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QDRO CREATION IN WISCONSIN
Building a Future After a Split
Attorney Diane S. Diel 5601 South 108th Street
Hales Corners, WI 53130 414-427-5355
E-mail [email protected]
Financial Advisor Garrick G. Zielinski, CFP, CDFA, CDS WFA Asset Management Corporation
5129 South Franklin Drive Franklin, WI 53132
414-421-8282 E-mail [email protected]
QDRO CREATION IN WISCONSIN
Building a Future After a Split
I. QDROS – TAKING A CLOSER LOOK
By Garrick G. Zielinski, CFP, CDFA, CDS
President, WFA Asset Management Corporation
I. QDROS – TAKING A CLOSER LOOK
By Garrick G. Zielinski, CFP, CDFA, CDS
President, WFA Asset Management Corporation
A. Definition of a QDRO
A QDRO is defined as any judgement, decree, or order (including approval of a
property settlement agreement) which (i) relates to the provisions of child support,
alimony payments or marital property rights to a spouse, former spouse, child, or
other dependant of a participant, and (ii) is made pursuant to a State domestic
relations law, including a community property law.
Although it is referred to as “qualified domestic relations order” in fact it is a
“domestic relations order” (DRO) until the Plan Administrator determines the
order is a QDRO.
Growing in importance is the division of retirement benefits by way of a qualified
domestic relation’s order (QDRO). A QDRO1 is a court order that typically
directs a retirement plan to divide the income payments or account balances
accrued to a participant between the parties in a divorce or legal separation.
Alternatively retirement plans can be valued as to their present day value after tax
consequences and offset against other marital property. However, quite often the
appearance of an equitable division using present value is misleading and can
result in inequities. More often, division by a QDRO is considered to be the most
equitable way to divide retirement assets.
It is important to first to determine what type of Plan it is. Most private sector
retirement vehicles are either Individual Retirement Arrangements (IRAs),
defined contribution (DC) plans, or defined benefit (DB) plans. The Employee
Retirement Income Security Act (ERISA) of 1974 governs DC and DB Plans.
The Retirement Equity Act (REA) of 1984 was enacted to resolve the growing
conflict between ERISA and state law allowing for distribution of retirement
rights in DC and DB plans upon dissolution of marriage. REA added I.R.C. §
414(p) which permits the creation, assignment and recognition of any right within
DC and DB plans of a participant only through a Qualified Domestic Relations
Order (QDRO). IRA’s are not qualified plans as defined by ERISA. Instead,
IRA’s come under the provisions of I.R.C. § 408. Thus to transfer funds tax free2
from an IRA to a spouse or former spouse, a QDRO is not required nor are the
QDRO rules applicable.
An IRA is the most basic sort of retirement arrangement. Most people tend to
think of an IRA as something that individuals establish on their own. However,
there are three plans that businesses can sponsor and help their employees to fund
their IRA’s. With an IRA the amount that an individual receives at retirement
depends on the funding of the IRA and the earnings or losses on those funds.
I.R.C. § 1041 is not applicable to transfers of funds from IRA’s as it was never
intended that I.R.C. § 1041 would override the provisions of I.R.C. § 408(d)
applicable to IRA’s which predated the adoption of the provisions of I.R.C. §
1041. Company sponsored IRA’s are typically referred to as SAR-SEP, SIMPLE
IRA and SEP-IRA Plans.
A plan that is expected to pay a monthly benefit at a certain retirement age, in
most cases, based on a formula using the participant's length of service and/or
salary is a defined benefit plan. While a participant is employed, sufficient
actuarial calculated contributions are made by the employer to generate the
defined monthly retirement benefit payable to the participant in the future. In
essence, the retirees “benefit” in a defined benefit plan is “defined” or known in
advance, and the contributions needed to provide the benefit are not defined.
Usually there are no individual account balances within a defined benefit plan. 1 See IRS Notice 97-11. Assistance for attorneys, judges, plan participants, spouses, former spouses in reviewing and drafting QDRO’s
Defined benefit plans are typically referred to as pension plans, retirement plans
or benefit plans.
A plan that defines the contributions while a participant is employed, with the
future value of the benefits left uncertain, is a defined contribution plan. In
essence, the “contribution” in a defined contribution plan is “defined” or known
and the final benefits payable are not defined. The defined contribution plan may
contain individual account balances for each participant, which are valued at least
once each year. Defined contribution plans are typically referred to as 401(k)
plans, profit sharing plans, employee stock ownership plans (ESOP), money
purchase, Keogh plans and savings plans. Many defined contribution plans may
contain sub-accounts such as employer contributions, employee contributions,
employer matching contributions, and pre-tax/after-tax contributions.
PRACTICE TIP: Many defined contribution plans provide for a single lump
sum distribution to alternate payees3 while most defined benefit plans do not.
B. How a QDRO Can Be Used
The QDRO statute is silent as to when a QDRO must be drafted. Most QDRO’s
take the form of a stipulated court order that is approved by the court, either
simultaneously or shortly thereafter a divorce proceeding. In numerous
circumstances the QDRO is not drafted for many years after the divorce. The
definition clearly indicates that the QDRO can be a judgement in itself. Although
a QDRO usually occurs after the date of divorce, it is also clear that the final
divorce is not necessary in order to draft a QDRO. The language states that a
payment may be made to a “spouse” or a “former spouse” as long as it is made in
accordance with a states domestic relations law. Further, a court may order a
2 I.R.C. § 408(d)(6) 3 I.R.C. § 414(p)(8) Alternate Payee defined
QDRO signed by the court and not necessary that either the participant or
alternate payee sign and/or approve the order.
The first step may seem obvious, however, it is worth repeating; it is imperative to
determine what type of plan you are attempting to divide. Defined contribution
plans are typically much easier to divide in terms of percentage splits than defined
benefit plans. Once you have determined the type of plan it is, of equal
importance is to thoroughly understand the benefit payment options available to
the participant. An alternate payee generally may elect any option that is
available to the participant in the plan other than a joint and survivor annuity with
a subsequent spouse. Therefore, benefits payable to an alternate payee are
derived “through the eligibility” of the participant. Benefits are payable to an
alternate payee based upon the terms and conditions of the plan. You cannot
require4 the plan to provide any type or form of benefit, or any option, not
otherwise provided under the plan. Benefits are then are paid in accordance with
the plan’s options.
A QDRO may be used to provide survivorship benefits to the former spouse. It
could be drafted to provide an early retirement provision thereby allowing the
former spouse an opportunity to collect her benefits independent of the
commencement of the participant. It is usually drafted in the context of a
property settlement but it can also be used to provide child support (current and
arrears), maintenance (current and arrears) or to satisfy marital property rights. A
QDRO can be used for a myriad of purposes, such as debt reduction, a down
payment on a residence, and possibly for an estate planning concern, when
nursing costs or the general claims of creditors are an issue. In a New York
Supreme Court case5the court not only ordered distributions from a profit sharing
plan to pay child support and other arrears, the court also ordered that attorney
fees in arrears, plus attorney fees for the current proceeding, be paid from the plan
4 I.R.C. § 414(p)(3)(A) 5 See Renner v. Blatte, 650 N.Y.S.2d 943 (N.Y. Supp. Oct. 18, 1996)
in addition to $41,000 for income taxes as a result of the distributions. The
author used a QDRO once to provide a “get out jail free” card to a plan participant
that embezzled money from her former employer and was ordered to make full
restitution within 120 days or go to jail for 3 years!
C. Restrictions on QDRO’S
Since the QDRO is the document that divides the retirement benefits, it is
imperative that you understand the type of plan, the plan benefits, the available
methods of distribution options and the required procedures necessary to obtain
the benefits prior to drafting, negotiating and filing the QDRO. Throughout this
booklet we will discus in detail a number of restrictions on QDRO’s. ERISA and
IRC § 414(p) lists the following restrictions on QDRO’s:
The order cannot require the plan to provide any type or form of benefits, or any
option, not otherwise provided under the plan6
The order cannot require the plan to provide increased benefits determined on an
actuarial value7.
The order cannot require the payment of benefits to an alternate payee that are
already required to be paid to another alternate payee under a previous order8.
D. Current Developments in Case Law and Legislation
Under the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA), an alternate payee can request a waiver of the 60-day rollover rule.
Also, the spouse that the participant was married to on the annuity starting date
6 IRC § 414(p)(3)(A) and ERISA § 206(d)(3)(D)(i) 7 IRC § 414(p)(3)(B) and ERISA § 206(d)(3)(D)(ii) 8 IRC § 414(p)(3)(C) and ERISA § 206(d)(3)(D)(iii)
(and one-year rule) is entitled to the survivor annuity unless a QDRO states
otherwise. A § 457(b) deferred compensation plan is subject to the QDRO rules
for purposes of recognizing and making distributions to an alternate payee.9 This
rule does not extend to City, County and state plans. However, many
municipalities have adopted, or are adopting, rules to divide deferred
compensation plans. Milwaukee County and City for example, have not adopted
a plan for division, but they have recognized some of the changes to the law and
now permit the 457(b) plan to be rolled over to an IRA upon retirement rather
than being paid as an annuity.
Effective August 29, 2002, the Sarbanes-Oxley Act of 2002 adopted new rules
under Section 16(a) of the Securities Exchange Act of 1934 accelerating the
deadlines for insiders of public companies to report changes in their ownership of
their company’s securities. Insiders are considered Directors, Officers and
stockholders with greater than 10% of stock. Transactions pursuant to divorce
decrees under domestic relations orders remain exempt from the Section 16(a)
rules. However, under the Act a Director, Officer or greater than 10%
shareholder would clearly be violating Section 16(a) of the Act if they were to
notify their former spouse of their intent to exercise certain stock option
agreements in advance of the sale and/or purchase. This might make it difficult to
draft a domestic relations order in regard to deferred stock arrangements, in
particular stock options, if your intent is that the non-participant spouse maintain
any form of control over the sale and/or purchase of any portion awarded to them.
Supreme Court of Wisconsin:
See Case No. 02-0036 Sulzer v. Diedrich: In this case Sulzer was awarded one
half of her spouses WRS pension and one half of his 457(b) Deferred
Compensation Plan in their divorce proceeding in 1989. WRS and the Copeland
Companies did not recognize QDRO’s at the time of divorce. In May of 1998 the
9 See Economic Growth and Tax Relief Reconciliation Act of 2001; IRC § 414(p)(12)
law was changed so the WRS would accept a QDRO for divorces prior to April
27, 1990. However, husband married Diedrich on May 9, 1992 and subsequently
changed all of his beneficiary designation to his subsequent spouse. Husband
died in early 1995 and Sulzer requested her portion of the retirement accounts.
WRS and Copeland however, already paid the account to Diedrich in the form of
survivor benefits. A host or problems ensued. Eventually, Sulzer recovered her
portion of the benefits.
In a recent U.S. Supreme Court10 case the husband died in auto accident two
months after he was divorced and before he changed his beneficiary on his group
life plan. Mr. Egelhoff lived in Washington, which under statute automatically
removes a spouse as beneficiary upon divorce. However, the group life plan is an
ERISA welfare benefit plan and it was not clear which law applied. The court
ruled for the former spouse and awarded the life proceeds to her. The
Washington Supreme Court reversed the decision and awarded the life proceeds
to Mr. Egelhoff’s children from a previous marriage. The former wife appealed
and the U.S. Supreme Court recently reversed the Washington Supreme Court
decision and awarded the proceeds back to the former spouse. Clearly, ERISA,
and not State law govern such benefits.
To avoid ambiguities, beneficiary designations should be addressed no later than
the completion of the divorce. Even if the MSA (Sulzer) names the intended
beneficiaries of individually owned policies or another plan not covered by
ERISA, the designated beneficiaries could still wind up in an expensive court
battle.
Court of Appeals:
See Case No. 99-3066 McNamara v. McNamara: Again, this is another WRS
matter. The divorce happened in 1985 at a time that WRS did not honor
10 See U.S. Supreme Court Egelhoff v. Egelhoff
QDRO’s. The parties retained an actuary to value the plan and it was determined
that the husband’s value of the wife’s plan was $25,000.00. However, adequate
assets did not exist to buy-out the wife’s portion. Therefore, the actuary devised a
formula that was intended to be used in the event that the plan “did not recognize
QDRO’s at the time of distribution.” Wife retired in 1998 and a QDRO was
presented to WRS and based upon their interpretation of the QDRO and based
upon a divorce in 1985, the plan determined that the husband was due $965 per
month out of $2,642 per month payable to the wife. The wife appealed that the
plan should have used the actuary formula in the MSA, and that calculation
determined a benefit of $391 payable to husband. The court concurred and the
husband appealed. The Appellate court reversed the decision but they based their
reversal on the fact that the original agreement that the actuary formula would be
used only if WRS “did not accept” a QDRO, which they subsequently did. The
wife had additional arguments that the agreement clearly meant to “freeze” the
value at the date of divorce and those arguments were also rejected. The author
feels that the very same arguments being made in regard to WRS and the lack of
QDRO legislation may apply to City and County Plans that have those some
characteristics today. In other words, if you are fashioning a settlement
agreement on City or County plans not governed under ERISA, it is imperative
that your language is clear in regard to the manner and effect of the formula used
to calculate the end result.
See Case No. 00-0525 Jeffords v. Jeffords: This case involves a bankruptcy
petition where the husband was ordered to have a QDRO drafted to facilitate an
award to his former spouse in the amount of $100,000. In the interim, the parties
agreed in the MSA that the husband would “lend” the former spouse $50,000 until
the QDRO was effective and the wife would pay the loan back. She received the
loan and subsequently filed for bankruptcy and the $50,000 loan was discharged
in bankruptcy court. The husband was successful in getting the court to modify
the MSA and reduce the QDRO amount to $50,000 because wife didn’t repay the
loan. Wife appealed and the court affirmed the lower court decision. However,
the wife also requested that she receive “interest” on her portion since it took 3
years before she was able to receive her portion of the QDRO. In response to
wife’s request for interest the court explained that “because she had not
cooperated in 1997 when husband offered to provide the QDRO required in the
MSA, she was not entitled to do so. While interest may be required where there
has been a delay in fulfilling obligations in a property division,11a family court
can deny interest if it offers a reasonable explanation. The explanation in this
case is that wife “cannot expect to profit from her refusal to complete the
transactions required in the final property division.” What’s interesting about this
case is that many times participants and non-participants alike delay the draft of a
QDRO for a variety of reasons, and arguments arise about equity. In particular,
we have seen instances where flat dollar amounts were used for the division of a
401(k) plan in year 1999, for example, and the amount was not remotely the same
as a division of the same account in year 2002. Also, most 401(k) accounts will
fluctuate in value and even fewer, actually earn “interest.” The terms, interest and
earnings, are often intertwined, yet have substantially different meanings to plan
administrators.
