Dividing Pensions in Divorce

Jacqueline Roessler
Originally prepared for the 2006 Upper Michigan Legal Institute

I. Introduction:

Most malpractice attorneys would agree that one of the largest areas of claims today involves Qualified Domestic Relations Orders (QDRO's for short) being handled poorly by attorneys both during and after the divorce process. All across the country, attorneys are being taken to court in post-judgment matters for not properly addressing the division of retirement benefits, lack of follow through and most importantly, improper Discovery and education of the client while the case was pending.

This presentation will shed some light on what can be called the key "before, during and after" must-do's as they relate to QDRO's. There will also be a brief review of basic QDRO and pension information to make sure all attendees have the necessary background information.

The key to managing the "before" issues lies in proper, early and thorough Discovery. These materials will include a detailed discussion of how to conduct pension Discovery as well as how to interpret the information received. The "during" issues consider how to negotiate clients' pension rights and understanding when to involve pension experts. Lastly, the "after" issues section will address how attorneys can protect themselves from post-decree malpractice traps.

II. Background Information

A. Retirement Plans: An Overview

For purposes of simplification, let's assume that there are three basic types of retirement plans; qualified, non-qualified and tax advantaged.

Qualified plans are those that are covered by ERISA (the Employee Retirement Income Security Act of 1974, as amended) and receive special tax-qualified treatment. They must abide by certain rules and regulations set forth by ERISA and the IRS Code. For example, in order to remain "qualified", the plan administrator must follow requirements in terms of funding the plan, anti-discrimination rules (i.e. not putting in 5 times as much money for your favorite executives), and tax reporting. Depending on the type of plan set up, employees (and/or employers) put money away for the employee (plan "participant") and those funds are earmarked for retirement. Some examples of qualified plans are 401k's, certain 403b's, 457 plans, profit sharing plans and qualified defined benefit pension plans.

A non-qualified plan does not comply with ERISA regulations. Funds set aside in non-qualified plans are still ear-marked for retirement; however, they often don't receive the same protection and special tax treatment as funds in a qualified plan. Examples of non-qualified plans include the State of Michigan plans, Civil Service, Military and Railroad Board Plans. In addition, corporate employers will sometimes set up non-qualified plans that only benefit highly paid individuals. For example, suppose employer XYZ wants to retain certain employees but they are already fully funded in their qualified plan benefits. XYZ may choose to set up a non-qualified deferred compensation plan as a special incentive for those employees to stay with the firm. These types of plans, again, are not covered by ERISA nor are the funds guaranteed to be paid to the employees.

The third basic type of plan is a tax advantaged plan. These are not generally sponsored by an employer, however, the funds do grow income tax deferred until retirement. Examples include regular IRA's, Roth IRA's, SEP IRA's and non-qualified annuities.

It is extremely important to keep in mind that only qualified plans are divisible via a Qualified Domestic Relations Order (QDRO). In other words, you may (or may not) be able to divide the assets in a non-qualified plan with a different instrument, but attorneys should expect that a QDRO will not be acceptable and that the assets may not be divisible at all. This is a common mistake made by attorneys. They assume that plan assets are divisible and often don't find out until the judgment has been finalized that certain plan assets are not going to be divisible. A tax-advantaged plan typically can be divided as a non-taxable event; however, a QDRO is not necessary for the division.

The scope of these materials will cover qualified plan division pursuant to a divorce and not the division of non-qualified or tax-advantaged assets. However, it is important to note that these other types of retirement plans exist (in large numbers) and that an expert's opinion should be obtained early on in the case to determine what (if any) pitfalls may surround their division.

B. Qualified Plans and Divorce: Historical perspective

Prior to 1984 and the implementation of the Retirement Equity Act, which amended ERISA, if a plan assigned away an interest in a qualified plan from one person to another, this was viewed as a violation of ERISA's "anti-alienation" clauses and disqualified the plan for tax purposes. In other words, before 1984, if Acme Widgets allowed Joe Smith to transfer to his ex-wife a portion of his 401k plan to her, pursuant to his divorce, the entire plan would become disqualified. What this means, in plain English is that all plan participants (not just Joe) would receive plan contributions and earnings back and would owe taxes and penalties on it.

