Deferred Distribution via QDRO − AP will obtain a lifetime stream of payments − Coverture fraction will allow for inflationary protection for AP − Guaranteed source of income in retirement years − Risk (or lack thereof) associated with the pension is shared between the parties. − Spreads different growth rates of different types of retirement assets between the parties. − May not be enough other assets in marital estate for offset to occur. 33
Actual Realities Leaving aside actuarial assumptions, assess the following case-by-case: − Health of Participant and Spouse − How long has Participant worked in the covered employment? − Is Participant likely to stay in the covered employment until retirement age? − Does the Plan change the benefit calculation formula the greater the years of service in the Plan? − What is the Participant's likelihood of future salary increases? Is he or she on a fast track? − If the Participant takes early retirement, how much of a reduction in benefit will be imposed by the Plan? 34
Defined Benefit Methods of Division: Coverture − Marital portion of the pension is determined by multiplying the accrued monthly benefit by a fraction, the numerator of which is the number of months of service accrued in the plan during the marriage and the denominator is the total service in the plan as of the date that benefit accruals ceased. − Each spouse gets 50% multiplied by the “marital portion” as determined by coverture. 35
“Frozen” Coverture: Beware! − Benefit calculated and frozen as of date of commencement. − No inflationary protection for alternate payee. − Benefit to participant: shelters future increments to salary post-divorce from alternate payee − Ex.: P’s attorney wants salary and service to be set at date of commencement levels. 36
Getting the Money Out: − Do not assume an immediate distribution is possible. − QDRO should state that Alternate Payee should be entitled to receive benefits in any available option under the plan, including a lump sum distribution, if permitted, but should not require lump sum distribution. − Direct Rollover or Payment to AP (IRC Section 72: QDRO allows payment to AP without penalty – AP can pay expenses, then put remainder into an IRA) 37
Client Relations: − Was client advised of necessity of pension valuation (if client declined, get disclaimer) − explain deferred distribution vs. immediate offset − Effect of remarriage before 55 (federal and military) − Effect of actuarial reductions − Forfeiture scenarios explained − Disability issues discussed and addressed? − Risk of Delaying QDRO filing explained 38
QDRO Drafting Issues and Pitfalls Emily W. McBurney Kegel McBurney LLC Atlanta, Georgia Emily@kegelmcburney.com 39
The Sooner, the Better • Get information about the retirement plans early – during the negotiation process. • Do not finalize an Agreement or go to trial without understanding the type of benefits involved. 40
Find Out: • Type of Plan (Defined contribution? Defined benefit? Cash Balance? IRA?) • Qualified? Non-qualified? Government? • Full legal name of the Plan • Account statement / benefit summary 41
Defined Contribution Plan • Employee and employer contribute to a specific account for employee • Account value fluctuates with the investments within it • The amount of the contributions is what is “defined” Example: 401(k) Plan 42
Defined Benefit Plan • No specific account for employee • Benefit based on years of service and salary • The amount of benefits is what is “defined” Example: traditional pension plan 43
Cash Balance Plan • Hybrid of Defined Contribution and Defined Benefit Plan 44
Contrary to popular belief, you do NOT need a QDRO to divide an IRA. • Trustee-to-trustee transfer pursuant to a decree of divorce or written instrument (such as a settlement agreement) incident to a divorce under 26 U.S.C.A § 408(d)(6). • Copy of divorce decree and Settlement Agreement, plus a letter of instruction or form from institution should suffice to transfer IRA funds. 45
Qualified v. Non-Qualified Plans Non-Qualified Plans are: • Not subject to ERISA • Usually NOT divisible by QDRO (but a few do permit division by DRO) • Generally unfunded and not secured (at risk if company goes bankrupt) • Not guaranteed • Subject to conditions (such as continued employment) 46
Non-Qualified Plans have terms in their names such as: • Supplemental • SERP • Non-qualified • Excess Benefit 47
• Many state and local government retirement plans are simply not divisible – confirm this in advance . • Federal government and military retirement plans are divisible, but not subject to ERISA. Subject to very complex and specific rules – do not attempt to do this without experience or expert advice 48
• Full legal name of the Plan can provide a lot of information about the type of Plan. • Account statements can also reveal important information about the nature of the Plan, the benefits, existence of loans, survivor designations, and restrictions. 49