See Appeal No. 02-0118 Taylor v Taylor: This case has the above mentioned
factors involved and the Court of Appeals District IV affirmed that absent
language to the contrary, the value of a retirement plan is subject to market
valuation increases and/or decreases until such time as the account is distributed.
Therefore if you intend not to have an account balance subject to fluctuation in
value from the date of divorce to the date of distribution the QDRO and MSA
should clearly state that. Another consideration is having the plan participant
redirect all or a portion of their investment allocation to a stable value investment,
a required component of the employee elective plan, as of the date of divorce, or
possibly sooner. If it is know in advance, or in a collaborative manner, that there
would likely be an equal division of the account, a reallocation of 50% of the
11 See Corliss v. Corliss, 107 Wis. 2d 338, 346, 320 N.W.2d 219 (Ct. App. 1982)
value could be stipulated. Upon the draft of the QDRO, the awarded share could
consist of 100% of the reallocated value in the account.
QDRO CREATION IN WISCONSIN Building a Future After a Split
II. SATISFYING ERISA CRITERION
Garrick G. Zielinski, CFP, CDFA, CDS
II. SATISFYING ERISA CRITERION
Garrick G. Zielinski, CFP, CDFA, CDS
President, WFA Asset Management Corporation
A. Required Standards for the QDRO
QUALIFICATION REQUIREMENTS: (I.R.C. and ERISA)
The Order must designate each alternate payee. An alternate payee is any spouse,
former spouse, child or other dependent of the participant who is recognized by a
domestic relations order as having a right to receive all or a portion of the benefits
payable under the plan with respect to the participant. (I.R.C. §414(p)(8) and
ERISA §206(d)(3)(K))
The Order must clearly specify the amount or percentage of the participant's
benefits to be paid to alternate payee, or the manner in which the amount is to be
determined. (I.R.C. §414(p)(2)(B) and ERISA §206(d)(3)(C)(ii))
The Order must specify the number of payments or the period to which the order
applies. (I.R.C. §414(p)(2)(C) and ERISA §206(d)(3)(C)(iii))
The Order must specify each plan to which the order applies. (I.R.C.
§414(p)(2)(D) and ERISA §206(d)(3)(C)(iv))
The Order must specify the name and last known mailing address of the
participant and alternate payee. Social security numbers, dates of birth and the
date of divorce are not required under the Code, but most plan administrators
require this information to process and calculate benefits payable to the alternate
payee, especially if the awarded benefits are to be based upon the lifetime of the
alternate payee. (I.R.C. §414(p)(2)(A) and ERISA §206(d)(3)(C)(i))
A domestic relation’s order is any judgment, decree, or orders including a
property settlement agreement which:
a. relates to the provision of child support, alimony or marital property rights
to a spouse, former spouse, child or other dependent of a participant.
b. is made pursuant to a state domestic relation’s law, including a community
property law. (I.R.C. §414(p)(B)(i)(ii) and ERISA §206(d)(B)(ii)(I)(II))
The qualified status of the domestic relation’s order is determined only by the
plan administrator in accordance with I.R.C. §414(p) and ERISA §206(d).
The order must create or recognize the existence of an alternate payee's right to,
or assigns to, the right to receive all or a portion of the benefits. (I.R.C.
§414(p)(1)(A)(i) and ERISA §206(d)(3)(B)(i)(I))
In the case of any payment before a participant has separated from service, an
order may provide that payments to the alternate payee can begin on or after the
date on which the participant attains the earliest retirement age under the plan
whether or not the participant has actually retired. The earliest retirement age
means the earlier of:
a. the date the participant is entitled to a distribution under the Plan, or
b. the date the participant reaches age 50, or, if later, the earliest date on
which the participant could receive benefits if the participant separated
from service. (I.R.C. §414(p)(4)(B)(i)(ii) and ERISA
§206(d)(3)(E)(ii)(I)(II))
An Order that is determined to be qualified will remain qualified with respect to a
successor plan of the same employer or a plan of a successor employer (§ 414(a) of the
I.R.C.).
Information in regard to a Qualified Domestic Relations Order can be obtained from the
I.R.C. §414(p), Employee Retirement Income Security Act (ERISA) of 1974 §206(d) and
the Retirement Equity Act of 1984 (REA-84), Public Law 98-397 §104, which amended
certain sections of ERISA to improve the delivery of benefits to an alternate payee.
I.R.C. §401(a)(13) creates an exception to the anti-alienation requirements of Code
§401(a)(13)(A). ERISA qualified plans are subject to the anti-alienation rules unless they
are divided by means of a domestic relations order that is determined to be qualified by
the plan administrator.
B. Procedures for Qualifying a Domestic Relations Order as a QDRO
Procedures are set forth in the IRC and ERISA. The procedures are often
misunderstood by attorneys and routinely not followed by plan administrators.
More often companies out-source the process to companies that have large
departments set-up for QDRO processing. Fidelity Investments, for example, has
established a business for their plan sponsors to deal with QDRO’s. All plans are
required to establish procedures,12however, experience with these matters
suggests that many companies have not. The IRC and ERISA provide no
sanctions for failure to provide procedures so therefore the lack of procedures are
absent consequences.
The plan has 6 basic procedures that are required:
1) The plan must have written procedures.
2) The plan must promptly notify the participant and alternate payee of receipt of
an order.
3) The plan must mail a copy of the procedure to the participant and alternate
payee.
12 IRC § 414(p)(6)(B); ERISA § 206(d)(3)(G)(ii)(II)
4) The plan must determine whether the order is qualified within a reasonable
amount time.
5) The plan must mail a notice to the participant and alternate payee notifying
them whether or not the order is a QDRO.
6) The plan must separately account for the alternate payee portion while the
plan is reviewing the order.
Upon receipt of a domestic relation order, the plan administrator is required to
“promptly” notify the participant and alternate payee that the plan received an
order and notify them of the procedures. The problem here is that “promptly” is
not defined and experience suggests that few plans follow this procedure. The
second requirement is that the plan should determine13 “within a reasonable time”
whether or not the order is a qualified domestic relations order. An additional
problem is, “reasonable amount of time” is also not defined. Many plans think
that the 18-month rule applies and that they have 18-months to approve the
QDRO. This is not the case. The-18 month rule has nothing to do with time
allowed to review a QDRO.
During the time that an order is being reviewed, the plan must separately account
for amounts that would have been paid to an alternate payee if the alternate had
received benefits during the period, as if the order had been determined to be a
QDRO. This does not require the plan to suspend payments that are already being
paid to a participant if the plan is in pay status. It simply requires separate14
accounting. Our experience is that we have seen plan administrators go both
ways in regard to plans in pay status. That is, we have seen plans that will
suspend payments or reduce the payment being made to the participant and hold
the anticipated benefit for the alternate payee. Correspondence and/or
communications from the attorneys, the court, and the parties, which in turn have
swayed the plan into taking some action, also influence many plans.
13 IRC § 414(p)(6)(A)(ii); ERISA § 206(d)(3)(G)(i)(II) 14 IRC § 414(p)(7)(A); ERISA § 206(d)(3)(H)(i)
C. Documentation Used in the Process of Qualification
Most often the documentation requested from a plan are a benefits calculation in
regard to a defined benefit plan and a valuation and/or the last valuation in regard
to a defined contribution plan. Plans have also established other documentation
procedures to minimize the confusion and misinformation between the plan
administrator and the attorney seeking information. They may include:
a. A QDRO approval and/or rejection.
b. An internal record of QDRO telephone communications.
c. A request for a benefit calculation.
d. A request for QDRO benefits payment (Distribution Form)
e. A benefit payment worksheet (How to calculate a defined benefit under the
terms of the Plan).
f. A benefit payment adjustment worksheet.
The documentation used is generally the same as the procedures previously
discussed, as well as the review process discussed below. The plan must
determine whether or not the order complies with the terms and conditions of the
plan.
D. QDRO Review Procedures
Most plans have established their own procedures in dealing with QDRO’s.
Below is a sampling of those procedures:
a. Identify the plan that will pay benefits.
b. Identify who will receive the benefits.
c. Identify the amount, percentage or formula used to determine the amount to
be paid.
d. Identify the date on which the payemnt of benefits to the alternate payee are to
begin and the form of benefit.
e. Identify when the payments will stop.
f. Identify what happens when the alternate payee dies.
g. Identify what happens when the participant dies.
For the order to qualify, the order must satisfy the requirements under IRC §
414(p) and provide sufficient administrative information to process the order.
Probably the most difficult part of the QDRO procedure for a plan administrator
is to make certain that the plan does not risk the qualified status of the plan. As
such, most plan administrators will use extreme caution in their decision making
process. However, a lump sum payment to an alternate payee under age 59 1/2
from a 401(k) plan, for example, will not lose its status as a qualified plan even if
the payment were made contrary15 to the terms and conditions of the plan. The
current trend of plans is to make payemnt to alternate payees at the earliest
possible time. The immediate payment cuts down on administrative costs and
plan liability. Even defined benefit plans are beginning to make premature
distributions more often. Not only does it cut down on current costs but solves
problems like not being able to find the alternate payee because of numerous
address changes. The problem exists though, unlike defined contribution plans,
that a plan could be substantially under-funded and, if too many alternate payees
take a distribution from such plans, it could result in actuarial losses and increased
costs to sponsors.
If the plan determines that the order is not a QDRO, the plan administrator must
notify the participant and alternate payee in writing of their determination. Most
often, the plan will provide details as to why the order is not qualified. Usually
the order is modified and returned to the plan. If the status as to whether or not an
order is qualified is not satisfied within the 18-month period, the plan is then
15 IRC § 401(k)(2)(B)(i)(III)
required to make payments, or in some cases resume payments to the person that
would have received the payments if there were no order. The plan administrator
has broad discretion in this matter. If an order is determined to be qualified all
amounts shall be paid according to the QDRO. If amounts have been withheld
and/or segregated, those should also be paid. In effect, this allows the order to be
administered retroactively with regard to the benefit division.
QDRO CREATION IN WISCONSIN
Building a Future After a Split
III. ANALYZING AND VALUING RETIREMENT BENEFITS
Garrick G. Zielinski, CFP, CDFA, CDS
III. ANALYZING AND VALUING RETIREMENT BENEFITS
Garrick G. Zielinski, CFP, CDFA, CDS
President, WFA Asset Management Corporation
A. Conducting a Preliminary Valuation
Discovery, analysis and evaluation should be completed before the
negotiation and drafting begins.
The importance of valuing retirement benefits for divorce cannot be
overemphasized. Viewed as an asset, the value of a retirement plan can, in many
cases, constitute the single largest marital asset. There are certain assumptions
made and tables used, which when altered, can significantly change the final
value of a participant’s retirement plan.
Defined contribution plans have the least amount of valuation issues while
defined benefit plans have the greatest number of issues. On occasion a
participant wishes to keep his entire interest in his retirement plan, and in
exchange, the non-participant former spouse will retain the equivalent value in
other marital property, such as investment accounts, equity in the home, vehicles,
etc. Often this can be an efficient and cost effective means of assigning half of
the value of the plan to the non-participant former spouse, especially if the value
is not very large.
There are different accepted methods of determining the present value of a
defined benefit retirement plan. Different methods of determining the present
value of a retirement plan will yield surprisingly different results. An “economic”
present value calculation uses different assumptions than an “actuarial” present
value calculation.
The interest or discount rate is one assumption that differs between the two
methods. Typically an actuary will rely on a tiered interest rate structure using
rates published by the Pension Benefit Guarantee Corporation (PBGC). The rate
structure that the PBGC produces has, in effect, an insurance premium or
guarantee built into these rates, which are paid by the employer in calculating the
employer’s pension liability. An insurance premium is not necessary in the case
of determining the value of a monthly benefit to an individual. The cost of the
plan to the employer, is not the same as the fair value to the employee.
An economic present value calculation will usually use an interest rate that is
based on the U.S. Treasury Bond Yield, for example. U.S. Treasuries are the
most creditworthy of all debt instruments since they are backed by the "full faith
and credit" of the U.S. Government. Using Treasuries as a barometer is
considered the risk-free rate, meaning the minimum rate of return an individual
can expect when considering all other types of investments.
Life expectancy of a participant based on gender and race is another important
element to consider. The United States life tables and national vital statistics
reports, described in another section of the outline, are excellent sources for
estimating the reasonable life expectancy of an individual. Be aware of actuarial
present value calculations that may consider life expectancies well over 100 years
of age, as their assumptions tend to mimic those of an employer seeking to
conservatively calculate it’s liability to fund a pension plan.
In determining the present value of a retirement benefit for purposes of a property
offset or buy-out against other post-tax marital property, it is important to use
assumptions that are suitable and logical in regard to the divorcing party. The
assumptions used in an economic present value calculation are more appropriately
geared towards a real life situation rather than a book of numbers.
A present value of a pension16 calculation has 5 basic factors, 2 of which are
assumed, which directly affect the final present value. These are (1) duration of
the payout period based on life expectancy, (2) mortality, (3) dollar amount of
benefit, (4) the participant’s tax bracket, and (5) the assumed interest rate. These
factors become a chain of assumptions upon which the calculation of the present
value is supported by the weakest link.
A key relationship is that the longer the payout period, the higher the present
value. The duration or payout period is based on 3 factors: The participant’s age,
the normal retirement age and the life expectancy.
Another approach is to look for the “control point” in a pension. It is pure
speculation as to when the participant will actually retire. However, the age at
which the participant has the absolute and non-forfeitable right to retire is certain.
Therefore, have the pension valued at the earliest possible retirement age.
A mortality discount is used to take into account the probability that the
participant will decease prior to commencing his or her pension. Pensions are
promises of future benefits, unlike a defined contribution plan. Under a pension
you are promised a benefit at a future date but one of the requirements is that you
live until that date. Under many plans a single participant will forfeit his or her
promised retirement benefit if they die prematurely.
