issues, since the QDRO should reflect the judgment.
Defining the Term "Marital Portion," The Use of Coverture Fractions in Defined Benefit Plan QDROs
Robert Treat, Esq.
When dividing a defined benefit retirement plan by Qualified Domestic Relations Order (QDRO), there are two different ways to define the marital portion. Determining the amount that is "earned during the marriage is key to how the benefit is ultimately divided. There are two kinds of coverture, "accrued" and "prospective", also referred to as "frozen" and "true." Michigan courts accept both methods.
The difference between the two is the denominator of the coverture fraction. When using frozen coverture the fraction is the participant's credited service during the marriage, divided by the participant's credited service as of the date of divorce, whereas when using true coverture the numerator is the same, but the denominator is as of the date benefits commence. Notably, the true coverture fraction's denominator specifies a date some time in the future, hence the term "prospective." Because the true coverture fraction calls for a calculation at some time in the future, the date of division must also be such date, rather than the date of entry of the judgment of divorce.
The issue in deciding which type of coverture to use is whether or not the participant's service after the date of divorce should be a factor in the calculation of the alternate payee's benefit. The participant's attorney may object to true coverture on the theory that the alternate payee is benefiting from the participant's employment after the divorce. There are various counters to such argument. First, true coverture is the only way to build in any growth on the alternate payee's share in order to protect the alternate payee's share of the pension from inflation. Second, because the numerator is fixed at the amount of accruals during marriage, the alternate payee will be assigned a smaller piece of a bigger pie as time goes on, because the denominator grows as employment continues. Third, when the benefit is eventually paid, each half of the marital portion should be the same. And fourth is the 401(k) analogy, which asks "Would anyone expect an alternate payee, who was awarded part of the participant's 401(k), to wait ten years for the distribution, and not receive earnings on the awarded amount while waiting?" Consider the following example:
50% x years marital service / years service at retirement x benefit at retirement = .5 x 25.83 / 37 x $2,611.68 = $911.62 to alternate payee
50% x months marital service / months service at divorce x benefit at divorce = .5 x 25.83 / 27 x $1,611.68 = $770.92 to alternate payee
In the above example, the true coverture formula shows that the participant and alternate payee each receive $911.62, representing half of the marital portion at retirement. True coverture proponents say that if the alternate payee only gets $770.92, then the participant is getting $140.70 of the alternate payee's share of the marital portion.
However you define the marital portion, it should be with a coverture fraction. If your judgment of divorce states "The parties shall equally divide the portion of the defendant's pension that accrued from the date of marriage to the date of divorce." there may be a dispute about which type of coverture was intended, so the judgment or settlement agreement should always contain the language describing the fraction. If the QDRO says "Participant assigns 50% of the benefit that accrued between the date of marriage and the date of divorce." the plan administrator will reject the QDRO, or even worse, accept the QDRO and interpret it in a way the parties did not intend. Using the two defining dates without a coverture fraction is called the "subtraction method." Because of the way pension benefits are calculated and funded, this method applies no meaningful reasoning, mathematical or otherwise. Pension benefits have one accrued benefit, and at the date of divorce, the accrued benefit that would have been calculated on the date of marriage no longer exists. The participant's pension is based on the plan formula in effect on the date of retirement.
To provide for true coverture, there is specific language that should be used in the judgment of divorce or QDRO, particularly if you are providing for the alternate payee to be allowed to commence benefits at the participant's earliest eligibility for retirement. The language is "Defendant shall assign to Plaintiff 50% of the marital portion of Plaintiff's pension through XYZ corporation as of the earlier of the date the participant commences receipt of benefits or the date the alternate payee commences receipt of benefits. The marital portion shall be determined by a fraction, the numerator of which is the participant's credited service during the marriage, and the denominator of which is the participant's credited service as of the earlier of the date the participant commences receipt of benefits or the date the alternate payee commences receipt of benefits." The denominator specifies what the date of division is. If you are using frozen coverture the denominator is "…as of the date of divorce."
Of course there are ancillary benefits to consider. Typically a QDRO will provide that the amount of any early retirement supplement, early retirement subsidy, and cost of living adjustments shall be shared proportionately by the alternate payee. The coverture fraction used will also bear on the amount of the assignment of these ancillary benefits. Sometimes the amount of the survivor annuity is also tied to the coverture fraction.