As can be easily imagined, ERISA's anti-alienation clause created a tremendous problem for divorcing spouses and their attorneys. Additionally, the IRS, the Department of Labor and each individual State had their own opinion as to whether or not non-divisible retirement assets should actually be included as marital property in a divorce. Then, in 1984, the Retirement Equity Act amended ERISA to allow for transfer of qualified plan assets from the employee (or plan participant) to an alternate payee pursuant to a domestic relations matter. However, the only document acceptable for effectuating the transfer would be a Qualified Domestic Relations Order, which of course needed to follow some very specific and strict rules in order for the plan to retain it's qualified status.

One of the reasons for all of the confusion regarding QDRO's, therefore, is that they simply haven't been in existence for a long period of time. After all, twenty years is a relatively short time for judges, attorneys and even plan administrators to get acclimated to the new rules and procedures.

C. What is a QDRO?

A QDRO can be simply defined as a domestic relations order which creates or recognizes an alternate payee's rights to receive benefits payable to a participant under a specific retirement plan. It is technically only a DRO (Domestic Relations Order) until it is approved by the Plan administrator (not the state court judge). ERISA grants the plan administrator therefore the final say as to whether a DRO is qualified and thus gives them great authority in a divorce matter. Their role cannot and should not be underestimated by the attorneys involved in the case.

As to who qualifies as an alternate payee, it must be a spouse, former spouse, child or dependant of the participant. Therefore, it can be inferred that as long as a case is pending, a QDRO can be entered and approved (and the funds distributed) even if the parties are still married. If the purpose of the QDRO is to pay for child support in arrears, the child would be the alternate payee and any taxes owed.

In order to be a QDRO, on a very basic level, it must be signed by a State court judge (thus mandating the involvement of the State) and it must be pursuant to marital property rights, alimony or child support. Additionally, the QDRO must state which of the three purposes the QDRO is being used for or it will likely get rejected.

Of course, there are a myriad of other requirements that a QDRO must incorporate, some of them boilerplate and others are more in-depth. Boilerplate items include the mandatory requirement for what is often called a "savings clause" in which it is enumerated what the QDRO is not attempting to do. More in-depth requirements can be plan specific and will be discussed further in a later section of this manuscript.

III. Defined Contribution Plans:

A. What is a Defined Contribution Plan?

For simplification purposes, there are two general types of qualified plans. There are actually hybrid plans as well, but that goes beyond the scope of this presentation. The first is a defined contribution plan and the second is a defined benefit plan.

Let's review defined contribution plan aspects and intricacies first as they are easier to understand. However, a word of caution; there are some fairly important issues to be aware of when attempting to divide these plans that are often underestimated by even the most experienced family law attorneys. For that reason, the division of defined contribution plans is often a malpractice trap.

In a defined contribution plan, the employee and sometimes the employer, put money away on a pre-tax (and sometimes post-tax) basis into an investment account that will grow income tax deferred until retirement. The value of the account will fluctuate based on the investment performance of the underlying assets, be they mutual funds, stocks, bonds or cash. The management of the account is generally up to the employee. There is generally a 10% penalty assessed for withdrawal of these plan assets when the employee is younger than 59.

Some examples of a defined contribution plan are 401k's, 457's and 403b's. Remember, we are only dealing with qualified plans, but there are other non-qualified (and often non-divisible) defined contribution plans. Again, although the division of these types of plans seems fairly straightforward, the savvy attorney will anticipate potential pitfalls and attempt to avoid them.

B. IRS Regulation 72(t)2(c):

One of the most interesting aspects of dividing defined contribution plans pursuant to a divorce is the little known exception to the 10% penalty that normally applies to pre-59 _ distributions. Pursuant to IRS Regulation 72t2c, a distribution to an alternate payee, pursuant to a QDRO will avoid payment of the 10% penalty. Ordinary income taxes will still be assessed to the alternate payee, at his or her highest marginal tax rate, however, the 10% penalty will not apply.

This presents a unique opportunity for spouses to pay off debt, free up cash in a non-liquid estate or even pay legal fees. Let's review an example:

Suppose that Mary is to receive $50,000 from her husband's 401k pursuant to their divorce decree. She needs $20,000 in cash and wishes to roll over the remainder ($30,000) in a tax free transaction to her IRA. The $20,000 will automatically be reduced by 20% for estimated taxes but she will receive the $16,000 without being assessed a 10% penalty for early withdrawal. Once the $30,000 is rolled over into an IRA, she no longer has the option of taking a penalty-free distribution. Of course, Mary should consult with a tax advisor before she makes any decisions as she may end up owing more (or less) than the $4,000 with-held for taxes.