The Plan Administrator usually provides the monthly benefit that is used to
calculate a pension valuation. It would be wise to ascertain the last valuation of
the accrued benefit. Many plans can be as long as 18-months in arrears with
updating their actuarial calculations. You may consider doing your own
calculations by seeking a copy of the Plan Document.
16 See Steinke v. Steinke 126 Wis. 2d 372, 376 N.W.2d 839 (1985)
The tax discount17 may possibly be the most debatable assumption used in the
valuation process, next to the assumed interest rate. The common question is
what tax bracket is the participant in now, or likely to be in during retirement?
Here is where the question of certainty comes up again. If one thing is for certain,
we know that tax rates and tax laws will continue to change in future years. A
rule of thumb currently being employed by many evaluators is to simply discount
the present value by 20%, the same discount rate used to withhold on distributions
from qualified plans18 unless a more suitable19 tax discount rate can be
ascertained.
The interest rate assumption20 used to value a pension is without question the
most critical of all the previous mentioned assumptions. The single most
important mathematical relationship to know and understand is the lower the
assumed interest rate used in the calculation, the higher the present value.
Conversely, the higher the rate used, the lower the present value. For example, if
a pension promises to pay $1000 per month for 10 years the present value is
$98,770 using a 4% discount rate, whereas the present value is $78,942 using a
9% rate. These are the lump sums needed, based on the discount rate used, to
provide $1000 per month for 10 years. The inverse relationship between interest
rates and present value results from the fact that at a lower interest rate
assumption, a larger lump sum of money would be required to provide the same
monthly income over the specified period of time.
Other valuation issues may include vesting, cost of living adjustments (COLA),
coverture fraction formulas, shortened life expectancy, and larger tax discounts.
PRACTICE TIP: Many clients are adamant about retaining their pension that
they worked so hard to accrue over many years of service. Having a pension
17 See Corliss v. Corliss 107 Wis. 2d 338, 320 N.W.2d 219 (Ct. App. 1982) 18 I.R.C. § 3405©(1)(B) and (e)(1)(A)(I) 19 See Laribee v. Laribee 138 Wis. 2d 46, 405 N.W.2d 679 (Ct. App. 1987) 20 See Bouchard v. Bouchard 107 Wis. 2d 632, 321 N.W.2d 330 (Ct. App. 1982)
valuation completed is necessary to understand the value or worth of a plan, but
with the above thoughts in mind, why would anyone want to offset their pension
with other marital property? In reality, the participant may very well be paying a
former spouse for something they may never realize. Great care and thought need
to go into a property offset against a pension.
As previously discussed there are not many issues when valuing a DC plan.
However, you need to be aware of the valuation date to make certain that you get
up-to-date information. The same tax discounts should apply to defined
contribution plans as defined benefit plans. You need to consider the date upon
which company contributions and forfeitures are added to the plan. Some
companies will wait until they file their corporate income taxes to make their
respective employer contributions to a plan. That means that company
contributions could be over 18-months in arrears. Forfeitures are contributions
made to a participant plan from the non-vested portion of a terminated employee’s
plan. If a distribution is being planned to a participant or alternate payee that was
50-years old before January 1, 1986, you have additional considerations. The
possibility of using 10-year forward averaging and capital gains tax treatment still
applies. Lastly, the limits on contributions to plans have increased dramatically
over the past several years. A participant’s DC account could receive as much as
$42,000, and as much as $170,000 could be allocated to a defined benefit plan.
Don’t disregard the contribution dates, it could cost your client over $200,000!
PRACTICE TIP: If you’re looking to free up some cash in a dissolution case and
the parties have substantial “rollover” IRA accounts from a previous employer
plan consider transferring the rollover IRA to a company sponsored retirement
plan that allows such contributions and then divide the plan with a QDRO that
requires an immediate distribution.
1. Social Security
In 1939 Social Security benefits were designed around the demographic of a
married couple with one breadwinner. That is, a spouse, usually the female,
remained at home and provided domestic household duties while the other
spouse provided an income and other benefits to the household. Today, many
families have dual income and approximately half of all marriages end in
divorce. Social Security reduced the poverty level among seniors from 35%
to 10% as of year 2000; the last year such information was made available.
However, the benefits as we know them today are not in sync with regard to
divorce. For example, only 2.4% of married seniors are below the poverty
level while 21% of divorced seniors are below the poverty level. A large
portion of these (73%) divorced seniors under the poverty level are women.
Currently, a couple must be married for at least 10 years for the spouse to be
eligible to receive benefits based on her former spouses work history. A
divorced spouse married for less than 10 years is not entitled to a benefit
based on the former spouses work history. Of course spouses can still collect
benefits based on their own work history. At last count, marriages that ended
in divorce lasted an average of 7 years. This system could potentially create a
myriad of problems and concerns for the attorney.
Consider the following:
If a spouse divorces a worker after 40 years of marriage, the spouse is entitled
to a spousal benefit of 50% of the benefit earned by the worker as long as the
worker is living. Should the worker die, the divorced spouse is entitled to a
benefit equal to the worker’s full benefit. On the other hand, if a worker has 4
Consecutive spouses and married to each of them for 10 year or more, each
spouse is entitled to the same benefits as the worker married to a single spouse
that paid the same amount of taxes. The benefits paid to former spouses could
be staggering.
A divorced person that was married to a much older worker may get
substantially more benefits than a divorced person that was married to a
worker with the approximate same age. That’s because the older worker’s
spouse is more likely to collect survivor benefits, which are more generous
(75%) than spousal benefits (50%).
Social Security is governed by federal regulations. Therefore Social Security
is not allowed to be treated as property for purposes of divorce21. However,
although Social Security may not be treated as marital property, the benefits
are considered income for purposes of support. Therefore Social Security
benefits in pay status can be used to meet maintenance and child support
obligations. When computing support obligations and factoring Social
Security the attorney needs to consider the tax consequences (up to 85%)
where not all Social Security income is taxed.
In some cases, maintenance obligations are negotiated to cease when a former
spouse becomes eligible for Social Security benefits. As you may be aware,
the normal retirement age has changed. Age 65 is the normal retirement age
for those people born before 1937. The normal retirement age is 65 plus 2
months if you’re born in year 1938 and an additional 2 months for each year
thereafter. For those born between 1943 and 1954, the age is 66. For those
born between 1955 to 1969, the normal retirement age is 66 plus 2 months for
each month born after 1955. Anyone born after 1960 will wait to age 67 to
collect full benefits. Of course, at age 62 we all are allowed a reduced benefit,
which is about a 20% reduction. However, when a divorced dependant spouse
receives benefits at age 62, the reduction approximates 25%.
Note that Medicare benefits are not available until a beneficiary turns age 65.
If a reduction in maintenance is considered at age 62, there could be a
significant cost for health care benefits.
21 See Wis. 2d 604, 323 N.W.2d 153 (Ct. App.1982)
Your client may receive social security in one of two ways: (1) based on their
own contributions to the system or (2) as a spouse of a worker based upon the
worker’s contributions. Your client will receive benefits based upon the
calculation of benefits that provide them the highest possible benefit. In order
for your client to receive benefits from a former spouse, they must also be
eligible for benefits regardless of whether or not they have commenced a
benefit. This point may be particularly important if you represent a dependant
spouse that is older than a contributing spouse and the dependant spouse has a
substantially lower contributory history. Other factors are that the dependent
spouse is at least 62 years old and not remarried.
However, if the dependant spouse remarries and that marriage eventually
ends, the dependant spouse may apply for benefits based on the contributions
of either spouse (assuming 10 years or more of marriage). If as discussed
above, a dependant spouse has been married to 4 other contributing spouses,
each for 10 years or more, the dependant spouse is entitled to benefits based
upon the largest benefit payable from any of the contributing spouses.
Benefits are also available if the contributing spouse predeceases the
dependant spouse provided they were married for 10 years or more and the
contributing spouse was fully insured (40 quarters or 10 years) at death and
the dependant spouse has not remarried. Under this circumstance the
dependant spouse is eligible for benefits payable at age 60. This important if
the dependant spouse is near age 60 and considering remarriage. Another
quirk is remarriage will not prevent eligibility if the dependant spouse is
disabled and subsequently gets remarried between the ages of 50-59.
2. Defined Contribution Plans
DC plans usually have an individual account balance, which is valued, at least
once each year on the “valuation date”. Be prepared to ascertain the valuation
date. The value of the plan illustrated on a participant statement reflects the
last valuation date and could potentially be over 18-months old. Because of
technological advances, many plans can value their individual accounts on a
daily basis. These plans are relatively easy to divide whether using a dollar
amount or based upon a percentage of the total plan assets.
Assigning an alternate payee an exact dollar amount from a defined
contribution plan will produce that stated dollar amount. Often a plan will
require an effective date of the award, and additional verbiage assigning the
applicable market value fluctuation to that awarded share. If you use a stated
dollar amount some plans may forbid the assignment of market value gains
and/or losses on an alternate payee’s award. They may require that an exact
dollar amount or percentage be awarded as of the date the plan accepts the
QDRO or the date that the alternate payee applies for a distribution.
Calculating a percentage award of the plan may ease the burden of trying to
anticipate market gains and losses.
PRACTICE TIP: Determine the factual rights of the participant under the
plan as it relates to the sub-accounts. For example, many plans allow in-
service distributions from one sub-account and not the other. It might be
appropriate to single out a certain sub-account to assign to an alternate payee.
An example might be to require a 100% award of the “after tax” portion of the
plan and require an immediate distribution. The proceeds of which could be
used to pay attorneys fees and reduce consumer debt, for example.
3. Joint and Survivor Benefits
A QDRO may designate an alternate payee as the joint and survivor for pre-
retirement and post-retirement benefits whether or not the QDRO is a
“Separate Interest” QDRO or a Shared Interest QDRO. However, a plan that
is already in pay status, may have limited or irrevocable benefits in place.
Particular to ERISA plans, and regardless of the circumstances, the joint and
survivor option previously elected may not be changed, even by a court order.
However, there a few plans we are aware of, particularly WRS and many
other state teacher’s plans, where options already in pay status may be altered
and changed after the date of divorce.
There are three methods to securing a joint and survivor protection for your
alternate payee. The first method would be to provide the alternate payee with
a “Separate Interest” QDRO that specifically states that the participant’s death
will not affect benefits payable to the alternate payee. The second method is
to specifically name the alternate payee as the surviving spouse for both pre
and post retirement survivor benefits. The third method is a combination of
the previous two methods in that a Separate Interest QDRO is drafted and the
alternate payee is named as the surviving spouse to any pre-retirement
surviving annuity and/or a post retirement survivor annuity. Please note that
the latter method may eliminate the participant’s ability to name a subsequent
spouse as the surviving spouse to future accrued benefits.
Under a “Separate Interest” QDRO (discussed later) it is acceptable to allow
the alternate payee to name a beneficiary under an optional form of payment.
Such optional form of payment could be in the form of 60 payments certain
and life form, for example. The Retirement Equity Act of 1984 (REA)
contains an example in which the alternate payee elected a 60-month certain
and life annuity payment and designated her son as the beneficiary to the
remaining payments if she did not survive the 60 months. Our opinion is that
under the payment certain option, you may elect anyone, including a
subsequent spouse, to collect the remaining unpaid benefits. In the REA
example, however, the “child” constitutes an “allowable” alternate payee
under the statutory definition. If the alternate payee chooses a beneficiary that
is not defined as an alternate payee, it could be easily argued by the plan that
the designation does not satisfy the statute requirements. For certain, the
statute is clear that an option of a “joint and survivor” annuity is not allowable
with a subsequent spouse. The difference of course is that one form of benefit
is paid over the lifetimes of the spouse and former spouse while a period
certain is a finite payment. The impact on the benefits paid is also altered in
the event of an election of a joint and survivor annuity.
Furthermore, assume that the QDRO requires that the former spouse is to be
named the surviving spouse for purposes of the survivor benefit paid and the
language is very general. The participant may be prevented from naming a
subsequent spouse or another beneficiary without first obtaining the consent
of the former spouse alternate payee.
Whether to use the Separate Interest QDRO or the Shared Interest method
when dealing with the survivor benefit issue depends upon each case.
However it is clear that most “model QDRO’s” take a conservative approach
and opt for naming the alternate payee as the surviving spouse.
What about a situation where the plan is in pay status and the participant
previously elected a survivor option, thus reducing his monthly benefit in the
process? Does the survivor benefit option have a present value? A recent
Court of Appeals case22 absolutely confirms that it does. At the time of
divorce the husband had been receiving a pension and social security in the
amount of $3,451 per month. The wife was still working as a teacher and
earning $2,833 per month. The court eventually got around to treating the
pension as income rather than an asset. The court also recognized that the
survivor benefit is a marital asset but did not include the $52,000 value of the
survivor option in a division of the marital property. In short, the court
decided that since the pension was treated as income, and there was no
22 See Cir. Ct. No. 01FA004940 Appeal No. 03-1140
assurance that the survivor would ever collect the benefit, the survivor option
was simply a derivative of that income. Had the pension been treated as
property, the survivor benefit would have also been property.
Contrary and prior to this decision, the author finished a case in Kenosha
County with nearly the exact same circumstances. However, the husband
participant was 65 years old and the non-participant wife was 50 years old and
they were married a relatively short 12 years. Nearly 80% of the pension was
accrued prior to the date of marriage. Nonetheless, in a conference with
counsel, Judge Wagner indicated that she would treat the entire pension as
income and the survivor benefit as an asset. The author believes the largest
factor in this case was the age discrepancy and that the wife was likely to
collect on this survivor benefit.
Also see Court of Appeals case No. 98-2905-FT Johnson v. Johnson. This
case also involves a pension that is in pay status. However, Northwest
Airlines in this circumstance provided a 50% survivor option to the husband at
no additional cost due to his disability. The husband appealed that the court
erred in not valuing the survivor benefit but the court affirmed. However, the
court stated “We do not mean to indicate, however, that had husband and wife
selected reduced benefits so as to assure the wife continuing pension benefits
in the event of husband’s death, that this would not be a proper factor for the
court to consider in ordering the distribution of the pension benefits.”
PRACTICE TIP: The survivor benefit issue is a separate issue23. It is
allowable to fully divide the entire accrued survivor benefit as of the date of
death for example, and then divide the accrued benefit as of the date of
divorce. Therefore, the parties may negotiate the survivor benefit issue
independent from the division of the marital portion of the retirement benefit.