What if the entire pension, as of the date of divorce, is marital? If the pension will not become payable until some time in the future, the failure to use a true coverture fraction will result in the alternate payee's benefit being frozen at the amount it was estimated to be at the time of divorce.
In conclusion, the author is of the opinion that true coverture is generally the fairest method to define the marital portion, but Michigan courts accept both methods. The judgment should contain whichever coverture fraction is intended, and the date of division should agree with the denominator. Ancillary benefits and sometimes survivor benefits are also affected by the coverture fraction. Consider using true coverture for pensions that accrued entirely during the marriage.
QDRO Ready Reference Guide for Negotiating and Judgment Drafting
Robert Treat, Esq.
The following guide covers the areas you need to consider when preparing to negotiate the terms of a Qualified Domestic Relations Order (QDRO), when reading the terms of the retirement plan division into the record, or when drafting a judgment of divorce or separate maintenance.
This guide covers both defined benefit and defined contribution retirement plans. It does not cover retirement plans that are not divisible by QDRO, but many of the topics discussed herein apply to EDROs. EDROs require a somewhat different format from QDROs, but the appropriate judgment language is similar to that contained herein. Federal Plans such as Military Retired Pay, the Civil Service Retirement System, and the Federal Employees Retirement System, have requirements that differ from this guide. There may be some public sector retirement plans that have provisions that are not addressed in this guide. Some retirement plans may treat topics discussed herein in a contrary manner.
I. Defined Benefit Plans
A. Define the term “Marital Portion.” It is not self-explanatory. You should use a coverture fraction.
True coverture has a numerator which is the employee’s credited service during the marriage and a denominator that is the employee’s credited service as of the date the participant commences receipt of benefits or the date the alternate payee commences benefits, if earlier. Note that the date of division should also be the date benefits commence. If the alternate payee is not allowed to commence benefits before the participant, the date of division and the alternate payee’s commencement date will both be the date the participant commences benefits. True Coverture can be used even if the entire pension, as of the date of divorce, is marital. Simply stating that the alternate payee is entitled to 50% of the pension accrued as of the date of divorce effectively freezes the alternate payee’s benefit, and you are therefore defaulting to frozen coverture, perhaps unintentionally. True coverture is the only way to ensure that the alternate payee’s and participant’s shares of the marital portion are the same when they are eventually paid. Judgment Language – “Plaintiff is entitled to 50% of the marital portion of the Defendant’s ABC pension. The marital portion shall be determined by a coverture fraction, the numerator of which is Defendant’s credited service that accrued during the marriage, and the denominator of which is Defendant’s credited service as of the date the Defendant commences receipt of benefits or the date the Plaintiff commences benefits, if earlier.”
Frozen Coverture has the same numerator as true coverture, but the denominator is the number of months or units of credited service as of a certain date, typically the date of divorce. Note that the date of division must be the same as the date used in the denominator. Judgment Language – “Plaintiff is entitled to 50% of the marital portion of Defendant’s ABC pension. The marital portion shall be determined by a coverture fraction, the numerator of which is Defendant’s credited service that accrued during the marriage, and the denominator of which is Defendant’s credited service as of the date of entry of this judgment of divorce.”
Common practice is to use Frozen Coverture, though this author believes True Coverture is usually appropriate.
B. Whose lifetime should the alternate payee’s benefit be based upon, and how does this affect survivor benefits?
Generally you can leave the issue open in your judgment of divorce, but this issue is tied to the issue of survivor benefits, and also to the issue of when the alternate payee may commence benefits.
Benefit based on the Alternate Payee’s lifetime (separate interest method of division)
a. A benefit based on the lifetime of the alternate payee will not need a post-retirement survivor annuity (qualified joint survivor annuity, or QJSA) associated with it. This means the rather high cost of such survivor annuity will, of course, not be charged to the benefit and both parties will receive a larger benefit than if a QJSA were necessary.
b. If the Alternate Payee’s benefit is based on the lifetime of the alternate payee, the benefit will not revert to the participant if the alternate payee predeceases the participant after the alternate payee’s benefits commence.
c. When the benefit is based on the lifetime of the alternate payee, the alternate payee generally may commence receipt of benefits any time after the participant’s earliest eligibility for retirement.