Contact the Plan Administrator and get QDRO procedures and model order. Find contact information: • On account statements • At http://freeerisa.benefitspro.com • From employee • It often takes several phone calls to get to the person who handles QDROs for the Plan. 50
Model Orders • Helpful tool or gateway to malpractice • Plan cannot require you to use the model • Attorneys should never blindly use the model – have to be sure that the model will provide the benefits as awarded in the divorce. • Online QDRO generating systems (Fidelity, Hewitt) can be a great way to streamline the process – but there are pitfalls if the case does not fit the template. 51
Prepare a draft QDRO and send to Plan Administrator to review before sending to court. • Some large QDRO processors will not review drafts (e.g., Fidelity). • Follow up once a month for response. 52
Issues that must be addressed in QDRO: • Date of division • Earnings and losses (defined contribution plans) • Loans (defined contribution plans) • Surviving spouse benefits (most important for defined benefit plans) 53
Date of division: As of what date are the benefits to be divided? • Date of divorce? • Date of separation? • Date of Agreement? • Date of retirement? • Any other date? 54
Earnings and losses (defined contribution plans only) • Will the Alternate Payee’s benefit be adjusted for earnings and losses between the date of division and the date of distribution? • This makes a BIG difference – especially in volatile markets. • Must be specified in the QDRO. 55
QDRO must indicate whether loans will be included or excluded from calculation of benefit awarded. 56
Surviving spouse benefits: • MUST be addressed – especially for defined benefit plans. • Distinction between pre- and post- retirement survivor benefits – BOTH must be addressed or result could be contrary to the parties’ intent. 57
• After the draft QDRO has been approved by the Plan Administrator, have the parties sign it as a consent order if possible. • Obtain certified copies from the court and send to the Plan Administrator. 58
Follow up with the Plan Administrator! NEVER close your file until you have confirmation that the QDRO has been approved and implemented. You should receive a formal letter from the Plan. Read the letter and make sure it is consistent with the intent of the QDRO! 59
For a defined contribution plan, confirmation might only come from your client – that the funds have been transferred to the client (or from the client’s account). For a defined benefit plan, you must have a letter. Keep a copy of the letter! It may need to be produced 20 years from now if the Plan claims there was no QDRO (after the Participant dies or retires). 60
REVIEWING DRAFT QDROS: A PLAN’S PERSPECTIVE Pamela D. Perdue Summers, Compton & Wells, P.C. St. Louis, Missouri; ppperdue@summerscomptonwells.com Summers Compton Wells 61
What the Plan Looks for: Does it satisfy the requirements to constitute a Qualified Domestic Relations Order (QDRO), and Can the Plan comply without running afoul of its own provisions Summers Compton Wells 62
What the Plan Looks for: To constitute a QDRO, the order must: satisfy a list of Dos, and avoid a list of Don’ts Summers Compton Wells 63
Dos to be a QDRO In order for a Domestic Relations Order (DRO) to be a QDRO, the DRO must: 1. assign all or part of the Participant’s vested account or benefit to an Alternate Payee (AP) 2. relate to the provision of child support, alimony or marital property rights; Summers Compton Wells 64
Dos to be a QDRO 3. specify name and mailing address of both Participant and AP 4. specify amount to be paid to AP, and 5. identify Plan to which DRO is directed [ERISA Section 206(d)(3)] Summers Compton Wells 65
Who is an AP AP limited to spouse, former spouse, child or other dependent of Participant • If order requires payment to anyone other than a bona fide AP, Plan will not approve as QDRO Summers Compton Wells 66
What the Plan Looks for: Limited to AP EX: DRO requires plan to pay 50% of Participant’s vested account to former spouse, plus $10,000 to spouse’s attorney. Plan Rejects—order requires payment to someone other than an AP Summers Compton Wells 67
What the Plan Looks for: Limited to AP Authority, however, for approval of DRO requiring payment to various state child support agencies [see, e.g., Advisory Opinion 2002-03A, 06/07/2002; Advisory Opinion 2001-06A, 06/01/2001] Summers Compton Wells 68
What the Plan Looks for: Limited to AP EX: Order provides that any benefit assigned to the AP which remains unpaid on AP’s death is to go to the AP’s new spouse in a lump sum. Many plans will reject for non-AP qualifying beneficiary. Law is unsettled. Consult with individual plan before specifying. Summers Compton Wells 69
What the Plan Looks for: Must specify payments EX: DRO directs calendar year Pension Plan to assign 50% of Marital Portion of Participant’s vested benefit. Marital portion specified as determined using fraction with “marital participation from 1/1/1992 to 7/31/2010—a total of 211 months.” Summers Compton Wells 70