23 See Herdt v. Herdt 152 Wis. 2d 17, 447 N.W.2d 66 (Ct. App. 1989) Civil Service survivor benefits
4. Retiree Health Care Benefits
The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires that
most employers sponsoring group health plans offer employees and their
families the opportunity for temporary extension of health coverage at group
rates, in certain instances where coverage under the plan would otherwise
cease. If you are a spouse covered by a medical plan, you have the right to
choose continuation coverage for yourself if you lose group health coverage
for divorce or legal separation from spouse, among other circumstances.
Under COBRA a divorced spouse may extend medical coverage and dental
coverage for up to 36 months.
The plan participant is required to notify the employer that a “qualifying
event” has occurred. A qualifying event is divorce. You will be given 60
days from the date a notice is mailed to you to inform the company COBRA
administrator if you want COBRA coverage. You may forfeit your COBRA
coverage rights if you do not notify the employer that you want continuation
coverage within 60 days of a qualifying event. Employers are not required
nor are they responsible to notify you of your eligibility for COBRA as a
result of divorce. Therefore, it is obvious that the attorney needs to address
this issue early in the divorce matter and collect as much information
regarding the cost and available options for health care.
When the payment or cost of health care benefits becomes an issue to a non-
participant spouse, while the participant spouse has full or partially paid
benefits, many times the cost of benefits can be calculated and accounted for
in an unequal property offset or a maintenance agreement.
The cost for COBRA coverage is the same cost as the group plan, plus the
employer may also charge a 2% administration fee.
The new Health Savings Account (HSA) is a trust like account created by an
individual, not an employer. They can be divided for divorce purposes and
the account could be used to pay COBRA premiums.
The military is much more liberal in regard to former spouse health coverage.
The Uniformed Services Former Spouses Protection Act permits former
spouses to continue receiving commissary, exchange, and heath care benefits
after a divorce in certain cases. In order to qualify for continued benefits a
former spouse must show that the service member served at least 20 years of
creditable service, that the marriage lasted at least 20 years and that the period
of the marriage overlapped the period of service by at least 20 years. A
former spouse who meets these requirements is known as a 20/20/20 former
spouse and is entitled to full commissary, exchange and heath care benefits.
Former spouses that do not meet these requirements lose their commissary
privileges once the divorce is final.
In cases where the service member served 20 years of creditable service, the
marriage lasted 20 years, but the period of the marriage overlapped the period
of service by only 15 years, the former spouse is entitled to full military
medical benefits only for a transitional period of one year following the date
of divorce. After this period the spouse is eligible to purchase a Department
of Defense (DOD)-negotiated conversion health policy.
The former spouse may not remarry and retain coverage nor enroll in another
employer sponsored health plan. All former spouses who don’t meet the
requirements above are entitled to the DOD Continued Health Care Benefit
Program, a premium type, temporary health plan for 36 months until
alternative coverage can be obtained. However, the non-member spouse must
enroll within 60 days of the date of divorce or they will lose full military
health care benefits.
You may also need to consider a qualified medical child support order
(QMCSO). A QMCSO is a medical child support order issued under state law
that creates or recognizes the existence of an alternate recipient’s right to
receive benefits that a participant or beneficiary is eligible to receive under a
medical plan and which satisfies certain additional requirements contained in
ERISA Section 609(a). Also, the plan administrator of the medical plan is
required to treat a notice pursuant to ERISA Section 609(a)(2)(ii) as a
QMCSO with the same force and affect until the actual QMCSO is filed with
the plan.
For purposes of a QMCSO an alternate recipient is any child of a participant
who is recognized under a medical support order as having a right to
enrollment under a group health plan with respect to such participant. Lastly,
ERISA also requires that self-funded medical must recognize QMCSO’s.
As part of divorce settlement a husband agreed to pay and maintain his former
spouse on his medical plan for two years. Instead of arranging for her to elect
benefits under COBRA, the husband continued her enrollment under his
group medical plan for almost 5 years after she had lost eligibility. When he
eventually notified the plan, the plan24sued him for fraud. The U.S. District
Court found him liable for reimbursement of over $100,000 in claims paid on
behalf of his former spouse. Subsequently, Biondi made malpractice claims
against his divorce attorney for failing to tell what he needed to do to obtain
COBRA coverage for his former spouse and also failing to tell him that he
needed to advise the medical plan of the divorce.
5. Plans with Special Issues
The bifurcation of retirement plans under Government sponsored plans,
church plans, tax exempt organizations and foreign plans are generally not
24 U.S. District Court Trustees of the AFTRA Health Fund v. Biondi
subject to ERISA and therefore may be very difficult to deal with. However,
today § 403(b) and § 457(b) plans are subject to the QDRO rules. Also tax
exempt organizations may now sponsor 401(k) plans.
Federal Government (non-military) orders are called Qualified Court Orders
and are not subject to the QDRO rules and ERISA. The rules for Civil
Service Retirement System (CSRS) and the Federal Retirement System
(FERS) are found at 5 CFR §838.211(a)(30) and 5 CFR §838.621 (a) subparts
C and F.
Generally under CSRS and FERS a former spouse (not referred to as alternate
payee) may not receive a portion of an employee annuity before the employee
annuity is paid to the employee. Also, the Government will only accept an
order that reflects a certain type of formula and/or share of an employee’s
annuity. It may be expressed in a fixed dollar amount, a percentage or
fraction, a formula set forth by statute25 or a pro rata share using a coverture
fraction formula which is specific to 5 CFR §838.621(a).
Military Plans are governed under the Uniformed Services Former Spouses’
Protection Act (USFSPA) which is the government’s version of ERISA
regarding divorce and division for governmental plans. Preparing a Military
plan or qualified court order is similar to a QDRO for an ERISA type plan.
Military plans however, have a number of unique features that you should be
made aware of. The order must allocate the benefits as either a percentage of
disposable retired pay26 or retainer pay or as a flat dollar amount. The
Military specifically prohibits the use of a formula or coverture fraction
formula method to divide benefits. In either event, under these circumstances
it makes it extremely difficult to provide a fair and equitable division. There
are some creative options that can make it much easier to divide the benefits
25 See 5 CFR §838.305(b)(1) 26 See Loveland v. Loveland 147 Wis. 2d 605, 433 N.W.2d 625 (Ct. App. 1988)
equitably. For example, the state court could retain jurisdiction and modify
the terms of the order at the time of benefit commencement for example. In
that manner, the order could be modified at retirement age using a flat dollar
amount or percentage based on a formula set forth in the marital settlement
agreement.
Each church plan has its own terms and conditions in regard to rules, which
define the division of the plan assets incident to a court order. Although a
church plan is generally not covered by ERISA, a plan may choose to be
governed by ERISA. In the author’s experience he has never come across a
church plan that is governed by ERISA. Rightly so, why would the plan want
to be burdened by a pile of red tape when they are not required to do so?
City of Milwaukee and County of Milwaukee Plans: Court orders are not
recognized by City and County plans not covered under the Wisconsin
Retirement System. The City of Milwaukee and County of Milwaukee are
exempt from ERISA and the IRC § 414(p) under Wisconsin Statute 66.81.
The Plans will however accept a wage assignment upon commencement of
benefits. If this is the only alternative we offer the following suggestions: The
non-employee spouse will have no control over the timing of the benefit
commencement. Death, disability, form of benefit27 and termination of
employment need to be discussed and negotiated. Upon the death of the
participant, the non-participant spouse loses all rights to a wage assignment
order. A life insurance policy could be secured on the life of the participant
and the named beneficiary could be the non-participant spouse. The amount
of coverage should be the future value of benefits or a negotiated amount
between the future value and present value. This is because the present value
increases as each year passes and/or the participant gets closer to retirement
age. A domestic relations order28 (DRO) is drafted which outlines the terms
27 See Lindsey v. Lindsey 140 Wis. 2d 684, 412 N.W.2d 132 (Ct. App. 1987) 28 See Lindsey v. Lindsey 140 Wis. 2d 684, 412 N.W.2d 132 (Ct. App. 1987)
and conditions of the division. In the Lindsey matter the husband was a City
of Milwaukee pension plan participant and the court ordered a division of the
plan in addition to a requirement that the participant elect a certain type of
payment option that would provide the former spouse with survivor benefits.
At a hearing the husband produced a letter from the City Attorney to the effect
that the payout plan for the pension in question had to be selected by the
participant and the previous court order drafted was not applicable. The wife
appealed and the appellate court reversed. In short, the trial court has
discretion regarding the “mechanics of its division.” To guard against future
problems the court retained jurisdiction and suggested that “maintenance” if
still a factor will be reexamined at the time the participant makes a pension
election.
Taxes will also be an issue with bifurcated City and County plans. The City
or County will not recognize the wage assignment as a taxable distribution to
the non-employee spouse nor will they consider the issuance of a 1099-R.
Taxes could be calculated and an after tax payment made with the wage
assignment. However, the most appropriate solution would be a maintenance
agreement upon commencement with the court retaining jurisdiction to
enforce. The DRO must be properly drafted to cover all the possible
contingencies.
B. Determining the Impact of Inflation and Vesting
If a plan contains either a specified or unspecified cost of living adjustment
(COLA) clause, an inflation adjusted interest rate should be applied. Most, not
all, ERISA plans don’t contain COLA’s. Most, but not all, government including
City, State and Federal plans contain a cost of living clause. Wisconsin
Retirement System does not contain a COLA clause. What it has is a “benefit
adjustment” based upon investment results. Therefore no COLA is specified but
the plan has averaged an increase near 6% annually over the last 15 years. The
plan may provide a COLA but the rate is unspecified. The plan document may
contain language that uses a benchmark rate such as the Consumer Price Index as
the rate.
Most states, including Wisconsin,29 recognize all retirement benefits as
distributable assets regardless of whether or not the retirement benefit is vested.
This issue went as far as the California Supreme Court in the Marriage of
Brown30where the court rejected the idea that non-vested benefits were mere
“expectancies” and not distributable. The employee’s right to benefits upon
completion of performance is a contractual right and therefore included as marital
property. The court did not determine that the present value of a vested pension is
the same as one with a lack of vesting. Lack of vesting should be considered and
the final pension value discounted for the lack of vesting. However, the
discounting methods are ripe for argument. One of the methods employed is to
discount the plan for the probability of death prior to vesting or termination of
employment before the participant becomes fully vested. To discount for the
probability of death, the formula to use is similar to the mortality discount
previously discussed. An occupational expert may have to be consulted regarding
the probability of termination of employment prior to full vesting. Obviously,
these methods complicate the issues and increase the cost of handling a divorce.
Assigning an alternate payee an exact dollar amount per month from a defined
benefit31 plan will produce that stated dollar amount, which the plan pays at a
certain date, such as the date the participant attains age 65. However, the actual
date of the alternate payee’s application for benefits may provide for a different
dollar amount. For example, if the alternate payee is awarded $500 based upon
the participant’s age 65 benefit, the alternate payee would receive $500 per month
at the participant’s age 65 and the benefit would stop at the participant’s death if
29 See Bloomer vs. Bloomer 84 Wis.2d124, 267 N.W. 2d235 (S. Ct. 1978) 30 See Brown 15 Cal.3d838, 847, 126 Cal.Rptr.633 1976 31 I.R.C. § 414(p)(2)(A)(B)(C)(D)
the alternate payee were not deemed the “surviving spouse”32. If the alternate
payee were to commence her benefit at any other time, the benefit would be
adjusted actuarially. Awarding an exact dollar amount may restrict the alternate
payee from participating in future service credits, subsidies, and cost of living or
benefit enhancements, unless specifically awarded.
PERCENTAGE DIVISION: Often the marital settlement agreement will assign
an alternate payee a certain percentage of the participant’s retirement benefits,
without any specification as to the effective date of the award. A percentage
award is acceptable, however specification of the effective date of the award is
recommended. Such date may be expressed as of the date of divorce, as of the
valuation date closest to the date of divorce or it could also be determined as of
the date of commencement as an example. If no date is specified and the Plan
“qualifies the order” it is likely that the percentage will apply upon application for
benefits.
MARRIAGE COVERTURE FORMULA: This is one of the most
misunderstood methods of dividing a pension. In the Journal of Forensic
Economics, Volume IV, Winter, 1990, pp. 47-54, the author Ralph A. Frasca
points out four coverture methods of dividing pensions. Using a fraction formula
to divide retirement plan benefits is popular in many states. A fraction formula
can be designed to exclude from division any benefits attributable to a
participant’s service prior to the marriage. Alternatively, it can be designed to
include a proportionate share of increases due to higher salaries earned by the
participant, and benefit improvements made by the plan for inflation, after the
date of divorce. A fraction formula is commonly referred to as a marriage
coverture adjustment, or a time formula. An example to assign one half of the
“marital portion” of a participant’s retirement benefits may look like this:
32 I.R.C. § 414(p)(5)(A)(B)
½ X
Number of months of Participant’s
creditable service accrued as of the
date of divorce (or during marriage)
X 100
= Alternate Payee's percent of
Total number of months of
Participant’s creditable service at the
earlier of Participant’s retirement or
Alternate Payee’s application for
benefit commencement
total retirement benefit earned
as of the earlier of
Participant’s retirement or
Alternate Payee’s application
for benefit commencement
A marriage coverture formula is often advantageous to the alternate payee
because it will allow her to participate in future service credits, enhancements and
entitlements under the plan. The largest increase in benefit accrual will normally
occur in the final five or ten years of service. When used for this purpose, the
benefit paid to the alternate payee is determined at the time of application for
benefits rather than the date of divorce. Most plans pay a benefit based on the
number of years of service multiplied by a formula using the “final average
earnings” method. As a result, this will dramatically increase the final benefit.
When the QDRO requires the plan to provide a benefit payable to an alternate
payee based upon the final benefit payable to the participant, it will generally be a
division of the greatest benefit payable. This is an excellent negotiating tool for
the alternate payee to provide the maximum benefit determined on the number of
years of marriage. It is recommended that this be negotiated in advance and
specified in the Marital Settlement Agreement to avoid problems during the
drafting stage.