Alternate payee’s benefit based on the lifetime of the participant (shared payment method of division)
a. If the alternate payee’s benefit is based on the lifetime of the participant, the QJSA is necessary if the intent is to ensure a lifetime income for the alternate payee, because when the participant dies, the alternate payee’s benefit stops.
b. If the alternate payee’s benefit is based on the lifetime of the participant, the alternate payee’s benefit will revert to the participant if the alternate payee predeceases the participant after the alternate payee commences benefits (1).
c. If the benefit is based on the lifetime of the participant the alternate payee must generally wait to commence benefits until the participant commences benefits (2).
Benefits in pay status If the participant has already begun receipt of benefits, the benefit must be based on the lifetime of the participant.
Common practice is for the benefit to be based on the lifetime of the alternate payee if the pension is not yet in pay status. If the benefit is in pay status, the alternate payee’s benefit must be based on the lifetime of the participant. Judgment Language – This issue can be left open in the judgment, but not usually in the QDRO. An understanding of how the particular plan works is important. Plan provisions such as commencement of benefits at the earliest eligibility, cost-of-living adjustments, and early retirement benefits will often be allowed under only one of the forms of benefit (separate interest or shared payment) for a particular plan. This is one of the most important reasons to obtain a Summary Plan Description (SPD) and the company’s QDRO guidelines and sample QDRO. If the circumstances dictate negotiating the terms of the division without the benefit of a full working knowledge of the plan being divided, you should negotiate all the other items and include the appropriate Judgment Language for each of them, and leave open the issue of whose lifetime the benefit should be based upon.
C. Survivor Benefits
The post-retirement survivor annuity (QJSA) was discussed in § I. B, above. The language in § I. C. 3., below, should cover the QJSA.
A pre-retirement survivor annuity (Qualified Pre-retirement Survivor Annuity, or QPSA) is almost always necessary if you want to protect the alternate payee’s right to receive any benefit from the plan in the event the participant predeceases the alternate payee before the alternate payee commences benefits (3).The language in § I. C. 3. b., below, should cover the QPSA.
Normally the intent is to ensure that the alternate payee receives his or her share of the marital portion of the pension, language designating the alternate payee as surviving spouse for the survivor benefits attributable to the period of the marriage will normally be adequate. You may negotiate for a larger or smaller survivor benefit. Other common levels of survivor benefits are the “…entire… benefit” or “…an amount equal to what the alternate payee would have received had the participant lived and retired voluntarily.” This latter amount is the amount that would provide the same dollar amount to the alternate payee that the alternate payee would have received had the participant lived. Judgment Language – “Plaintiff shall be treated as the surviving spouse for all pre-retirement survivor benefits attributable to the period of the marriage, and also all post-retirement survivor benefits attributable to the period of the marriage unless Plaintiff’s benefit is based on Plaintiff’s lifetime.”
D. Early Retirement Benefits
Early Retirement Supplements and Subsidies are ancillary benefits that are separate and distinct from the basic accrued benefit. They can be very substantial, sometimes even exceeding the amount of the basic accrued benefit. Early retirement supplements are temporary payments that are designed to pay until a participant is eligible for social security. Not all plans provide for such benefits, but those that do typically pay supplements to eligible participants until age 62 or 65. Early retirement subsidies are generally payable from the early retirement date throughout the participant’s lifetime. Commonly, a pro-rata share of these benefits will be awarded to the alternate payee, since the amount payable is normally tied to the years of the participant’s service, at least some of which have been marital.
Early Retirement Windows, Early Retirement Incentives and other Early Retirement Benefits are also ancillary benefits separate and distinct from the basic accrued benefit. They are not necessarily tied to the years of the participant’s service. Argument can be made both ways, as to whether these benefits should be divided (4).
Common Practice is to award the alternate payee a proportionate share of early retirement subsidies, supplements, or sometimes both. All of the early retirement benefits listed above should be considered, or problems can arise later. For example, the participant might accept an early buyout incentive paid as part of the pension, and the judgment and QDRO are silent on the issue. The plan administrator has interpreted the QDRO in favor of one of the parties, and the other now wants to take whatever legal action is necessary to change the pending payment. Judgment Language – “Plaintiff is entitled to a prorata share of any early retirement benefits, including early retirement supplements, early retirement subsidies, early retirement windows, early retirement incentives and any other early retirement benefits paid to Defendant by the plan.”