C. Pitfalls: Loan Balances, Vesting, Delayed Plan Contributions, etc.:

The first potential pitfall is addressing whether or not loan balances will be included or excluded in the divisible amount when calculating the alternate payee's share.

As an example, let's suppose that the participant has $100,000 in her 401k. However, there is a $10,000 loan balance, thereby reducing the account value to $90,000. Her spouse says the $10,000 loan was for the wife's legal fees (or maybe a vacation with her new boyfriend) and therefore, he doesn't believe he should be responsible for half. He would therefore like the loan excluded from the calculation, which would give him $50,000, instead of $45,000.

She, on the other hands says that the loan was used to pay off marital debt and it should be included in the division, leaving each of them with $45,000. Either way, the important point is that the attorneys need to determine if there is a loan balance and the inclusion of it should be discussed between the parties - especially if you represent the plan participant.

Vesting must also be considered when dividing a defined contribution plan. The vested amount is the amount an employee can take with them when they leave the company. Employees are always 100% vested in their own contributions and the earnings they generate. Suppose that the employee husband has been with his company for 3 years. His employer contributes money to his 401k, but he's not fully vested in those contributions until he's been with the firm for 5 years. The real question is, are we dividing the entire account balance or just the vested account balance?

Another issue that needs to be considered is delayed plan contributions. Suppose that at Mom and Pop's diner, they make an annual lump sum contribution to all employee's 401k's on December 31st and the divorce is final on November 30th. Does that delayed contribution count in the divisible amount or is it excluded? A better question is, "Does the attorney even know that there may be a delayed contribution"? If you represent the alternate payee, you need to find out.

Another often overlooked issue is potential surrender charges. Often times, a school employee will have a qualified 403b plan that is invested inside of an annuity contract. Generally, annuity contracts have surrender charges to get out of them, depending on how long the money has been there. This needs to be addressed in the context of a divorce. Who pays the surrender charge or is it going to be shared? Does anyone even know if there is a surrender charge? Again, attorneys need to do their homework during the Discovery process and find out.

IV. Defined Benefit Plans:

A. What is a Defined Benefit Plan?:

A defined benefit (pension) plan is the type of plan where the employer promises the employee "X" dollars per month for the rest of their life in retirement. In general, the longer they stay at the company and the higher their salary, the larger the monthly payment. Qualified pension plan benefits are guaranteed by the Pension Benefit Guarantee Corporation (PBGC) up to a set monthly dollar amount ($3,971.59 as a Single Life annuity for those age 65 and older for plans terminating in 2006). Some companies allow their employees to contribute to the pension plans in order to increase the monthly payments. It is extremely important to note that the present value of the employee's contributions is NOT the actuarial equivalent of the pension's present value. It is generally worth much more than that and should be evaluated by a pension expert.

There are several ways to address pensions in the context of divorce cases. The first is to place an actuarial value on the pension and assign it to one party with an offset to the other. The second is deferred division, which happens via a QDRO. The third is, we can't decide today, so we'll figure it out later. This doesn't often happen and in my opinion, should never happen.

B. Division via QDRO: Separate Interest vs. Shared Benefit:

Let's explore the Deferred Division, or QDRO approach. There are two basic ways a pension can be divided via a QDRO, although, again, there are plan-specific exceptions. The first is the separate interest approach.

In this approach, the alternate payee controls the timing and receipt of his or her benefits. In other words, the alternate payee may initiate payments upon the participant's earliest retirement date whether the participant is in pay status or not. Payments are generally based on the alternate payee's life expectancy and once begun will not cease, even upon the subsequent death of the participant. It's important to keep in mind that even in this method of division, pre-retirement survivor benefits must be preserved to protect the alternate payee's interest in the plan. It is often possible for the alternate payee to name a subsequent beneficiary to their benefits upon their death.

Let's compare and contrast with the other method; the shared benefit approach. In this approach of division, the alternate payee may not commence benefits until the participant is in pay status and benefits will be based on the joint life of the parties. Both pre and post retirement survivor benefits must be set aside for the alternate payee in order that payments can continue beyond the death of the participant. Upon the death of the alternate payee, there is an automatic reversion of benefits to the participant, either pre or post-retirement. It's important to note that if the participant is already retired, this is the only option available to the parties.