The marriage coverture formula has also been applied by the State of Wisconsin
in Court of Appeals District IV. However, the formula is used to arrive at a
percentage of a divisible plan rather that as the formula set forth in a QDRO. In
the Marriage of Halverson v. Halverson Case No. 00-1884, the coverture fraction
was applied to arrive at the appropriate percentage other than a 50/50 division to
use on a WRS QDRO. In this case, the parties were married for approximately
7.5 years and the husband was a participant in the WRS plan for approximately 20
years. The court used 6.5 years as the numerator. Therefore, 32.5% was
considered as a marital component of the plan. The QDRO awarded 16.25% to
the former spouse. Another interesting part of this case is that the court used 6.5
years as numerator even though the marriage was 7.5 years in length because the
participant did not work for a full year during the marriage due to brain surgery.
Although the pension is a marital asset, the court has discretion in its division.
C. Using Mortality Tables
A key relationship for the attorney to understand is that the longer the duration or
payout period, the higher the present value of a pension. The duration is based on
three factors: (See Appendix E)
a. the participant’s present age
b. the participant’s assumed retirement age
c. the participant’s life expectancy
Once understood, the relationship between a short and long payout periods
becomes obvious. The longer the payout period the greater the present value.
PV $ Now PV at Retirement
Deferral Period Payout Period
45
65
85 Application of Mortality Discount (the probability of death before retirement) $1000/ Month
General Rule: Higher PV: the shorter this period the longer this period Lower PV: the longer this period the shorter this period
Early Normal Retirement Retirement
85 45
Basically there are two kinds of pension valuations used today. They are an
actuarial valuation and an economic valuation. Both valuation methods have five
basic factors that directly affect the final present value. They are (1) the duration
or payout period, (2) mortality discount, (3) dollar amount of the benefit, (4) the
participant’s tax bracket, and (5) the assumed interest rate. Unfortunately, these
elements become a chain of assumptions upon which the calculation of the
present value is supported by the weakest link. In other words, if any of the five
factors turn out to be incorrectly assumed, the present value calculation is
inaccurate.
While it is true that most valuations provide recent and credible sources for these
assumptions, different sources can be used to produce different results. Just as
important as knowing the sources of these assumptions is knowing why and how
these assumptions affect the participant’s present value of their pension.
An actuary will most often site the mortality tables published by the PBGC and
specifically the 1983 GAM table, which is the Group Annuity Mortality table. In
some circumstances, based on age and gender, the table may stretch a life
expectancy to over 108 years. On the other hand, most economists use the Vital
Statistics of the U.S. Life Tables Volume II, Section 6, Publication Number (PHS)
84-1104. In some cases, separate life tables can be used which specifically apply
to unhealthy individuals. This approach was successfully used in a Texas
court33and had the affect of lowering the value of the pension due to the shorter
life expectancy.
An argument has been made in other states for the use of unisex tables in valuing
pension benefits because of doubt concerning the constitutionality of making
distinctions between males and females. Unisex tables average out the mortality
rates for females and males. In a valuation where gender based tables are used in
33 Marriage of Butler (Tex. App.) 543 S.W.2d 147 (1976)
determining the present value, a female participant will be required to surrender a
greater dollar amount than would an identical situated male participant.
Nonetheless, does your client want to know the value of the pension as it pertains
to them and their circumstances or would they rather have a valuation based upon
a variety of unrealistic assumptions? It might be that the practitioner could use
both. The actuarial valuation uses a blended table, however its use is designed to
even out the cost of the plan to the employer. The U.S. Supreme Court held that it
was unconstitutional for employers to pay a smaller pension benefit to women
because women, as a class, live longer.
Another life expectancy discount commonly applied to a pension valuation is
referred to as the “mortality discount.” The mortality discount takes into account
the probability of death prior to the date the pension benefit is commenced. In
most defined benefit plans the participant will forfeit his/her promised retirement
benefit in lieu of a pre-retirement survivor annuity, usually 50% of the accrued
benefit payable for the life of the survivor, and actuarially adjusted for age and
gender of the survivor. Most often, these are only payable to surviving spouses,
and in some rare plans, to surviving children under age 18 and even more rare to a
named survivor of your choice. Statistics used are found at the same Life Tables
sited above when an economic valuation is used. The PBGC GAM tables have
the mortality discounts built into the tables.
The third factor is the monthly benefit or dollar amount used in the calculation.
The Plan Administrator most often supplies the monthly benefit and is a
calculation based on, for the most part, the participant’s average prior earnings,
the number of years of service, multiplied by a given factor. If the monthly
benefit is not supplied it can be accurately calculated using the formula set forth
in the plan document or Summary Plan Description.
The fourth factor is the participant’s income tax bracket. Apart from the interest
rate assumption, the tax discount may possibly be the most debatable assumption
in the valuation process. The question most commonly asked is what tax bracket
is the participant in now, and what tax bracket will they be in at retirement. One
thing is certain, we know tax rates and tax laws will change in the future. A
common rule of thumb being used is to discount the present value by twenty
percent. This figure is derived from the rule (Unemployment Act of 1983) that
requires a plan administrator to withhold twenty percent federal taxes from
distributions from lump sum qualified retirement plans. There is some support for
the twenty percent discount and it comes from the Statistical Abstracts of the
United States, 2001, which suggest that an average retiree has an effective tax rate
of 17.6% with a variance of 2.4%. Obviously, you will find circumstances where
the tax discount should be reduced and/or increased.
The final assumption in regard to the pension valuation is without question, the
most critical of all the assumptions. The interest rate assumed will have a
dramatic affect on the lump sum present value calculation. An important
mathematical relationship to know and understand is that the lower the interest
rate assumed, the higher the present value will be. Conversely, the higher the
interest rate, the lower the present value. The inverse relationship between
interest rates and the final present value of the pension becomes obvious. Be
careful of the pension valuation prepared by the actuary that uses a four-tiered
interest rate approach. The actuary is assuming decreasing interest rates over the
period from the date of valuation to the date of retirement. Using this rate
structure will produce an artificially high present value because of the low interest
rate assumption during the deferral period and a decreasing interest rate
assumption during the payout period. In the Bouchard case34the use of a 5% rate
prescribed by the State of Wisconsin’s insurance code for valuing annuities
(formerly the standard used in Wisconsin) was rejected. That was in a year
during which yields on U.S. Treasury Bonds and Bill were 12.8% and 10.6%
respectively. Clearly the court was ruling in favor of realism in this case.
Throughout the past decade, the author has seen the use of the PBGC rates
34 Bourchard vs. Bourchard (107 Wis. 2d632, 321 N.W.2d 330 (1982)
conflict with the realities of the current market interest rates. In the Herbst case35
the court clearly rejected the actuarial valuation over the economic valuation as
more “realistic” interest rate approach.
The author has an obvious bias toward the economic valuation process because
the actuarial method has numerous unrealistic assumptions tied to the calculation.
For example, Actuaries who employ the four tiered interest rate structure
discussed above are really valuing the employer’s liability to the plan, not the
value of the plan to the employee. The rates and table inherent in the PBGC data
are typically lower, on a weighted basis, than those used by economists. This is
due to the ultra conservative nature of the PBGC in insuring the plan against the
possibility of default for under-funding in the event of termination. Thus the rate
structure that the PBGC produces has an insurance premium built into these rates,
paid by the employer in calculating the employer pension liability. The actuaries’
calculations don’t relate to a single life, but rather a diverse cross-section of
hundreds and thousands of individuals and is not applicable to an individual
pension plan and its participants. The PBGC structure inadequately accounts for
inflation, lack of liquidity, and the fact that a historically short-term interest rate is
being assumed over a relatively long period of time. In other words, is the
liability or cost of the plan to the employer the same as the value of the plan to the
employee? At what point does the usefulness of the pension benefit matter? If
the actuary assumes a life expectancy to age 108, does the income stream really
have any usefulness or value to 108 year old?
Whether it is an actuary or economic valuation of the pension, the valuation
should contain notes describing the basis for certain assumptions used and other
pertinent data. As of late, the ratio of economic value to the actuarial value
actually increased as interest rates have declined since beginning their decent in
2002.
35 Marriage of Herbst Case No. 98-FA-222) unpublished
D. Other Benefit Division Considerations
The most commonly used age for valuing the retirement benefit is the “normal
retirement age” under the plan. This is usually age 65 for most ERISA type plans,
much sooner for government plans. With more and more people opting for early
retirement, using the normal retirement age may be inappropriate in some cases.
Under the terms and conditions of most defined benefit plans, the active
participant will have the non-forfeitable right to retire at any time after attaining a
certain age (sometimes a minimum number of years of service are required) such
as 55. It is pure speculation as to the date that a participant will actually retire,
but the age at which the participant has the absolute right to retire is referred to as
the “control point.” Although the actual age is speculative, the control point is
certain. The author believes that even though you may not use the control point
information at trial or in negotiations, determining the value of the plan at the
“earliest allowable” retirement date is valuable information. This is even more
important if you represent the non-participant spouse.
Don’t overlook the importance of determining the date on which the valuation
will be made. Failure to recognize and determine the financial ramifications of
such a date could have serious consequences. Many DC plans allow for
discretionary profit sharing contributions that are determined at year-end but may
not be deposited until 3-4 months later. Also, some voluntary contributions may
not post in the account until after the valuation date. In a DB plan, under most
circumstances, using the same valuation date as the retirement date leaves the
benefits payable at retirement or to your alternate payee, unknown and most likely
increased by future service credits, most often undetected by you.
PLAN LOANS: It should be determined whether a qualified plan loan is a marital
debt. Any amount borrowed from a plan by the participant is taxed as a
distribution unless the loan is not more than the lesser of (1) $50,000 or (2)
greater of $10,000, or one half of the non-forfeitable accrued benefit to the
participant. The loan must be repaid within 5-years and must be amortized in
level installments over its term with payments not less frequently than quarterly.
The 5-year amortization requirement does apply to any loan used to acquire a
principal residence. Loans will generally only be an issue with defined
contribution plans. Defined contribution plans have a definite account balance for
each participant as well as an alternate payee if the alternate payee has retained
her share with the plan. If loans are allowed within the terms and conditions of a
plan, a QDRO may provide the right to borrow from the plan to the alternate
payee. More often than not, plan documents require that the “participant” is an
active employee, therefore loans would not be available to an alternate payee
because they would not be an active employee. If all or a portion of the loan
becomes taxable, it is subject to premature distribution rules and ordinary income
taxes to the participant and/or alternate payee. Loans and the tax consequences
should be considered in the equitable division of the marital property.
RETIREMENT AGE: It is important for the attorney to ascertain the earliest
retirement age under the plan that is being divided via QDRO. Most defined
benefit plans provide early retirement at the participant’s attainment of age 55.
However some plans define the earliest retirement age as a function of the number
of years of service or age plus years of service. Benefits paid sooner than the
normal retirement age are subject to reduction for early commencement. For
example, if a participant has earned a benefit equal to $1,000 per month payable
at age 65, he may be allowed to receive it early, at age 55, in reduced form, such
as $500 per month. The accrued benefit is reduced to compensate for the
extended payout period.
In a standard defined benefit plan, benefits are not payable to an alternate payee
until the participant attains the earliest retirement age under the plan. While the
age of the alternate payee may impact the amount of benefit she receives under an
independent interest QDRO, it has no impact on her ability to commence receipt
of benefits.
Compare the age of the participant to the age of the alternate payee. Determine
the earliest retirement age of the participant, which is the point at which benefits
are payable to the alternate payee. If there is a large discrepancy in age between
the alternate payee and the participant, it is possible that the awarded benefit will
never become payable to an alternate payee. In some instances it is worthwhile to
explore creative and cost effective solutions to the variety of problems that may
be encountered.
For example, assume that you have a 60-year-old male participant that has
accrued a vested lifetime benefit equal to $2,000 per month. Assume the alternate
payee is age 50, and she is awarded 50% of his benefit, or $1,000 per month. If
the alternate payee is to receive benefits in the amount of $1,000 per month, they
will be based on the participant’s lifetime and will cease upon his death, often
referred to as “if, as and when” type QDRO’s. If benefits are to be paid to the
alternate payee over her lifetime, which is most often the intent, then the amount
she receives must be actuarially converted to accommodate her age and life
expectancy under the terms of the plan. Given the age difference between the
parties in this example, a benefit of $1,000 payable for the lifetime of the
participant may only yield $350 per month for the lifetime of the alternate payee.
This is because the alternate payee is younger, expected to live longer, and thus
receive payments over a longer period of time.
PRACTICE TIP: Further assume that the plan allows for a 100% joint and
survivor annuity equal to $1,600 per month payable over the lifetimes of both the
participant and his former spouse. The 100% joint and survivor annuity is less
than the option that would provide the participant with a monthly benefit for his
lifetime alone because it is reduced by the costs associated with paying the benefit
out over the lifetimes of two individuals. A shared interest QDRO could require
benefits to be paid in the form of a 100% joint and survivor annuity, with the
alternate payee deemed the “surviving spouse”. The QDRO could for example,
award the participant $1,200 per month (which is more than 50% of the accrued
$2,000 he would have received with a straight 50/50 division) and the former
spouse $400 per month (which is more than the actuarial equivalent she would
have received under an independent interest QDRO). At the participant’s death,
which is likely to be substantially earlier than the alternate payee’s in this
example, the alternate payee would receive $1,600 per month until her death
(which is substantially greater than what would otherwise be payable to her under
an independent interest QDRO). This example demonstrates how analyzing the
spousal benefits in each particular marital situation could provide increased value
to each party and potentially solve a myriad of financial issues.
Summary:
The common threads, which flow through different pension valuations, have, in a
comparative sense, varying effects on the present value outcome simply because
of the methods and sources used. One thing is for certain, the relationships of
interest rates to the present value or duration to the present value are mathematical
truisms, which are only modified or distorted by the methods of valuation
employed.
FACTORS AND ASSUMPTIONS AFFECT ON PRESENT VALUE
High Interest Rate Lower Present Value Low Interest Rate Higher Present Value Early Retirement Age Higher Present Value Normal Retirement Age Lower Present Value Shortened Life Expectancy Lower Present Value Cost of Living Adjustment Higher Present Value Marriage Coverture Adjustment Lower Present Value Larger Tax Discount Lower Present Value
The closer a person is to retirement, the larger the present value. The value of the
pension peaks at the retirement date. This makes sense when you consider that
with any length of a deferral period, that the plan, or individual saving for
retirement has time to let the funds compound at interest. At retirement, the fund
is no longer growing and must then be annuitized or liquidated to pay out the
desired monthly benefit. As each year passes subsequent to the retirement date,
less and less money is needed in the form of a lump sum to provide the required
income over the remaining payout period.