Post-retirement cost-of-living adjustments are designed to protect the pension benefit from inflation. Typically a pro-rata share of these will be awarded to the alternate payee. Judgment Language – “Plaintiff is entitled to a prorata share of any post-retirement cost-of-living adjustments to Defendant by the plan.”
Application of MCL 552.101(5) For any divorce or separate maintenance action filed on or after September 1, 2006, if the judgment provides for the assignment of retirement benefits to the alternate payee, a proportionate share of all components of the reetirement plan (including all those discussed in Sections C and D above) shall be included in the assignment unless the judgment specificaly excludes one or more components. Contrast this with the result in actions filed prior to September 1, 2006, in which the Roth 6- Quade 7 - Gingrich 8 line of cases hold that the alternate payee is not entitled to a share of such plan components unless specifically awarded in the judgment or by stipulation of the parties.
E. As to the form of distribution the alternate payee will receive, a simple clause in the judgment stating that the alternate payee may receive the benefit in any one of the forms of distribution permissible under the plan will suffice. When the QDRO is drafted, the drafter should include language allowing any unusual forms of benefit, such as a lump sum. One common question regarding this issue is whether or not the form of distribution can negatively affect the participant’s benefit. Generally it cannot, because the participant’s benefit is reduced by the percentage of the award, and then, any actuarial reduction will be made to the alternate payee’s benefit. What can negatively affect the benefit of both parties is if the form of benefit is a benefit based on the lifetime of the participant and a QJSA is necessary. Unfortunately, the industry uses the terms “form of benefit” and “form of distribution” loosely, therefore, you should be sure to think of these issues in terms of whose lifetime should the benefit be based upon, and whether it is acceptable to both sides if a QJSA is provided to the alternate payee. Judgment Language – “Plaintiff shall be allowed any form of distribution permitted for alternate payees under the plan.”
F. Refund of Participant Contributions
One commonly overlooked aspect of defined benefit plans is a refund of participant contributions. Some plans allow participants to contribute to their pension. These companies may also allow participants to withdraw such contributions in the form of refunds. A QDRO that is silent on the issue may leave room for a participant to reduce the alternate payee’s award by getting a refund of their contributions. For example, a divorcing couple may be equally dividing a pension that was funded equally by the employer and the employee. If the judgment and the QDRO are silent on the issue of refunded contributions, the plan might honor the participant’s request for a refund of all participant contributions. Thus, the monthly benefit now has only half the funding it had before the refund, and the monthly benefit to each divorced spouse will only be half of what it could have been because the participant withdrew half the funding. Judgment Language – “Defendant shall not be allowed a refund of contributions.” or “Plaintiff shall receive a prorata share of any refund of contributions paid to Defendant.” This latter clause might be appropriate if current cash flow problems are indicated and the participant will soon be eligible for a refund, but would not be eligible to receive benefits otherwise.
II. Defined Contribution Plans
A. Marital Portion
Just as in defined benefit plans, the term marital portion is not self-explanatory. The common practice is to subtract the account balance on the date of marriage from the account balance on the date of divorce. Frequently, the current record keeper will not have adequate records to access the account balance on the date of marriage, and in such cases the parties must supply the data or stipulate to a negotiated amount. Judgment Language – “Plaintiff is entitled to 50% of the marital portion of Defendant’s 401(k) through ABC Corp. the marital portion is defined as the increase in the account value from the date of marriage to the date of divorce.5 The date of division shall be the date of entry of this judgment of divorce.”
B. Earnings (gains and losses) attributable to the alternate payee’s assigned amount are commonly applied to such amount, unless it is the intent for a certain amount to be assigned to the alternate payee irrespective of fluctuations in the securities markets. Either way the judgment should speak to the issue. The difference in the flat amount versus the earnings adjusted amount can sometimes be extremely large. Judgment Language – “The amount assigned to Plaintiff shall/shall not be adjusted by earnings (gains and losses) attributable thereto, from the date of division until the date Plaintiff’s funds are segregated into a separate account for Plaintiff.”
C. Outstanding loans as of the date of division, taken from the plan by the participant may be included in, or excluded from, the calculation of the amount to be divided. Including an outstanding loan will result in a larger amount to be divided and a larger award to the alternate payee. Excluding such a loan will have the opposite effect. A loan, while considered by a participant to be a negative number, is actually considered to be a positive number from the perspective of the plan administrator. This is because the administrator views the loan to the participant as a receivable, which is an asset, not a liability. This is why including it results a larger award. Judgment Language – “Any outstanding loan balances due to loans taken from the plan by the participant, as of the date of division, shall be included/excluded for purposes of calculating the amount to be divided.”