What the Plan Looks for: Must specify payments Plan rejects based upon failure to specify amount to be paid or clear manner to determine Conflict between fractional participation formula(i.e., January 1, 1992—7/31/2010 which is actually 223 months) and DRO’s specification of 211 months. Summers Compton Wells 71
What the Plan Looks for EX: DRO provides for payment to AP “on or after the Participant attains the earliest retirement age under the Plan.” However, the order fails to define the term “earliest retirement age.” Plan Rejects—Could mean Earliest Retirement Age as defined in the Code, or could intend reference to plan’s early retirement age or something else Summers Compton Wells 72
Avoid the Don’ts In all events, DRO will fail to constitute a QDRO if the order: 1. requires a type, form or option not allowed under the Plan; 2. requires the Plan to provide increased benefits, or 3. requires payment of benefits that infringe on an earlier AP’s rights to benefit Summers Compton Wells 73
What the Plan Looks for: Type, form or option not allowed under Plan EX: Small Plan with a single valuation date receives a DRO requiring division on date of divorce—which is not a Plan valuation date. Plan rejects –order requires a type or form or option not otherwise allowed under the Plan. Summers Compton Wells 74
What the Plan Looks for: Type, form or option not allowed under Plan EX: DRO purports to assign 50% of the “plan value on August 31, 2010 plus gains.” Plan Rejects—DRO purports to assign more than the Participant’s vested account Summers Compton Wells 75
What the Plan Looks for: EX: DRO states that AP shall be entitled to all of the rights, benefits and options to which the Participant would be entitled. Plan Rejects—technically AP has the status of a beneficiary not a participant under the law. Plan terms may grant lesser rights to beneficiary than to Participant. Summers Compton Wells 76
Changes to be Aw are of: Until recently, courts were divided as to the legitimacy of an order as a QDRO issued nunc pro tunc Subsequent legislation revised rules Now, DRO can be a QDRO even though it amends a prior QDRO or even if issued after the death of the Participant. [Labor Reg. Section 2530.206(b)(2), Ex. 1; Labor Reg. Section 2530.206(c)(2), Ex. 1] Summers Compton Wells 77
Best Practices Pamela D. Perdue Summers Compton Wells Emily Widmann McBurney Kegel McBurney LLC Carolyn A. D'Agostino Law Office of Carolyn A. D'Agostino Summers Compton Wells 78
Best Practice Tips Before drafting, ask for the Plan’s QDRO information and Summary Plan Description • More plans than you are aware will contain special provisions allowing immediate distribution to an AP Omit unnecessary tax information--Many Plans will reject DRO that contain incorrect tax information. Summers Compton Wells 79
Best Practice Tips Avoid drafting your DRO using provisions found in litigation • Often the provisions are either completely inappropriate for the plan at hand or cause the DRO to be internally inconsistent Summers Compton Wells 80
Best Practice Tips Where the Participant’s account balance includes the value of a loan, please be clear in drafting as to how the loan is to be treated is the loan included or excluded in determining the underlying value of the account; is the loan included or excluded for purposes of assigning distribution to the AP Summers Compton Wells 81
Best Practice Tips Please specify what the Plan is to do in the various “what if” events • what if the Participant dies before qualification as a QDRO or before distribution to the AP? • what if the AP dies before qualification as a QDRO or before distribution to the AP? Summers Compton Wells 82
Best Practice Tips If one party is to not bear any future losses, the DRO MUST be drafted to ensure that no other participant under the Plan not party to the DRO could be adversely affected Summers Compton Wells 83
Best Practice Tips Have your draft DRO approved by the Plan before approval by the court Summers Compton Wells 84
Best Practices Emily W. McBurney Kegel McBurney LLC Atlanta, Georgia Emily@kegelmcburney.com 85
Best practice tips : Check in advance whether the Plan will charge an administrative fee (defined contribution plans only) to review the QDRO. Specify in the Settlement Agreement whether this fee will be split between the parties, or if one party will be solely responsible for the administrative fee. The Plan will have a default for how the fee will be paid if the QDRO is silent, but you can generally have the fee handled differently if it is set forth in the QDRO. 86
Best practice tips : Review the model order in advance (during negotiation). You can often save a lot of money by tailoring the division of the retirement so that you can use the model order and make the QDRO process go more smoothly and without excess administrative fees. 87