Understanding how each of these elements of a present value calculation relate to
the final value of the plan, whether the attorney represents the participant or the
participant’s spouse, will only strengthen the attorney’s ability to negotiate a fair
settlement on behalf of their client.
QDRO CREATION IN WISCONSIN
Building a Future After a Split
IV. TIPS AND STRATEGIES FOR EFFECTIVE DRAFTING AND
IMPLIMENTATION
Garrick G. Zielinski, CFP, CDFA, CDS
IV. TIPS AND STRATEGIES FOR EFFECTIVE DRAFTING AND
IMPLIMENTATION
Garrick G. Zielinski, CFP, CDFA, CDS
President, WFA Asset Management Corporation
A. Interpretation of Order From Court
The Plan Administrator should take certain steps whether the plan pre-approves or
does not pre-approve an order when it’s received. The Plan Administrator has a
statutory obligation to determine if a court order meets the requirements of §
414(p) of the Code. This obligation must be completed in a reasonable amount of
time after the plan has received the order36. When a proposed draft is reviewed
the “reasonable time” rule does not begin until the plan receives the final order
signed by the court.
The statutes do not define “reasonable time.” In the absence of regulations it’s
not clear what the maximum amount of time is allowable for reviewing an order.
Many attorneys believe that the 18-month period as referenced in the QDRO
provisions is the period required for a “qualified” status. This is incorrect because
the statute is only referenced in regard to the requirement that the Plan must
segregate payments that would have otherwise been paid to the alternate payee
and have not been paid pending the “qualification” process by the Plan37.
Therefore the 18-month period does not apply to the “reasonable” time period for
qualification. Our experience is that most plans provide a response within 30-45
days.
B. Establishing Administrative Procedures
36 IRC § 414(p)(6)(A)(ii); ERISA § 206(d)(3)(G)(i)(II) 37 IRC § 414(p)(7)(E); ERISA § 206(d)(3)(H)(v)
In connection with the written procedures discussed below the plan must
determine if a particular order meets the requirements of IRC § 414(p). In doing
so the plan should adopt the following administrative procedures:
a. Identify the Plan that will pay the benefits
b. Identify who will receive the benefits
c. Identify the amount, percentage or formula used to determine the
amount to be paid to the alternate payee
d. Identify the date which benefits are to be paid to the alternate payee
and the form of payment
e. Identify when the benefit payments will cease
f. Determine what happens when the alternate payee dies after the order
is approved but before benefits are paid
g. Determine what happens when the participant dies after the QDRO is
approved
C. Communicating QDRO Procedures to Participants and Alternate Payees
For plan years beginning on or after January 22, 2001, the Department of Labor
requires that the Summary Plan Description of a pension plan include either a
description of the plans’ QDRO procedures or a statement indicating the
participant’s and an alternate payee can obtain a copy of the plan’s procedures
from the plan administrator, at no charge.
All qualified plans are required to have the following:
1. A QDRO procedure in writing
2. A statement proclaiming that each individual identified in the DRO, as
being entitled to benefits from the plan, shall be mailed a copy of the
written QDRO procedures at the address cited in the DRO upon
receipt of the DRO.
3. The procedure must allow the alternate payee to designate a
representative for the receipt of such notices that are sent to the
alternate payee.
4. The procedures must be reasonable in nature.38
5. The plan must follow the written procedures so any unwritten
procedures should be put into writing. See Appendix D for a sample
written procedure.
A Plan Administrator should never release information regarding a participant
without receiving written authorization from the participant. If a participant
refuses or fails to provide such authorization a properly served subpoena to the
Plan Administrator will accomplish the same.
D. Required Information and Elements of the QDRO
The Order must designate each alternate payee. An alternate payee is any spouse,
former spouse, child or other dependent of the participant who is recognized by a
domestic relations order as having a right to receive all or a portion of the benefits
payable under the plan with respect to the participant. (I.R.C. §414(p)(8) and
ERISA §206(d)(3)(K))
The Order must clearly specify the amount or percentage of the participant's
benefits to be paid to alternate payee, or the manner in which the amount is to be
determined. (I.R.C. §414(p)(2)(B) and ERISA §206(d)(3)(C)(ii))
The Order must specify the number of payments or the period to which the order
applies. (I.R.C. §414(p)(2)(C) and ERISA §206(d)(3)(C)(iii))
The Order must specify each plan to which the order applies. (I.R.C.
§414(p)(2)(D) and ERISA §206(d)(3)(C)(iv))
38 ERISA §§ 206(d)(3)(G)(ii)(I), 206(d)(3)(G)(ii)(II) and 206(d)(3)(G)(ii)(III)
The Order must specify the name and last known mailing address of the
participant and alternate payee. Social security numbers, dates of birth and the
date of divorce are not required under the Code, but most plan administrators
require this information to process and calculate benefits payable to the alternate
payee, especially if the awarded benefits are to be based upon the lifetime of the
alternate payee. (I.R.C. §414(p)(2)(A) and ERISA §206(d)(3)(C)(i))
A domestic relation’s order is any judgment, decree, or orders including a
property settlement agreement which:
a. relates to the provision of child support, alimony or marital property rights
to a spouse, former spouse, child or other dependent of a participant.
b. is made pursuant to a state domestic relations law, including a community
property law. (I.R.C. §414(p)(B)(i)(ii) and ERISA §206(d)(B)(ii)(I)(II))
The qualified status of the domestic relation’s order is determined only by the
plan administrator in accordance with I.R.C. §414(p) and ERISA §206(d).
The order must create or recognize the existence of an alternate payee's right to,
or assigns to, the right to receive all or a portion of the benefits. (I.R.C.
§414(p)(1)(A)(i) and ERISA §206(d)(3)(B)(i)(I))
The order cannot require the plan to provide any type or form of benefits, or any
option, not otherwise provided under the plan. (I.R.C. §414(p)(3)(A) and ERISA
§206(d)(3)(D)(i))
The order cannot require the plan to provide increased benefits determined on an
actuarial value. (I.R.C. §414(p)(3)(B) and ERISA §206(d)(3)(D)(ii))
The order cannot require the payment of benefits to an alternate payee that are
already required to be paid to another alternate payee under a previous order.
(I.R.C. §414(p)(3)(C) and ERISA §206(d)(3)(D)(iii))
In the case of any payment before a participant has separated from service, an
order may provide that payments to the alternate payee can begin on or after the
date on which the participant attains the earliest retirement age under the plan
whether or not the participant has actually retired. The earliest retirement age
means the earlier of:
c. the date the participant is entitled to a distribution under the Plan, or
d. the date the participant reaches age 50, or, if later, the earliest date on
which the participant could receive benefits if the participant separated
from service. (I.R.C. §414(p)(4)(B)(i)(ii) and ERISA
§206(d)(3)(E)(ii)(I)(II))
Clearly an attorney should not simply fill in the blanks of “model documents”, but
rather gain a thorough understanding of the retirement plan and its benefits,
leading to his/her own draft to submit to the plan administrators. Discovery,
analysis and a pension valuation should be completed before the negotiation and
drafting of a QDRO begins.
An Order that is determined to be qualified will remain qualified with respect to a
successor plan of the same employer or a plan of a successor employer (§ 414(a)
of the I.R.C.). Information in regard to a Qualified Domestic Relations Order can
be obtained from the I.R.C. §414(p), Employee Retirement Income Security Act
(ERISA) of 1974 §206(d) and the Retirement Equity Act of 1984 (REA-84),
Public Law 98-397 §104, which amended certain sections of ERISA to improve
the delivery of benefits to an alternate payee. I.R.C. §401(a)(13) creates an
exception to the anti-alienation requirements of Code §401(a)(13)(A). ERISA
qualified plans are subject to the anti-alienation rules unless they are divided by
means of a domestic relations order that is determined to be qualified by the plan
administrator.
E. Separate Interest vs. Shared Payment QDRO
Every divorce is different, and every plan is different. In determining which
format is most beneficial to the parties, consider the age difference between the
parties and how close they are to retirement age. Independent interest QDRO’s
usually provide the most equitable means of division when the parties are
relatively close in age and in good health. Also consider the health of the parties.
Shared interest QDRO’s are usually beneficial when terminal illness afflicts one
of the parties. Shared interest QDRO's are usually the only form of QDRO
permissible once the participant has already retired.
PAYABLE OVER LIFE OF ALTERNATE PAYEE OR PARTICIPANT: The
most typical type of QDRO, an independent interest QDRO, assigns benefits to
the alternate payee over the alternate payee’s lifetime, regardless of survival of
the participant. In securing an independent interest QDRO it is essential to clearly
define the intent. Phrases such as “actuarial equivalent”, “payable over the
alternate payee’s lifetime” will reduce the likelihood of misinterpretation by the
plan administrator. There have been numerous malpractice cases where the
alternate payee’s benefit has either been forfeited or has ceased at the death of the
participant because the QDRO preparer mistakenly assumed that benefits would
be payable to the alternate payee for her lifetime.
A shared interest QDRO will pay benefits to the alternate payee over the lifetime
of the participant. This means that retirement benefits will cease to be paid to the
alternate payee upon the death of the participant. A shared interest may also
provide for pre-retirement and post-retirement survivor benefits to be paid to the
alternate payee upon the death of the participant, however they do not come
without a cost.
SEGREGATED BENEFITS: A QDRO that assigns a benefit to an alternate payee
that is independent of the participant’s employment status and survival is
considered a separate interest QDRO, or an independent interest QDRO. An
independent interest will allow the alternate payee to collect benefits at the
participant’s earliest retirement age (or the age the participant would have attained
the earliest retirement age39 under the terms of the plan) or later, regardless of the
survival of the participant. The plan administrator is directed to provide the
alternate payee with benefits payable over her lifetime. Essentially the benefits
awarded to the alternate payee are segregated from the benefits of the participant.
In doing so, the alternate payee should not need to be deemed the “surviving
spouse” of the participant to collect benefits for her lifetime. This is usually the
most equitable and efficient manner in dividing defined benefit retirement plans.
Also, it will provide the least cost to the participant. That is, the participant’s
benefit will be reduced only by the amount awarded to the alternate payee,
without further reduction for the costs associated with survivor benefits. On
occasion this approach will prohibit other options such as cost of living
adjustments, subsidies, or a reversion to the participant upon the premature death
of the alternate payee.
The opposite approach to an independent interest QDRO is a shared interest
QDRO. A shared interest QDRO essentially treats the parties as a married
couple, instead of single individuals. In certain circumstances this may be
appropriate. The alternate payee receives a portion of the participant’s benefit
during retirement and survivor benefits can be secured in the same fashion as if
the parties were married. Rather than segregating the benefits and having the
alternate payee receive benefits based on her own lifetime, the benefits are paid
based on the joint lives of the parties.
F. Suggested Language
Countless times the author has read marital settlement agreements that simply
state to “divide the retirement interest” in half. I’m sure you realize by now that
39 I.R.C. § 414(p)(4)(B)(I)(ii)(I)(II)
some very critical issues cannot simply be divided in half. In fact, in a defined
benefit situation, an exact “equal” division is unlikely in the eyes of the lay person
due to the actuarial assumptions used in the division of the benefits. Obviously
the attorney needs to carefully articulate the myriad of issues facing the final draft
in the marital settlement agreement.
Language needs to be clear on simple matters such as the actual name of the plan
being divided. You need to address the method used to bifurcate the benefits, and
the date to be used in valuing the benefit for division. The marital settlement
agreement should also address survivorship issues, cost of living increases, or
future contingent benefit increases, subsidized benefits and language that the
participant will not take any action that could jeopardize or reduce the benefits
assigned to the alternate payee. Here’s a sampling of some suggested language
for a variety of situations:
If you want to provide a single lump sum from a defined contribution and have
the award adjusted for account fluctuations from the date of the divorce to the
date of distribution the following language may be acceptable:
The amount assigned to Alternate Payee shall be equal to fifty percent (50%) of all account balances in the Plan with respect to the Participant as of the date of divorce, (date of divorce) or the Plan valuation date closest to the date of divorce.
Alternate Payee shall receive her portion of the Participant's account balance stated above in a single lump sum payment after this Order has been accepted by the Plan Administrator as a Qualified Domestic Relations Order and Alternate Payee has completed such notice of application for distribution of benefits as required under the terms and conditions of the Plan and in the manner in which Alternate Payee requests to receive and/or transfer said account balances. Such distribution shall fully satisfy the Alternate Payee's rights under this QDRO.
The lump sum payment to Alternate Payee may be made as soon as practicable after this Order has been approved as a Qualified Domestic Relations Order. The lump sum amount stated above shall be adjusted for any market value and/or investment gains or losses from the effective valuation date of the award to the date of valuation for distribution to the Alternate Payee. Any distribution from the Plan pursuant to this QDRO shall be made in accordance with normal Plan procedures.
If you want to award a pro-rata share of an early retirement subsidy, the following
language may be acceptable:
The Alternate Payee shall be entitled to a pro-rata share of any early retirement subsidy provided to the Participant on the date of his retirement (including any temporary, supplemental payments made to the Participant). In the event the Participant retires early after the Alternate Payee has already commenced benefits on an unsubsidized basis, the amounts payable to the Alternate Payee shall be recalculated according to the Plan Administrator’s practices and the Plan’s actuarial principles, in order to provide the Alternate Payee with a pro-rata share of such subsidy (including a pro-rata share of any temporary supplement payable to the Participant). The Alternate Payee shall only receive her portion of any temporary supplement as long as the Participant is eligible for and receiving such supplemental payments.
If you want to require that proceeds from the QDRO distribution be used to pay
attorney fees or other possible debts the following language may be acceptable:
Alternate Payee shall receive her portion of the Participant's shares stated above in a single lump sum payment after this Order has been accepted by the Plan Administrator as a Qualified Domestic Relations Order and Alternate Payee has completed such notice of
application for distribution of benefits as required under the terms and conditions of the Plan and in the manner in which Alternate Payee requests to receive and/or transfer said account balances. Alternate Payee is hereby ordered to elect to receive a portion of her awarded share in the form of a taxable distribution with a net payment not less than the amount of the Attorney’s fees that she has incurred. Alternate Payee is hereby ordered to pay all Attorneys’ fees that she has incurred upon receiving the distribution of her award. The Plan shall not be held responsible for enforcing the obligations of the Alternate Payee. Such distributions shall fully satisfy the Alternate Payee's rights under this QDRO.
