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Retirements and QDROs

Qualified domestic relation orders (QDRO)

The intent of this blog is to give some insight into the world of retirements in divorces and specifically the role of the Qualified Domestic Relation Order as it relates to the division of these retirements. This is just a primer of course, so for a more thorough examination of the subject matter readers should direct their attention to Attorney Marshall Willick's website which has substantially more detailed information on the matter. Mr. Willick and his associate attorney Trevor Creel have substantial experience and expertise in the matter and both are considered authorities on the subject.

Employment Retirement Income Security Act (ERISA) laws mandate that contributions to a qualified plan cannot be alienated. A properly "qualified" domestic relations order must be accepted and enforced by an ERISA qualified pensions plan. What that means is that a qualified plan will pay a portion of the plans proceeds to a designated "alternate payee." An alternate payee is an individual who, under a qualified plan, has a recognizable interest in the plan proceeds.

First of all it should be noted that most private pensions are governed by ERISA as well as the Internal Revenue Code (IRC). Thanks to ERISA laws, employees of these qualified plans actually receive the deferred benefits of these plans. Additionally the ERISA statutes protect the spouses of the employee. Specifically, the code makes "survivor benefits" mandatory for spouses; unless the spouse elects to waive this provision. What this means is that, absent of such waiver by the non-employee spouse, a qualified joint and survivor annuity will provide all or a portion of the benefits which would otherwise be payable to the plan participant, to the alternate payee upon the participants death.

ERISA qualified plans come in two varieties: defined contribution plans and defined benefit plans. A defined contribution plan is a plan which is contributed toward annually by the employer and sometimes by the employee. These monies are then invested into one of various funds. The contribution plans typically pay out in a lump sum and usually have statements which issue annually showing the current value of the plan.

Defined benefit plans distribute an ongoing series of payments, usually monthly, upon retirement of the employee spouse. The plan itself describes the factors used to calculate the monthly benefits. Typically the employee's age at retirement, years of service at retirement, and highest income received will all be pertinent factors in this calculation. Remember, the value of the benefits in this type of plan do not depend on the value of contributions by the member.

Keep in mind that not all retirement plans are qualified plans. For example supplement executive retirement plans (SERPs) are an example of non-qualified plans. Non-qualified plans are typically not funded. They are simply unilateral contracts for the payment of deferred compensation. Since the plan is not qualified a sponsor of the plan may decline to recognize the non-employee's interest. Thus, the non-employee spouse would have to seek other remedies such as offsets in the form of property or alimony.

As stated above ERISA makes survivor benefits mandatory for qualified plans. Again this means that the non-employee spouse will ordinarily, without a QDRO saying otherwise, receive all or a portion of the benefits which would otherwise be payable to the participant if the participant dies. A retirement benefits order should address what happens if the non-employee spouse dies prior to receipt of his or her share under the plan. There are several different scenarios which could happen depending on whether one of the spouses die and whether they die before or after the participant has begun receipt of retirement benefits. The order should specify the course of action that should occur depending on which of these scenarios happen. An attorney preparing the QDRO, or just planning ahead prior to the actual date of divorce, should look into the available options. The attorney should acquire the plan documents or speak to the administer of the plan to determine what options are available. Be advised that some plans require benefits to revert to the employee spouse in the event of the death of the non-employee spouse. The attorney representing the non-employee would want to be aware of this so that he may provide for contingencies reservations in jurisdiction within the divorce documents.

A separate interest QDRO is one which provides for the interest of the pension as opposed to just the benefit stream. A separate interest QDRO thus can only be attained prior to the employee spouse actually receiving any part of his pension. If the employee spouse has already begun receiving benefits prior to the time the QDRO is submitted then the only available option is a shared interest plan. A shared interest plan divides the payment stream of the pension but not the interest itself. A separate interest QDRO creates greater protection for the non-employee spouse and eliminates the beneficiary issue altogether. Under a separate interest plan the death of either party is of no consequence. In the event you are dealing with a shared interest QDRO, if the plan will allow a non-employee spouse to name a beneficiary, it will likely limit the selection of beneficiary to those who could be classified as an alternate payee in the first place.

Remember that per ERISA requirements an employee's current spouse is protected in the event of the employee's potential death. So that in the event of the employee's death the non-emoloyee current spouse will receive all, or a portion of, the employee spouses benefit stream. If you are dealing with a separate interest QDRO this has no consequence but if you are dealing with a separate interest QDRO this is significant. It is significant to the practitioner in that he will need to name the employees prior non-employee spouse, whom he currently represents, as the "surviving spouse" in the QDRO documents. Thus the prior non-employee spouse steps into the shoes of the current non-employee spouse if one exists or otherwise still maintains his or her position as the non-employee spouse even if the employee spouse has yet to remarry. The QDRO may provide that the prior non-employee spouse receive all of the qualified survivor benefits or otherwise share the qualified survivor benefits with a later non-employee spouse.

