With good reason, the majority of family law attorneys refer out the preparation of Qualified Domestic Relations Orders (QDRO) to QDRO/pension experts. Never a neutral document, QDROs always benefit one side at the expense of the other. Therefore, sharp attorneys carefully review prepared QDROs to ensure they represent an equitable division of the benefits and protect their client’s interests.
What about sections in the QDRO typically referred to as “boilerplate”–the ones that tend to be omitted in employer-provided QDRO Models and web-generated Orders? Are they necessary or do they just contain technical jargon (i.e. gibberish)? This blog zeroes in on one “gibberish” section that, if omitted, can come back to bite an attorney – years after the QDRO is entered.
Do you ever represent union employees, their spouses or participants who retire prior to age 65?
For those who answered “no,” you’ve dodged a bullet and are free to skip this blog. The rest of you, read on.
Were you aware that, under IRS Code Section 415, the government restricts the annual dollars employees can receive from their defined benefit pension plans? For 2015, that amount is $210,000, with the added stipulation that benefits can’t exceed 100% of the employee’s average compensation during their 3 highest consecutive paid years.
$210,000 in annual pension benefits? Think this only affects the highest-paid employees? Think again.
Suppose your middle-level automotive client, Joe, begins taking his pension benefits at age 48. Under Section 415, the $210,000 maximum annual benefit is actually reduced to reflect Joe’s early commencement. His employer determines he’s in violation of Section 415, which results in a lifetime annual pension reduction for Joe. Also consider the case of Jane, a multi-employer union employee who receives a relatively modest paycheck, but an extremely fat pension benefit – as negotiated by the union. Jane’s annual pension income easily exceeds 100% of the average of her three highest wage-earning years. Her pension is reduced accordingly, per Section 415. Both Joe and Jane end up with significantly more reduced pension benefits than they had anticipated.
How does this affect divorcing spouses and QDROs? If a pension payout is in violation of Section 415 limits, the retiree’s pension income will be reduced until the income is within the acceptable limit. If the QDRO doesn’t include a Section 415 paragraph, the entire reduction will likely come out of the retiree spouse’s share instead of being shared by both parties.
For example, Jane is going to receive $1,500 per month and her ex was to receive $1,500 per month via their QDRO. Since Jane is in violation of IRS Section 415 (her pension was much higher than her wages), her $3,000 per month pension is reduced by $1,000 per month. Since her QDRO lacks language on IRS Section 415, her benefit amount is reduced to $500 per month. Her ex still receives $1,500 per month, however.
That would be an unpleasant surprise for Jane!
Therefore, if you represent the plan participant, check the QDRO “gibberish” and confirm there is a Code Section 415 paragraph that offers protection – for your client and you!