If you want to provide for an independent interest QDRO you have a variety of
alternatives. Typically an independent interest would require the alternate payee
to meet certain age requirements to commence a benefit, usually the participant’s
age 55 or if deceased, the age the participant would have attained age 55.
However, if you want to award an independent interest and provide a pre
retirement survivor annuity (a benefit could be paid prior to age 55) the following
language may be acceptable:
The assignment of an independent interest of the Participant’s
benefits to the Alternate Payee herein shall not be reduced, abated
or terminated as a result of death, disability or termination of
employment of the Participant. Plan benefits shall be payable to
the Alternate Payee even if the Participant dies prior to, or after
commencement of Alternate Payee’s benefit, or prior to or after the
commencement of the Participant’s benefit. The Alternate Payee
shall be treated as the surviving spouse of the Participant for
purposes of Sections 401(a)(11) and 417 of the Internal Revenue
Code to the qualified pre-retirement survivor annuity (QPSA)
benefits provided by the Plan, if the Participant should predecease
the Alternate Payee, subject to the following conditions: (1) the
Alternate Payee would be entitled to receive a QPSA benefit based
only on the Participant’s pension benefit accrued as of the date of
divorce; and (2) the QPSA benefit protection will expire as soon as
the Alternate Payee commences receipt of her awarded benefit as
set forth in paragraph 1 of this Order.
This sample language is not designed to address all the retirement benefit issues
that may arise in each domestic relations matter or QDRO. Further, some of the
sample language while helpful in facilitating a draft; it is not meant to satisfy all
or any of the requirements of a QDRO. See the appendix for a sample defined
benefit QDRO and defined contribution QDRO.
G. Calculating the Division of Pensions and Other Offsetting Assets
As previously stated, there are five factors that determine the present value of a
pension. And, the most critical of all the factors is the interest rate or discount
rate assumed. If your considering an offset situation, it makes financial sense to
look at the value of the pension in terms of the risk tolerance of the individual to
be certain that you are comparing a fair value. For example, many times one
party opts to retain the home while the other party retains his/her pension.
Assume that you represent the non-participant spouse and they would prefer to
retain the residence. If the non participant spouse is accustomed to putting their
long term investments into stock, and/or stock mutual funds for example,
assuming a 4% interest rate on the value of the pension for offset purposes will
result in a substantially larger present value. If as a result of that valuation
assumption you were unsuccessful in reaching an offset agreement, did you really
provide counseling that was in the best interest of the individual? Probably not
because the value of the pension using a 4% discount rate artificially increased the
true value of the pension to that individual. The correct way to handle this
situation is to fully understand the calculation and illustrate several interest rate
assumptions, which will put you into a much better negotiation position. Often
times attorneys request a pension valuation from their expert and they receive a
report that indicates that the present value of a pension is X amount of dollars.
The attorney sticks to that number as if it’s a bank account balance and many
times will even litigate the issue. On the other hand, if you represent a client that
is largely unsophisticated, maintains mostly bank assets if any, using a more
conservative interest rate might be most suitable. However, under a circumstance
such as this additional financial counseling is likely warranted because your client
might be putting themselves into a financial situation that they may not able to
sustain for any length of time.
H. Tax Issues
1. Distinctions between IRC and ERISA Title I
The Employee Benefits Security Administration (EBSA) is responsible for
administering and enforcing the fiduciary, reporting and disclosure provisions
of Title I of the Employee Retirement Income Security Act of 1974 (ERISA).
At the time of its name change in February 2003, EBSA was known as the
Pension and Welfare Benefits Program. At the time of this name change, the
Agency was upgraded to a sub-cabinet position with the establishment of
Assistant Secretary and Deputy Assistant Secretary positions.
The provisions of Title I of ERISA, which are administered by the U.S.
Department of Labor, were enacted to address public concern that funds of
private pension plans were being mismanaged and abused. ERISA was the
culmination of a long line of legislation concerned with the labor and tax
aspects of employee benefit plans. Since its enactment in 1974, ERISA has
been amended to meet the changing retirement and health care needs of
employees and their families. The role of EBSA has also evolved to meet
these challenges.
The administration of ERISA is divided among the U.S. Department of Labor,
the Internal Revenue Service of the Department of the Treasury (IRS), and the
Pension Benefit Guaranty Corporation (PBGC). Title I, which contains rules
for reporting and disclosure, vesting, participation, funding fiduciary conduct
and civil enforcement, is administered by the U.S. Department of Labor. Title
II of ERISA, which amended the Internal Revenue Code to parallel many of
Title I rules, is administered by the IRS. Title III is concerned with
jurisdictional matters and with coordination of enforcement and regulatory
activities by the U.S. Department of Labor and the IRS. Title IV covers the
insurance of defined benefit pension plans and is administered by the PBGC.
Prior to 1978 reorganization, there was overlapping responsibility for
administration of the parallel provisions of Title I of ERISA and the tax code
by the U.S. Department of Labor and the IRS, respectively. As a result of this
organization, the U.S. Department of Labor has primary responsibility for
reporting, disclosure and fiduciary requirements; and the IRS has primary
responsibility for participation, vesting and funding issues. However, the U.S.
Department of Labor may intervene in any matters that materially affect the
rights of participants, regardless of primary responsibility.
Pre-ERISA Legislation: Initially, the IRS was the primary regulator of private
pension plans. The Revenue Acts of 1921 and 1926 allowed employers to
deduct pension contributions from corporate income, and allowed for the
income of the pension fund’s portfolio to accumulate tax-deferred. The
participant realized no income until monies were distributed to the participant,
provided the plan was tax qualified. To qualify for such favorable tax
treatment, the plans had to meet certain minimum employee coverage and
employer contribution requirements. The Revenue Act of 1942 provided
stricter participation requirements and, for the first time, disclosure
requirements.
The U.S. Department of Labor became involved in the regulation of employee
benefits plans upon passage of the Welfare and Pension Plan Disclosure Act
in 1959 (WPPDA). Plan sponsors (employers and labor unions) were required
to file plan descriptions and annual financial reports with the government;
these materials were also available to plan participants and beneficiaries. This
legislation was intended to provide employees with enough information
regarding plans so that they could monitor their plans to prevent
mismanagement and abuse of the plan funds. The WPPDA was amended in
1962, at which time the Secretary of Labor was given enforcement,
interpretive and investigative powers over employee benefit plans to prevent
mismanagement and abuse of plan funds. Compared to ERISA, the WPPDA
had very limited scope.
ERISA: The goal of Title I of ERISA is to protect the interest of participants
and their beneficiaries in employee benefit plans. Among other things,
ERISA requires that sponsors of private employee benefit plans provide
participants and beneficiaries with adequate information regarding their plans.
Also, those individuals who manage plans, along with other fiduciaries, must
meet certain standards of conduct. The law also contains detailed provisions
for reporting to the government and disclosure to participants. Furthermore,
there are civil enforcement provisions aimed at assuring that plan funds are
protected and participants who qualify receive their benefits.
ERISA covers pension plans and welfare benefit plans (e.g. employment
based medical and hospitalization benefits). Plan sponsors must design and
administer their plans in accordance with ERISA. Title II of ERISA contains
standards that must be met by employee pension benefit plans in order to
qualify for favorable tax treatment. Noncompliance with these tax
qualification requirements of ERISA may result in disqualification of a plan
and/or other penalties.
Important legislation has amended ERISA and increased the responsibilities
of EBSA. For example, the Retirement Equity Act of 1984 reduced the
maximum age that an employer may require for participation in a pension
plan; lengthened the period of time a participant could be absent from work
without losing pension credits; and created spousal rights to pension benefits
through qualified domestic relations orders in the event of divorce, and
through pre-retirement survivor annuities. The Omnibus Budget
Reconciliation Act of 1986 eliminated the ability of employers to limit
participation in their retirement plans for new employees who are close to
retirement, and the ability to freeze benefits for participants over age 65. The
Omnibus Budget Reconciliation Act of 1989 requires the Secretary of Labor
to assess a civil penalty equal to 20% of any amount recovered for violations
of fiduciary responsibility.
The department’s responsibilities under ERISA have also been expanded by
health care reform. The Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) added a new part 6 to Title I of ERISA which provides for the
continuation of health care coverage for employees and their beneficiaries (18
–36 months) if certain events would otherwise result in a reduction in benefits.
More recently, the Health Insurance Portability and Accountability Act of
1996 (HIPAA) added a new part 7 to Title I of ERISA aimed at making health
care coverage more portable and secure for employees, and gave the
department broad additional responsibilities with respect to private health
plans.
2. Non-Qualified Plans, Stock Options and Welfare Benefit Plans
Section 457(f) plans are referred to as non-qualified deferred compensation
plans and in less common circles sometimes called “Rabbi Trusts.” Typically
they are designed to attract and retain highly compensated employees by tying
the benefits paid to the employee over a long-term employment contract. The
IRS recognizes these types of plans as non-qualified40 and they are not subject
to ERISA. The primary reason is the benefits (whether funded or unfunded,
or phantom stock) or accounts are subject to the claims of the businesses
general creditors. Therefore, if the business has financial problems in the
future, the assets in the plan are subject to paying the business debts. On the
other hand, ERISA plans are not subject to the claims of the business creditor
nor are the participant’s assets in the plan subject to the claims of their
respective creditors. In other words, the plan’s assets are at risk of loss until
they are actually paid and/or distributed to the participant and/or alternate
payee. Most plans have written provisions in regard to how the plan will
divide benefits incident to divorce, if at all.
As we enter the 21st Century, attorneys will need to become more
knowledgeable regarding non qualified stock options. Traditionally stock
option plans have been used as way for companies to reward top management
and key employees and link their interest with those of the company. Those
plans were commonly referred to as “golden handcuffs.” A survey conducted
in 1997 found that more than a third of large U.S. companies have broad-
based stock option plans covering all or a majority of their employees, not just
key employees. That’s more than double the figure in 1993.
A stock option is the right to purchase a specified number of shares of stock
for a specified price, at specified times. The price at which the option is
granted is called the grant price and in many cases is the market price of the
stock at the time the option is granted. Whether the option is granted to
provide income, for past services, as an incentive for future services, or for no
consideration at all, an option holder has finite term to exercise the option or
they are subject to loss. So with an option contract, time is a critical factor. If
you are entering an agreement using a deferred payment agreement, to avoid
problems the risk of forfeiture of the option going unexercised while value
40 I.R.C. § 83
exists should be addressed to avoid economic loss or a potential malpractice
claim.
Most courts, including Wisconsin41treat stock options as marital property.
What most courts don’t agree on is the manner of valuation and/or division.
In Chen v. Chen, the court clearly struggled with placing a value on stock
options. Instead, the coverture fraction formula and order of a net after tax
payment due upon exercise of the options was used. The courts have to deal
with a myriad of issues. They need to determine if the options are a result of a
reward for past service and thus completely marital or are they an incentive
for future services. What about stock options that have no value. If a value
cannot be determined can they be divided? Are they vested or unvested
options?
Most courts are using a four-step process with dividing options. The first step
is to trace the options to past and/or future services. The second step is to
determine the portion that is related to compensation for past service. This is
usually determined by when the options were granted during the marriage in
relationship to when they vest. All vested options at the date of divorce would
be considered a marital asset unless a portion was vested prior to the marriage.
The third step is determining the portion that was granted for future services.
Those would be all the shares granted but don’t vest until a later date. The
marital share of those options can be determined using a fraction formula.
The result will then be divided between the parties. A value could be placed
on the option as of the date of divorce for property offset purposes or as in
Chen v. Chen, a deferred payment arrangement could be negotiated.
3. Defined Benefit and Defined Contribution Plans
41 See Chen v. Chen 142 Wis. 2d 7, 416 N.W.2d 661 (Ct. App. 1987)
A plan may allow an alternate payee to elect a distribution immediately after
the plan receives the order and deems the order “qualified”. A plan may not
require an alternate payee to receive their distribution immediately unless the
alternate payee’s account value is less than $500042. Payments to an alternate
payee under a QDRO are not taxed to the participant; they would not be
subject to the premature distribution penalties and would not interfere with the
participant receiving a lump sum distribution in the future. Furthermore, the
distribution to the alternate payee could be rolled over into an IRA. All
distributions from qualified retirement plans (with the exception of
distributions to children via QDRO for child support purposes) are considered
ordinary income to the recipients, and taxed as such. A direct distribution
from a defined contribution plan to an alternate payee is pursuant to a QDRO
is exempt from the 10% federal and 3.3% Wisconsin state premature
distribution penalties that would otherwise apply to distributions prior to age
59½. Please note that once the distribution is rolled over or transferred to an
IRA, the exemption from the premature distribution penalties no longer
applies.
Distributions from defined contribution plans that are not directly rolled over
into an IRA or other qualified retirement plan are subject to an automatic 20%
federal tax withholding. The rollover of assets from one qualified plan to
another qualified plan is permissible, provided that the receiving plan will
accept rollovers from other plans. Most often, however, alternate payees will
opt to transfer their awards into an IRA.
Therefore, there are two ways an alternate payee may be able to receive
benefits from the plan that are eligible for a rollover; a direct rollover to
another plan or Individual Retirement Arrangement (IRA), or a rollover paid
to the alternate payee.
42 I.R.C. § 411(a)(11)
a. If the alternate payee elects a direct rollover to another qualified plan
(provided the subsequent plan accepts rollovers) or IRA the payment
will not be taxed in the current year and no income tax will be
withheld. The plan benefits cannot be rolled over to a ROTH IRA,
SIMPLE IRA or an Education IRA because they are not traditional
IRA’s.
b. If the alternate payee elects to receive the payment in cash, the
alternate payee will receive only 80% of the gross payment. Under the
Unemployment Act of 1983 the Plan Administrator is required to
withhold 20% of the payment and send it to the IRS for federal income
tax withholding. The amount is credited to the alternate payee and if
the tax turns out to be less than the amount withheld a refund will be
given after the taxes are filed.