Why is it important to know the different division methods when negotiating pension divisions in divorce cases? If you represent the alternate payee, he or she may want to access the benefits at the earliest possible date and be very surprised if they can't. Alternatively, the participant may feel strongly that their ex-spouse not touch a penny of their retirement until they actually retire! Again, the participant may assume that upon his/her death, the benefits assigned to the alternate payee may revert to him/her. Any of these issues could present an unpleasant surprise that leads to a post-judgment lawsuit. The important thing to remember, again, is that it's imperative that these issues be discussed, agreed upon and written in the judgment of divorce so that it's perfectly clear what will and will not happen in the future.

V. Dealing with the Plan

A. The Importance of Discovery:

For every case that involves retirement plans, attorneys must do their homework and conduct very thorough Discovery early in the case. It's not enough to ask the other attorney to supply retirement plan information. Even in the most amicable and open divorce, the participant may not know all the benefits they have or how they can be divided. It's imperative that subpoena's and discovery request letters be sent to the employer directly.

In the appendix of these materials, I've provided you with a discovery letter that should be presented to the employee to sign and then submitted to the employer shortly after the case is filed. It's quite thorough and comprehensive, however, let's review some of the salient points dealing with defined benefit plans.

The first deals with getting a pension benefit estimate. If you request the benefit estimate from the employer and don't specify how you want it quoted, you'll likely not receive important information. For example, let's suppose that Jane Doe with 23 years of service under the plan is eligible for $1,000 per month at age 62. However, upon attainment of 25 years under the plan, she is eligible for $2,000 per month at age 55. Most plans will only supply the exact information you request. This could be a serious a malpractice trap if Jane is buying out John's interest in her pension?

Let's suppose that Jane is also eligible for an early retirement subsidy that's nearly as much per month as her entire pension benefit and will drop off at her age 62. Should that be included in the amount awarded to John? If you represent Jane, the answer might be no, but John sure wants a share of that. The point again, is, the inclusion of an early retirement subsidy should be negotiated, not necessarily a given. Even more importantly, the attorneys need to determine how much it is per month before they spend thousands of client dollars arguing over what could be a small benefit or a very large one.

It's also important to determine what are the benefit election options? Are there other options in addition to the separate interest and the shared benefit? Does the plan not allow for separate interest or shared benefit (even though they are technically required to by the Department of Labor QDRO guidelines). Again, this is very important to know up front before you get the wrong language in your judgment of divorce.

Another important question: Is the participant retired and if so how did he/she elect their benefits at retirement? It's usually an irrevocable choice for example if they named their spouse as survivor. However, sometimes, the plan allows for a change with a QDRO.

Again, it cannot be stressed enough how important Discovery is in the QDRO process. Very often the QDRO preparer is brought in post-decree with no specific plan information and very little guidance in the settlement agreement as to the parties' intentions. For your assistance, I've also included in the appendix an employee authorization form, and initial letter to the Plan administrator.

You can be well assured that when the response comes back from the employer it will either have missing information or partial information, regardless of what you requested. It will probably also have information that you don't know how to interpret. This is the time to bring in your expert to make sure you've obtained everything you need and to explain the information provided. For example, you might receive all the information required on the participant's qualified plans, but they might have overlooked a $500,000 non-qualified deferred compensation account.

B. Entry of the QDRO:

Assuming you have all the information you need to draft the Order, is there anything you need to know when dealing with the plan as it relates to entry of the QDRO? Remember, the final arbiter of whether or not it is a Qualified Domestic Relations Order (versus a domestic relations order) is the Plan. In this author's opinion, the best case scenario is for the QDRO to be entered with the Court simultaneously with the Judgment of Divorce.

Most plans will have a QDRO model that they'd like you to use. It's recommended that you look at the model during the Discovery process for insight into what the plan is looking for, however, it's not advisable to use it. In fact, the model usually doesn't benefit the participant or the alternate payee, but rather it actually benefits the plan. It's easier and less expensive for the plan to review cookie cutter orders instead of actually having skilled employees read individualized QDRO's. We've even seen models that benefit the Alternate Payee at the expense of the Participant. Each QDRO you prepare or review for a client should be tailored to the case at hand and the specific plan you are dealing with.

Plans are allowed to charge a fee for reviewing and administering QDRO's now (they didn't used to be able to charge a fee). It makes sense to determine the fee in advance and discuss it with your clients who are probably already going to be surprised they need to pay a QDRO preparation fee.