Within the context of these survivor benefit designations the practitioner should be able to discern the difference between a qualified pre-retirement survivor annuity (QPSA) and a Qualified Joint and Survivor Annuity (QJSA). Again, these are both death benefit provisions and thus are only relevant in the context of defined benefit plans, not contribution plans. The context of defined benefit plans are only relevant within the context of shared interest QDROs as a non-employee spouse already has protected interest in a separate interest QDRO.

A QPSA and QJSA can be distinguished by the timing of the employee spouse's annuity starting date. A QPSA protects the non-employee spouse during the period preceding the participant's annuity starting date. If the employee spouses dies prior to vesting and receiving his or her annuity the non-employee can and will still receive his or her portion of the annuity. QJSA protects the non-employee spouse after the date of the employee spouse's vesting and annuity starting date. The non-employee spouse will be able to receive payment in any form which would otherwise have been available to the employee spouse. Thus the former spouse could elect a lump-sum payment, periodic payments, or a single life annuity.

Perhaps the single most important thing for a practitioner to remember is that the QDRO needs to be submitted as close in time as possible to the date of divorce. Ideally the QDRO should be submitted at the same time as the Decree of divorce. Remember that if the parties divorce and a QDRO has not been submitted that the alternate payee is in a precarious position. If the employee spouse liquidates his pension or dies before the QDRO the non-employee will have little recourse. Such recourse may be directed at the practitioner in the form of a malpractice suit.

Any time a practitioner picks up a case where a retirement will be divided the practitioner should first locate the plans. The plan can be attained from the plan administrator, the employer or plan sponsor by way of request, or by subpoena for production of business documents if necessary. Once a practitioner has the plan he should contact the plan administer to speak with the person who handles divorce matters. This person's information can be found in the Summary Plan Description (SPD). After contact with the plan administer, or at the same time, the attorney should submit a notice of adverse interest to the plan. In Nevada a joint preliminary injunction should suffice as such. This notice of adverse interest may be served even before the initial complaint for divorce has been filed. Because plans have a fiduciary duty to beneficiaries as well as their participants any plan should honor such notice.

The notice of adverse interest should indicate the plan, the participant, and the party claiming the interest. The notice should be served on the plan administrator and service should be attained in a method which allows for proof of such service.

Discovery can be directed at the plan administrator, the employer, or the opposing party. The practitioner should deliver an authorization to the employee spouse to execute which will allow release of plan documents. Such discovery should seek the summary plan description, the plan documents and all amendments, employee benefit records, and QDRO procedures if the attorney intends on preparing the QDRO themself. If the practitioner is dealing with a defined contribution plan he or she should request a statement of account as of date of marriage, recent monthly statements of account (to determine current value), loan and withdrawal information, and beneficiary designations. If the practitioner is dealing with a defined benefit plan then pertinent information will include the latest accrued benefit statement, factors used in calculating the benefit, and information regarding outstanding participant loans.

Generally speaking when dividing a retirement we will apply the time rule. Under the time rule we look at how many years of marriage overlap with service and the non-employee spouse is entitled to 50% of this amount. She or he has ½ community interest in the retirement. However a practitioner should not assume this always to be the proper application. Often times retirements can be divided into pre-marital and post marital time periods. It could be that there was substantially greater contributions made prior to marriage as opposed to post marriage resulting in an unfair result for the time rule. Moreover there are circumstances when the retirement benefits don't correspond with time of service in employment. It could be the case that the retirement only came into effect a number of years after service already began. In this case we would want to look at years of marriage which overlap with years of retirement as opposed to years of service.

There are times when a practitioner may not want to divide the retirement by way of a percentage. Perhaps in the spirit of negotiation the parties wish to apply offsets so that the employee spouse can keep his or her entire retirement to themselves. In this case the practitioner will need to value the plan. A defined contribution plan's value is always easily ascertainable. However, a defined benefit plan is much more difficult to value. To value a defined benefit plan the practitioner must ascertain the present value of a stream of expected future payments. An actuary can make these calculations for you if you need them. Essentially an actuary will reduce the value of future payments to a lump sum computed as of the date the employee will retire or the benefit will mature. The sum is then reduced by various discounts such as the present value with an assumed interest rate and by taking into consideration risk factors; such as death. The parties may want to stipulate as to an expert for the purpose of valuing the retirement.

Be aware that there are some plans such as PERS and military retirement systems wherein the retirement system will not pay anything to the non-employee former spouse until the employee actually retires. Thus the non-employee spouse would have to seek payment directly from the employee spouse in order to begin receiving prior to this period.

Categories: Family Law