Forfeitures and other contributions made to the plan after the date of division, but attributable to periods prior to the date of division. This is a commonly overlooked aspect of defined contribution plans.
a. Forfeiture occurs when a participant has an interest in a plan that doesn’t vest before the participant terminates employment. This forfeited interest is either used to reduce plan costs or it is divided up among all the remaining participants. In a plan with only a few participants, the forfeited interest transferred to each remaining participant may be quite large.
b. Contributions, other than forfeitures, made after the date of division, but attributable to periods prior to the date of division may also have been made by the plan. For example, the plan might make contributions only quarterly or annually. If the 2004 contribution isn’t made until some time in 2005, the alternate payee should probably share in such amount if still married to the participant until December 31, 2004. Judgment Language – “Plaintiff will share proportionally in any contributions made to the plan on behalf of the participant, including forfeitures if applicable, which are made after the date of division but attributable to periods prior to the date of division.
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(1) No matter whose lifetime the benefit is based upon, the alternate payee’s benefit generally reverts to the participant if the alternate payee predeceases the participant before the alternate payee’s benefit commences.
(2) Some plans, Ford and GM for example, will allow the alternate payee to commence benefits at the participant’s earliest retirement age whether the benefit is based on the alternate payee’s lifetime or the participant’s lifetime.
(3) Some plans use a “totally segregated approach” if the alternate payee’s benefit is based on the alternate payee’s lifetime. Under the totally segregated approach, no QPSA language is necessary in the QDRO because the plan will pay the benefit to the alternate payee irrespective of when the participant dies. Effectively, the alternate payee’s benefit is deemed to be the QPSA. The other instance in which QPSA language is not necessary in the QDRO is when the pension is already in pay status.
(4) Participant’s counsel might argue that the benefits: 1) did not accrue during the marriage, 2) were not funded by the plan during the marriage, and 3) represent replacement wages for a termination that is not truly desired. Alternate Payee’s counsel might argue that the benefits: 1) should be divided because a properly drafted QDRO uses true coverture, which divides the pension as of the date of retirement, 2) are generally offered to employees with many years of service, such years being at least partially during the marriage, 3) are a form of early retirement subsidy, which is normally based on the years of service, 4) are paid as part of the plan which the parties are agreeing to divide, and not as part of a severance package, and 5) should be divided because if the participant did not accept the early retirement offer she or he would continue to work, and a properly drafted QDRO using true coverture would take into account those additional years of service.
(5)Regarding the appreciation of the premarital balance, the parties may negotiate/stipulate to a certain amount to be excluded from division, but see McNamara v. Horner, 249 Mich. App. 177 (2002), which held that commingling the premarital balance and the appreciation thereon, with marital contributions and the appreciation thereon, made all the appreciation marital. The premarital and marital amounts were so commingled that the premarital appreciation could not be separated from the marital appreciation.
(6) Roth v. Roth, 201 Mich App 563 (1993). To be assigned in the QDRO, survivor benefits must be awarded in the judgment.
(7) Quade v. Quade, 238 Mich App 222 (1999). To be assigned in the QDRO, early retirement benefits must be awarded in the judgment.
(8) Gingrich v. Vanderwerp, Michigan Court of Appeals Case No. 226039, 12/3/02. To be assigned in the QDRO, post-retirement cost-of-living adjustments must be awarded in the judgment.
Employer Provider QDRO Forms Should be Used as Guides, Not as Fill In the Blank Forms
Robert Treat, Esq.
A proper QDRO form would be accompanied by a detailed explanation of all the divisible benefits under the plan and the various combinations of such benefits. A form that does this is so rare as to be nonexistent. Even the few companies that have tried to provide such a quality form leave certain benefits out and lack the language necessary to ensure the proper division of benefits. But the forms generally do provide hints as to how the plan administrator will interpret a QDRO, and they also contain certain words or clauses that the plan administrator will accept.