Keep in mind that timing for entry of the QDRO is critical. Once the participant has retired or re-married certain options that you were counting on for the alternate payee may no longer be available. Even more important is entry prior to the death of the participant. Remember, the only document that can assign benefits to an alternate payee is a QDRO. The Judgment of Divorce is not sufficient. If the QDRO isn't entered and approved prior to the death of the participant, you can assume that the alternate payee will receive nothing.

Once the QDRO arrives at the plan's front door, it can sit on someone's desk for as long as they deem reasonable before they make a decision. That could be 2 weeks, 6 months or a year. There is no time limit unless the participant is retired and then they have 18 months to make a decision. It's a good idea to tell your clients of this timing issue so they know not to expect a distribution 2 weeks post-decree.

Lastly, when dealing with the Plan, make sure that the plan's interpretation letter is read and complies with the parties' agreement. This is an often over-looked last step that must be taken. Even if the QDRO is perfectly prepared, if the plan interprets it wrong, your client could be out of luck. Again, involve your expert to review the Interpretation Letter.

VI. Avoiding Common Malpractice Traps

The last part of this presentation will cover ways to avoid malpractice. Again, the importance of Discovery cannot be stressed enough. Second, all the terms of the QDRO that will be important for your client should be discussed and negotiated, including survivor benefits, when benefits will be received and any ancillary or "extra" benefits the plan may provide. The more information your client has, the more secure they'll feel about their settlement. Additionally, current Michigan Case law indicates that whatever is not in the Judgment of Divorce does is not allowed to be in the QDRO. Although there is legislation pending in Michigan that would change this, it makes sense to assume that current case law will stand as is.

It's very important therefore, that the specific terms of the QDRO be incorporated in the Judgment of Divorce. It is not enough to say that wife gets half the pension and all the "bells and whistles". I've provided in your materials what could be considered "good language" and "bad language". I would encourage you to review it when you sit down to write the language for your cases. Bad language generally includes being vague, non-detailed and using incorrect terminology. Again, this is where your expert should be of help. Use them to tailor the language for your specific case.

The plan must send an Interpretation letter. If you don't receive one, call and ask for it. It's essential that your QDRO preparer compare the letter against the QDRO to make sure they're in agreement. If they're not, the plan may accept a clarification letter or you may need to submit an amended QDRO.

It's also recommended that the attorney review the terms of the QDRO with the client (and the expert if necessary) and have them sign a form stating that they understand the terms. I've also included a form letter in your materials for this purpose. Again, it's good practice to review the QDRO with the client and may serve as valuable protection down the line.

Lastly, do not expect ex-spouses to cooperate with each other post-decree. Protect yourself with Judgment language that says what will happen if there is no cooperation. If the wife is supposed to provide account statements to equalize her retirement accounts within 30 days, what happens if she doesn't? What happens if husband removes wife's name as beneficiary on his 401k prior to entry of the QDRO and he dies in the interim? It's important to take the case out to the worst possible resolution in your mind when drafting the judgment and prepare accordingly.

VII: Summary

In summary, prior to settlement, place a strong emphasis on Discovery. Send out subpoenas and requests for information and carefully read all information received. Any portion that isn't clear or seems incomplete should be reviewed with the plan or a QDRO expert. Next, while the case is being negotiated, involve experts early to help you interpret, to educate yourself and your client and to assist with drafting judgment language. After the case is completed, ensure entry of the QDRO as quickly as possible, without sacrificing the integrity of the document. Finally, thorough follow-up is a must. This is not one of those areas that you can close the book on and consider "case-closed" until you have an interpretation letter in your hand that agrees with your QDRO.

 

 

APPENDIX A:
SAMPLE EMPLOYEE AUTHORIZATION FORM

I ___________________, authorize ____________________________ to provide Attorney __________________ along with his/her associates with any and all information they may request or require concerning my retirement benefits (both qualified and non-qualified), other employment benefits, employment history (including dates of employment and salary history), COBRA continuation coverage, stock option agreements, signing contracts and bonus and other incentive compensation plans.

This authorization will become invalid 365 days within receipt of this request.

To facilitate handling this matter, I authorize you to reveal this information by phone, letter or fax to the above-noted authorized agents. In addition, I ask that you honor faxed transmissions of this authorization form or copies thereof, recognizing that the original will be forwarded, if requested for your records.

If there are any questions regarding this authorization, please contact me at:

__________________________________________
Employee's Signature

__________________________________________
Employee's Name (typed or printed)

_______________________________
Employee's Social Security Number

_______________________________
Employee's Phone

Date: ___________________________

 

 

APPENDIX B:
SAMPLE LETTER TO PLAN ADMINISTRATOR

Dear Plan Administrator,

Enclosed please find an authorization form signed by ___________________ (Social Security Number ________________) that grants you permission to disclose information relative to any and all retirement benefit programs under which he/she may be covered as a result of employment with your company.