Best practice tips : Do NOT put the parties’ Social Security Numbers in QDROs – even if the model order indicates that this is required. Insert “will be provided to the Plan Administrator under separate cover” in the line for SSNs, and include the SSNs in your cover letter when you submit the QDRO. Same is true for birthdates. 88
Best practice tips : Do NOT have a non-lawyer handle a QDRO. A QDRO is a legal document that must be prepared by a lawyer or risks being considered the unlicensed practice of law. Non-lawyers are not subject to malpractice and not bound by attorney-client confidentiality and other ethics rules. Find a specialist to prepare the QDRO if you don’t handle them regularly. There is a huge malpractice risk in this field. An attorney who refers a client to a non-lawyer to handle the QDRO may be subject to malpractice claims if the non-lawyer makes a mistake – even if the lawyer had no involvement with the QDRO. 89
Best Practices Carolyn A. D'Agostino, Esq. 21 Everett Road Ext. Albany, NY 12205 (518)489-1098 90
Checklist for Separation Agreements: Attach and Incorporate DRO by reference Be sure that the Plan will permit the contemplated division before the division is recited in the agreement. Be sure that ALL retirement assets have been disclosed. − Look for DC companions to DB plans (i.e. Deferred Comp, Thrift Savings Plan, Union Annuity funds) − Obtain a complete employment history Review Plan description to determine benefits available – extra enhancements for certain 91 types of employees, extra annuity funds, etc.
Checklist, cont'd Always address in Agreement for any type of Plan: − Who is responsible for preparing the QDRO (and for which Plan) − Who is responsible for any administrative fees charged by the plan (can be as high as $400-$500 charged by Plan to qualify the Order) Address each Plan with specificity and separately in the Agreement − Complete Plan name − IRA account numbers − DO NOT simply say “Husband's retirement benefits” or “Wife 92 has three IRA accounts”
Checklist, cont'd Defined Benefits Plan: − Method of division: coverture, flat amount, percentage? − separate/shared interest? − Survivorship − No survivorship for AP: AP's share from maximum benefit − Disability of Plan Participant? − Cost of Survivorship option? 93
Checklist, cont'd: − Effect of Plan loans − COLAs and other post retirement supplements, recal for AP if she's commenced benefits − Early retirement subsidies − Code 415 benefit limitations:(high income pensions), Reductions should be applied proportionately to both parties − Anti circumvention language − Will retired P pay AP out of pocket until QDRO filed? − Retroactive assignment dates (be sure Plan will 94 permit this)
Checklist cont'd: Defined Contribution Plans: − Valuation Date − Division of Benefits (%, $$ amount, etc.) − Investment experience − Effect of loans − Delayed Employer Contributions − Death of AP before segregation, after segregation − Death of P before/after segregation − Who is responsible for filing QDRO − Who pays administrative fees 95
Client Relations: − Was client advised of necessity of pension valuation (if client declined, get disclaimer) − explain deferred distribution vs. immediate offset − Effect of actuarial reductions − Forfeiture scenarios explained − Disability issues discussed and addressed? − Risk of Delaying QDRO explained 96
Checklist for Pension Discovery: − Complete employment history. − Breaks in service due to child rearing or disability. − Separate Property Issues − 401k and Cash Balance Plan: value of account as of date of marriage − Pre-marital service purchased? Source of funds? − Pre-Marital Loans For what purpose? Loans paid back with marital funds? − Benefit Statements 97
Pension Discovery, cont'd: − Prior QDROs: suvivorship option may already be spoken for − Even if no prior QDROs, prior marriage may mean possibility of competing spousal rights 98
Request from Plan: Formal name of each plan, name of Plan Administrator and address to send for QDRO review All plans with that employer in which Employee is a member Do not assume that the Plan Name on the member's benefits statement is the “official Plan Name.” www.freeerisa.com : look up plan name, and plan administrator Dates of membership, participation in the plan, and any breaks in service. Summary Plan description for each plan to which the employee belongs QDRO procedures and sample QDROs Benefits statements, projected benefit statements (if available) or account statements. 99
Plan Authorizations, cont'd: − Vesting provisions of Plan − Loans, encumbrances, withdrawals − Current Beneficiary designations Beneficiary designation history − look for changes over the years − Is participant retired? If yes: copy of retirement application, option election, amount of monthly benefit and where sent, amount of health/life insurance and other deductions. Obtain a copy of spousal waiver (if Plan requires one) potential fraud issue 100
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