Employer provided QDRO forms have the deceptive appeal of being less expensive than thorough research and thoughtful drafting. If, when the benefits are paid, one of the parties realizes that the QDRO did not afford them the rights intended, the costs, in attorney fees and the research and proper drafting that should have been done in the first place, will ultimately be much higher.
These forms also have the deceptive appeal of being simple to prepare. Most QDRO forms are simple; too simple. They leave out things such as treatment of plan loans, forfeiture of unvested benefits, prohibition of participant refunds, recalculation of benefits if the parties commence benefits at different times, adequate choices for the amount of survivor benefits, and different ways to define "marital portion." Sometimes they even leave out basic benefits such as cost-of-living adjustments, early retirement benefits, and gains and losses.
Perhaps the most glaring example of the pitfalls of using QDRO forms is the fairly recent development of a website where the parties can fill in the blanks online. Of course, most parties understand very little about QDROs, and the website's explanations are minimal. The program automatically lists the alternate payee as the plaintiff, the language choices are limited, and the coordination of benefits is ignored except for a reference to a separate guideline book, to which there is a link. For one local company, this separate book touches on most of the issues, but contains a sample QDRO which contradicts its own guidelines with regard to eligibility for commencement of benefits. Notably, and despite its very serious problems, the guidelines and models provided on this site are among the better guidelines and models available. The biggest problem with the site is that it is designed as a means to produce a QDRO, rather than as a guide.
Employers cannot be expected to offer QDRO forms to suit every case, and even those with well organized (though incomplete) decision trees will typically contain a disclaimer stating that the form is intended as a guide and will not be accurate for every QDRO. The disclaimer will frequently state that the plan's only interest is making certain that the QDRO meets the requirements of ERISA, the Code, and the Plan document. Indeed, the main purpose in offering a form is to make the plan administrator's job easy.
Plans are under no obligation to provide these forms. Under ERISA the plan is obligated to review and approve or reject any QDRO they receive as well as to provide QDRO guidelines and the data necessary to prepare the QDRO.
Among various other obligations not related to using a company provided form is the obligation to explain why any particular QDRO is not acceptable. Note that some plans will attempt to reject a QDRO because it does not follow their form closely enough. This directly conflicts with the Department of Labor's position, which states: "Plan administrators are required to honor any domestic relations order that satisfies the requirements to be a QDRO. In the view of the department, a plan may not condition its determinations of QDRO status on the use of any particular form." Department of Labor publication "QDROs...The Division of Pensions Through Qualified Domestic Relations Orders," question 2-7.
The vast majority of model QDRO forms lack adequate boilerplate. Retention of jurisdiction, continuation of jurisdiction, overpayments, IRC Section 415 limitations, constructive receipt, and plan termination procedures are frequently missing from the forms.
Perhaps most importantly, model QDROs often limit the language choices, and are usually very restrictive in their methodology. This can effectively contradict the terms of the property settlement and judgment if the QDRO form is followed. For example, post-retirement cost-of-living adjustments may have been awarded to the alternate payee, and the plan may provide for this benefit, but if it is not in the form, and the form is used, the alternate payee will not receive a share of this benefit. Plans are under no obligation to include all the benefits the plan offers in the QDRO form.
It should be noted that if certain conditions are present, the use of a company provided QDRO form dividing a defined contribution plan can yield the desired result, but it is not recommended because the conditions are rarely, if ever, all present. The preparer would still need to have a solid understanding of the plan, and the form would need to address gains and losses, loans, contributions made to the plan after the date of division but attributable to periods prior to the date of division, and have adequate boilerplate provisions.
In conclusion, it is not recommended that a QDRO form ever be used to divide a defined benefit plan, and almost never for a defined contribution plan. Plan administrators are not to be faulted for attempting to defray QDRO processing costs by providing a model QDRO that is intended to assist parties in the division of a retirement plan, but the model QDRO should only be used as a guide that contains clues as to the mechanics of the plan and the coordination of benefits. Using the model QDRO is the path of least resistance, but the perceived benefits of simplicity, expedited processing and lower costs, are likely be outweighed by the complexities, protracted processing and higher costs of trying to correct an inadequate QDRO when its defects are discovered upon payment of benefits. Not all model QDROs are equal. Some omit even basic benefits, while some attempt to be quite comprehensive. Almost none address all the issues that need to be in a given QDRO. There is no substitute for thorough research and thoughtful drafting.
What is a QDRO, Anyway?
Robert Treat, Esq.