Please provide us with the following information:

1. All Qualified Retirement Plans: The names of all the qualified retirement plans under which the above named employee is currently accruing (or has accrued) benefits, including but not limited to any defined benefit pension plan or defined contribution plan (such as 401(k), profit sharing, retirement savings plan or ESOP). Please supply a Summary Plan Description as well as any Model QDRO or QDRO Procedures documents for each plan in which the employee is a participant.
2. All Non-Qualified Retirement or Deferred Compensation Plans: The names of all nonqualified plans under which the above named employee participates (or has participated) including, but not limited to, any stock option plans, Stock Appreciation Rights (SAR's), Phantom Stock, excess defined benefit plans, or any other deferred compensation plans, whether insured or uninsured. Please indicate whether plan benefits are divisible by Domestic Relations Orders. For all stock options, please provide the Stock Option Agreement, along with a current listing of all outstanding options, exercise price, fully vested date and expiration date as well as whether or not they are ISO's or NQ's.
3. Statement of Accrued Benefits and/or Account Balances: Please include the following information with respect to each retirement plan which the above named employee has accrued a benefit:
   1. An estimate of his/her accrued benefit under any defined benefit pension plan, including the date on which he/she may commence his/her benefits on an unreduced basis (Normal Retirement Date), and also the plan's provisions for early retirement, including the extent of the actuarial reductions, if any, that may be applied to the participant's early retirement benefits. Assume that a Single Life Benefit will be paid.
   2. A statement that indicates whether (and when) the above named employee would be eligible to retire early under the plan and whether he/she will be entitled to any early retirement subsidy (and the amount of such early retirement benefit and subsidy, including any temporary or supplemental benefits that may become payable under the terms of the plan). Also, please indicate whether your defined benefit plan allows for any lump sum distributions.
   3. A statement of his/her current account balances under any defined contribution plan or ESOP, indicating any previous loans/and or withdrawals. Also, please indicate whether your plan has in-service withdrawal features, such as loans or hardship withdrawals. Also indicate whether alternate payees under QDRO's are eligible to receive immediate lump-sum distributions upon approval of a QDRO or whether plan assets must remain with the plan.
4. Imminent Plan Enhancements: Please detail whether the participant will become entitled to any imminent plan enhancements including but not limited to, predetermined or pending contractual plan increases (i.e. union negotiations), upcoming early retirement window programs or buyout offers.
5. Summary Plan Descriptions: Please provide us with a copy of the latest summary plan description ("SPD") for each plan under which the above named employee is covered.
6. Model Qualified Domestic Relations Orders: Please send us any model QDRO's that you may have developed or any written procedures for drafting QDRO's in order to help us expedite the approval process.

Thank you for your help in this request. If you have any questions, please do not hesitate to contact me.

 

Very Truly Yours,

_______________________________________
(Attorney's Name)

 

 

APPENDIX C:
SAMPLE QDRO REVIEW LETTER TO BE SIGNED BY CLIENT

Date:

 

Dear Attorney______________________,

By signing this letter, I hereby state that on the date above, you and I reviewed the terms of my Qualified Domestic Relations Order(s) to ensure my understanding of the key provisions. As a result, my signature on this letter indicates that I fully understand the provisions of the Order, as indicated below. If I have further questions or concerns, I understand that I should contact you, my attorney and/or the QDRO preparer ____________________. I was also made aware of the fact that I should consult with my tax specialist to determine the tax consequences of any distributions I may take from the pension/retirement plans covered by the QDRO(s).

Provisions Reviewed:

1. Benefit assignment amount
2. Inclusion/exclusion of loan balances (defined contribution plans only)
3. Earliest date for commencement of benefits
4. Inclusion or Exclusion of Ancillary Benefits (early retirement subsidies, COLA's, temporary or interim benefits)
5. Survivor Benefits: Pre and Post retirement; implications for future spouse coverage (if plan participant); anticipated coverage level
6. Naming a beneficiary
7. Duty of informing the Plan if my address changes
8. Next step

 

Very Truly Yours,

__________________________
Client Name (to be printed or typed)

__________________________
Witness (to be printed or typed)

 

 

APPENDIX D:
"GOOD" SETTLEMENT AGREEMENT LANGUAGE FOR RETIREMENT PLAN DIVISIONS

The sample language that follows should be tailored to the specific plan that is being divided as well as the intentions of the parties'. Therefore it does not include all provisions that may need to be addressed and should be modified on a case by case basis as needed.

Sample Language to be Used for Defined Contribution Plans

The Alternate Payee shall receive "x"%/"x dollars" of the Plaintiff/Defendant's entire/vested account balance in his/her "x" plan, as of "x" date. The parties agree that the following pre-marital balance shall be excluded from the divisible amount: __________________________. (Note: Many plans do not retain records that go back more than five to ten years. For this reason, it is important to specify in the divorce decree what the pre-marital balance is if it is the intent of the parties to exclude it).

The assigned amount shall include/exclude (select one) investment earnings and losses on his/her share from the date of division to the date of segregation of the account. The assigned amount shall be taken in a pro-rata share amongst all the investment holdings in the account. A pro-rata share of pre and post tax dollars shall be assigned to the alternate payee and participant, if applicable.

The amount assigned shall be calculated with regard (i.e. netting out)/without regard (i.e. a larger dollar amount to the alternate payee) to any loan balances up to the division date. Any loans taken out after the date of division shall be assigned exclusively to the participant. It is understood that the Alternate Payee's share shall be taken from the non-loan assets in the plan.

If the alternate payee dies before receipt of the entire amount of his/her portion of the account balance, any amount owing shall be paid to his/her estate. If the participant dies prior to the account being assigned to the alternate payee, the alternate payee shall be treated as the beneficiary, but only to the extent of his/her assigned share. If, for any reason, the alternate payee is not named beneficiary to the extent of their assigned interest in the Plan, the alternate payee shall have the right to obtain a lien against the participants' estate to secure the assigned interest.

Sample Language to be Used for Defined Benefit Plans

Part A: Select 1 of the 3 options listed below

When using a percentage and the division date is the date of divorce:

The Alternate Payee shall be entitled to x% of the marital portion of Participant's Defined Benefit plan(s) earned through his/her employment with _________________. The marital portion shall be calculated by multiplying the total benefit amount as of the date of divorce times a fraction in which the numerator is equal to the number of months of credited service earned from the date of the parties' marriage through their date of divorce and the denominator is equal to the total months of credited service earned up through the date of divorce.

When using a percentage and the division date is the date of retirement:

The Alternate Payee shall be entitled to x% of the marital portion of Participant's Defined Benefit plan(s) earned through his/her employment with _________________. The marital portion shall be calculated by multiplying the total benefit amount as of the date of retirement times a fraction in which the numerator is equal to the number of months of credited service earned from the date of the parties' marriage through their date of divorce and the denominator is equal to the total months of credited service earned up through the date of retirement.

When using a dollar amount:

The Alternate Payee shall be entitled to $___________ per month of the of Participant's Defined Benefit plan(s) earned through his/her employment with _________________.

Part B

In addition, the Alternate Payee shall/shall not (choose one) be entitled to any early retirement supplements, interim or temporary benefits as well as cost of living adjustments provided to the Participant on or after his date of retirement in an amount that is proportional to his/her assigned interest in the total pension.

Part C: Choose 1 or 2 below

1. (Separate Interest Method; Benefits are actuarially adjusted, based on the Alternate Payee's life expectancy, no reversion to Participant upon Alternate Payee's death, once benefits commence to the Alternate Payee, the subsequent death of the Participant shall not have any affect on the Alternate Payee's continuation of benefits)

The Alternate Payee shall have the right to access his/her share of the benefits at the Participant's earliest retirement date under the plan in any form that is available under the plan, unless such election negatively impacts the Participant's benefit amount, in which case the Alternate Payee's benefits will commence upon the date of the Participant's retirement.

Or
2. (Shared Benefit Method; Benefits are based on the Participant and Alternate Payee's Joint life expectancy, reversion to Participant upon Alternate Payee's death, to protect continuation of benefits, Alternate Payee needs pre and post retirement survivor benefits. If the Participant is retired, this is the only method available)

Benefits to the Alternate Payee shall commence upon the date that benefits commence to the Participant.

Part D

In the event that the Participant becomes disabled, the Alternate Payee shall be provided with a proportionate share (calculated in the same manner as indicated above) of any disability pension benefit that the Participant receives. However, if the disability benefit is paid prior to retirement age under the plan and is being paid as income replacement, the Alternate Payee will not receive a share. Further, when the Participant becomes eligible to receive a life annuity at retirement age, the Alternate Payee will be eligible to receive such benefit as well.

Part E

Prior to the Alternate Payee's benefit commencement date, he/she shall be named pre-retirement surviving spouse under the plan in an amount equal to:

Choose one:

1. his/her assigned interest in the total pension, as if the Participant had lived and retired voluntarily.
2. 100% of the pre-retirement survivor benefit under the plan
3. 100% of the pre-retirement survivor benefit accrued as of the date of divorce
4. the marital portion of the total pension benefit

If the alternate payee does not elect a benefit based on his/her life, he/she shall also be named post retirement surviving spouse under the plan in an amount equal to:

Choose one:

1. the pension benefits he/she was receiving under the Plan.
2. 100% of the post-retirement survivor benefit under the plan
3. 100% of the post-retirement survivor benefit accrued as of the date of divorce
4. the marital portion of the total pension benefit

The Participant may name another surviving spouse on any pre or post retirement survivor benefits, above the amount granted to the alternate payee, if the plan allows.

Part F

Should the Alternate Payee pre-decease the Participant, and if the plan allows, he/she shall be entitled to name a beneficiary to her remaining benefits. If the plan does not allow the Alternate Payee to name a beneficiary, his/her benefits shall revert to the Participant, unless this negatively impacts the Alternate Payee's election options (as in the case of General Motor's plans).

Part G (VERY Important)

A QDRO shall be prepared in accordance with the terms of this agreement and submitted to the plan administrator for processing. The parties shall share equally the cost of said QDRO and any costs related to the entering of the order or charged by the plan administrator. Until such time as the QDRO is approved by the Plan administrator, the Participant shall continue to name the Alternate Payee as the beneficiary of any pre-retirement surviving spouse benefits under the plan. If he/she fails to do so, the alternate payee shall have a claim against his/her estate and the court retains jurisdiction to take whatever means necessary to provide the alternate payee with the equivalent of his/her assigned interest in the pension as outlined above.

The Court shall retain jurisdiction with respect to this Order to the extent required to maintain its qualified status and the original intent of the parties as stipulated herein. The Court shall also retain jurisdiction to enter such further Orders as are necessary to enforce the assignment of benefits to the wife as set forth herein, including the re-characterization thereof, as a division of benefits under another plan, as applicable.

 

 

APPENDIX E:
"BAD" SETTLEMENT AGREEMENT LANGUAGE FOR RETIREMENT PLAN DIVISIONS

Sample #1: All retirement accounts and pension plans shall be equalized as of the date of divorce.

Comments:

• Language is too vague
• Accounts are not listed; will be difficult for QDRO preparer to decipher
• Are the pension plans to be present valued and offset?
• If the pensions are to be offset, which account should be QDRO'd?
• No mention of survivor benefits, supplements, loan balances, etc...

Lesson: Be specific and be prepared with adequate and thorough Discovery.

 

Sample #2: The Plaintiff Wife shall receive the marital share of Defendant Husband's pension through United Airlines with plan improvements, subsidies and survivor rights.

Comments:

• What do the parties intend by "marital share"? This language is too vague. Is the marital share 50% of the pension that accrued as of the date of divorce? Or is it 25% of the pension that will have accrued as of the Participant's date of retirement? The more specific the language, the less room for interpretation (and post judgment matters) later on.
• Should the Wife receive 100% of all survivor benefits or a limited share?

Lesson: Be specific and learn the correct QDRO "lingo."

 

Sample #3: The Plaintiff Wife shall receive 100% of Husband's 401k, excluding any outstanding loans.

Comments: If the Wife is to receive 100% of the account, she must also receive the loan balance, which would be netted out prior to the account being transferred to her.

Lesson: Verify that the intent of the parties' can be effectuated by the plan.

 

Sample #4: The Plaintiff Husband shall be entitled to 50% of Defendant Wife's pension plan with Acme Motors. He shall be entitled to access the plan at the earliest retirement date under the plan and benefits shall be based on his life expectancy. Should he pre-decease the Defendant Wife, his assigned share of the benefits shall revert to her.

Comments: Under most plans, this language would not be acceptable as it is contradictory. When benefits are based on the Alternate Payee's life expectancy, under most plans, a reversion to the Participant is not allowed.

Lesson: Learn the different division methods available under a plan and how to apply them correctly.