The payment will be taxable to the alternate payee unless it is rolled
over into another qualified plan or IRA. The alternate payee can
rollover the payment that was received within 60 days after they
receive the payment. The amount rolled over will not be taxed until it
is withdrawn from the IRA or qualified plan. If the alternate payee
wants to rollover 100% of the payment to a traditional IRA for
example, the alternate payee must find other money to make-up the
20% difference that was withheld. If the alternate payee rolls over
only the 80% that was received, the alternate payee will be taxed on
the 20% that was withheld and not rolled over.
Any payments made to an alternate payee that is not the spouse or former
spouse (i.e. child of the participant) via QDRO will be considered taxable
income to the participant. Usually this type of award is made for purposes of
collecting child support.
The IRS requires that the Plan provide written information to the alternate
payee regarding the tax consequences of a distribution from a qualified plan
via a QDRO. Suggested language issued by the IRS is below:
“This notice contains important information you will need before you
decide how to receive your Plan benefits.”
This notice is provided to you by the ABC Plan Administrator because all
or part of the payment that you will soon receive from the ABC plan may
be eligible for rollover by you or your plan administrator to a traditional
IRA or another qualified employer plan. A traditional IRA does not
include a Roth IRA, SIMPLE IRA or education IRA (Coverdell).
If you have additional questions after reading this notice, you can contact
your plan administrator at the following address”:
I. How to Effectively Work With the Plan Administrator
Discovery, analysis and evaluation should be completed before the negotiation
and drafting begins! This cannot be over emphasized. Once you have determined
that your client or the client spouse is a participant in defined benefit or defined
contribution plan you should contact the plan administrator to obtain as much
information as possible about the plan. You need to request a copy of the plan
document so that the benefit formula and other provisions can be fully
understood. If the plan has a “model QDRO,” request this document as well.
You should find out if the plan pre-approves QDRO’s (most do) and the correct
channel for pre-approval and final submission. You should discuss with the plan
administrator whether or not the plan has any special provisions that need to be
addressed in the QDRO. You will find a sample Form that can be used as the first
contact with the plan administers. (Appendix E).
After the Discovery, analysis, evaluation, and negotiation are done, a proposed
draft should be completed and approved by the participant and alternate payee.
Then submit the proposed draft to the plan administrator for their review and/or
pre-approval. It is typical that the plan may require some language changes. You
should determine the relevance of the changes to the alternate payee and
participant and get their approval. After the pre-approval is made, the participant
and alternate payee should sign the original QDRO and submit the same to the
court for its approval. When court approval is made, the QDRO should be mailed
“certified, return receipt requested” to the plan administrator per the previous
instructions that you obtained. Once the plan administrator “qualifies the order”
as a QDRO, a notice should be sent to both parties. If the order is not “qualified”
the plan will return the order with an explanation of what needs to change.
PRACTICE TIP: Seek an interpretation of how the plan will administer the
distributions based upon the QDRO language. If the plan explains how the
benefit will be calculated and/or paid to the alternate payee, it is likely those
unpleasant or unexpected surprises will not occur. The request for a
determination is best sought when the proposed QDRO is sent to the plan
administrator for pre-approval. In that manner, if the plans’ administration is
different than your understanding changes can still be made without costly re-
drafts and potential litigation.
Many plan administrators will provide you with a “model” QDRO specific to
their plan. Certainly using the “model” QDRO will make your task much easier
and assuming you follow the form, the plan administrator will “qualify” the order
much more efficiently and quicker that a draft they have never seen before. We
see numerous different models from a variety of sources and there are
approximately 15 “model QDRO’s” on the State Bar web site. However, some of
these QDRO’s are very good while other are simply not so good. Many others are
drafted in a manner that would be unfair to the alternate payee. We have even
seen QDRO’s that unfairly reduce the retirement benefits paid to the participant.
Consequently a one or two works for all “model form” QDRO simply does not
exist in the perfect world. Therefore, a model form QDRO should be looked over
carefully to determine the impact on the retirement benefits payable to each party
and whether or not the party wants their benefits allocated in the manner
suggested by the model QDRO.
Clearly an attorney should not simply fill in the blanks of “model documents”, but
rather gain a thorough understanding of the retirement plan and its benefits,
leading to his/her own draft to submit to the plan administrators. Discovery,
analysis and a pension valuation should be completed before the negotiation and
drafting of a QDRO begins.
J. Administering Distributions
As we’ve discussed in other areas, administering a distribution is treacherous
ground. And, you may use the distribution for a variety of reasons and solve a
myriad of financial problems such as reducing debt or paying attorney fees. The
problem is that a QDRO distribution cannot be used collateral. It also cannot be
paid to the attorney trust account (must be spouse, former spouse, child or
dependant of the participant) or another third party without triggering tax
consequences to the participant. Therefore, if the QDRO is being used for an
unorthodox approach, it is very important to keep track of the distribution and/or
distribution dates. Keeping in touch with the plan administrator will usually yield
an anticipated date of distribution. In that manner, you should have a fair idea as
to when the distribution will be made. The distribution could be mailed (changing
the address of record, and then change it back after the distribution) to the
attorney’s address of record and held until the alternate payee signs it over to the
attorney’s trust account for deposit, as an example.
You will also note that we discussed the 20% federal tax withholding. But it’s
worth repeating that state taxes are not automatically withheld and in many cases,
the actual tax could be substantially more than the tax withheld. Of course there
are those rare occasions that the tax could be actually less. In that case, it likely
occurred with a very small distribution.
Once the QDRO is drafted and approved, the attorney should note that an
“automatic” distribution would not occur, even if the QDRO requires it. Once
approved, the alternate payee will need complete a plan distribution form and
submit it to the plan administrator. Plans that use daily valuation systems will
usually yield a fairly short time frame for the distribution to get to the alternate
payee. Plans that use monthly, quarterly and even annual distributions will
experience a longer delay in receiving a distribution.
Most experienced financial advisors can calculate with pinpoint accuracy the tax
consequences of distributions. In addition, with much less accuracy however, a
financial advisor can give your client a fair assessment of the future purchasing
power of their distribution and whether it makes suitable and logical financial
sense to rollover the proceeds or use it for another purpose. As previously stated,
the vast majority of clients may have substantial assets, but most are wrapped into
IRA’s, 401(k)’s, and other employer sponsored plans. If your client lacks liquid
after type investments, savings and money market assets, this should trigger red
flag in that your client spends most of what they make. In that manner, it
behooves the client to get expert financial advice that will project a long-term
approach to their short-term decision making before they suffer the consequence
of a lifelong financial mistake. A good financial advisor can illustrate likely
retirement scenarios based upon your client’s income and tax consequences. It’s
even possible to pinpoint the amount of savings and investment required and the
rate of return needed to answer a host of financial questions such as:
How much money do I need at retirement?
Am I saving enough now or do I need to be saving more?
Am I going to run out of money or is my money going to run out first, before I
die?
What rate of return is needed for the money that I do have to meet the goals that
I’ve set?
Most clients don’t deal fairly with their retirement plan needs. They fail to
recognize that their income will need to continue to rise. They get falsely secure
with fixed income streams that have no opportunity to increase the monthly
stream of income. They fail to recognize that real estate tax bill or rent will
continue to rise. That medical insurance and health care costs will continue to
rise. The cost of food, clothes and transportation will also rise. These costs need
to be accounted for and necessary planning done well in advance of their
retirement years. Most clients find that they are not saving enough. Straight talk
and tough answers are the keys to their success. Client’s financial goals will not
be met by purchasing a hot stock or investing in any single financial product. In
many cases, clients need to be prepared for the somewhat less than an obvious
answer to their financial woes. They may need to find another job or take a
second job. They could also increase the risk of their investment portfolio, but
most people find themselves reducing their expected lifestyle or working much
longer than they would have had they done good planning.
K. Pitfalls You May Encounter – Taking Preventive Risk Management Actions
There is not a statutory time limit which a practitioner must prepare and/or
complete the QDRO process. It is obviously in the best interest of the alternate
payee to have the QDRO drafted and filed as soon as possible. Likewise, it is in
the participant’s best interest to delay the draft and filing as long as possible.
To protect your alternate payee, the attorney should contact the Plan
Administrator and place them on written notice that your client has a potential
claim to the participant’s benefits. A notice may prevent your clients rights from
being lost or reduced in an unorthodox manner. Even though this is not
technically a DRO or QDRO, most Plan Administrators will take notice of the
written correspondence and freeze all distribution paperwork or take other
procedures they feel necessary under the circumstances to protect the alternate
payee benefit for no other reason than the fear of litigation.
Often attorneys opt to include certain security devices in marital settlement
agreements that are designed to better insure compliance with the other
agreements contained in the agreement. Unfortunately, the practical application
of such security devices often has less than the intended effect. For example,
acceleration clauses with respect to support are often included and triggered by
non-compliance. Such clauses can bring with them problems with front-loading
and recapture as described above.
Life insurance and trusts are also considered security devices. Problems emerge
when the intended insured fails to qualify for the level of coverage needed.
Further attorneys must be diligent about tracking any beneficiary changes that
could trigger major probate problems.
Phantom stock interest in a company owned by the payor spouse is sometimes
used to “secure” payment of ordered support or other obligations. Binding
agreements are difficult to draft and enforce. Beyond the difficulty in drafting,
there are effects on other stockholders, which negate or weaken the payee’s
spouse’s interest. Attorneys must be diligent about detecting buy-out provisions
in corporate agreements and determining if such provisions can be overwritten.
Otherwise, stockholders could buy the payee spouse’s “security interest” from
him or her at a much-reduced price.
QDRO CREATION IN WISCONSIN
Building a Future After a Split
V. ADDRESSING ETHICAL ISSUES – PRACTICAL AND LEGAL
PROBLEM AREAS
Attorney Diane Diel
V. ADDRESSING ETHICAL ISSUES – PRACTICAL AND LEGAL
PROBLEM AREAS
Attorney Diane Diel
A. Attorney-Client Privilege
B. Malpractice Issues and Avoidance – Limiting Your Liability
Failure to account for 100% of the retirement benefits, including supplemental
benefits, cost of living adjustments, plan improvements and a myriad of other
issues can result in future litigation over issues that could have been resolved
years earlier. Keep in mind that most QDRO’s that pertain to DB plans may not
provide benefits to an alternate payee for 20 or 30 years from now!
Many attorneys fail to identify the various retirement plan benefits that employees
are participating in. In a recent case, I interviewed a former spouse who came to
see me about rolling over her 401(k) plan that she was awarded in her recent
divorce. The client’s former spouse was an employee of UPS. I asked her what
did her attorney do with the defined benefit plan? Was a present value established
and the value offset with another marital asset? The client looked befuddled and
told m that she was told that this “IS” the retirement plan. I referred her back to
her attorney and then I learned that she did not have an attorney and that her
former spouses attorney was a “friend of the family” that handled the entire
matter for them. I was informed that they “didn’t have adequate assets” to argue
over, so it was determined that one attorney could save them both a lot of money
in their divorce proceeding. You can only imagine the phone call that I received
from the attorney. To make a long story short the defined benefit plan had a
present value in excess of $100,000! In this case a conflict was present being a
“friend of the family.” There was also an appearance that he was representing
both parties even though she signed a statement reflecting that the attorney
represented the participant and not the alternate payee. In addition, I worked with
this particular attorney for nearly 20 years and he was more than familiar with
retirement benefits and failed to disclose the defined benefit plan.
Disciplinary Proceedings – Board of Attorneys Professional Responsibility:
See Case No. 98-2497-D where the Board of Attorneys Professional
Responsibility Complaint against Attorney John P. Louderman, III, for failure to
send a QDRO to the court for its approval in a divorce action until more that six
years after being ordered by the court to do so. Attorney Louderman received a
public reprimand for his misconduct.
ROLE OF THE EXPERT: The effect of equitable distribution upon divorce has
created a new emphasis toward the economic aspects of marriage. These include
valuation, division and tax considerations of marital property. The concept of
equitable distribution of property also brought the need for attorneys to find and
use experts to establish many of the values. Just about every divorce case
involves tax issues and retirement plan issues, some simple, some complex. The
attorney and client need the help of the expert in these matters.
The financial expert in particular can provide a myriad of services to the client
and attorney. These include developing a theory of the case, valuation of a
business, marshaling the assets, providing tax advice, preparing an expert report,
testifying at trial, assisting the attorney in cross-examination of the opposing
expert as well as helping to negotiate a settlement. No case should be settled
without consideration of the tax aspects of the entire settlement. Finally, the
expert may also help the attorney in following-up after the divorce is final to
facilitate an equitable and orderly bifurcation of the marital assets. These include
the transfer of assets from one spousal account to another, assistance with the
draft of the QDRO, follow-through with the change of beneficiary designations,
re-title of assets, estate planning issues etc.
Be certain to check with your financial advisor to see that they have the proper
level of errors and omission (professional liability) insurance. Many advisors
such as the author carry specific professional liability insurance for providing
advice to attorneys related to the financial aspects of divorce, taxes, financial
planning and investments.
C. Conflicts of Interest
QDRO CREATION IN WISCONSIN
Building a Future After a Split
VI. SPECIAL ISSUES
Garrick G. Zielinski, CFP, CDFA, CDS
VI. SPECIAL ISSUES
Garrick G. Zielinski, CFP, CDFA, CDS
President, WFA Asset Management Corporation
A. Death of a Participant – Survivorship Protection43
Pension benefits in pay status may cease being paid or they could are forfeited to
the plan upon the death of a single plan participant44 prior to or after the
commencement of the benefits. If a plan will recognize an independent interest
QDRO, the alternate payee’s awarded share of the participant’s benefits will not
be affected by the participant’s death. If the alternate payee is deemed the
“surviving spouse” for pre-retirement survivor annuity (QPSA) benefits, said
QPSA benefits may commence immediately after the death of the participant, or
they might be delayed until the date the participant would otherwise have been
eligible to receive retirement benefits. The terms and conditions of the plan
apply.
PRACTICE TIP: Attempt to determine whether or not pre-retirement survivor
benefits are necessary to secure the alternate payee’s awarded share for the
remainder of the alternate payee’s life. If they are not necessary, excessive
verbiage may be confusing. If they are necessary, be certain to specify to what
extent the alternate payee is covered. Many plans allow only one “survivor”.
Otherwise the alternate payee may experience a windfall upon the death of the
participant at the expense of the widow. For example, a participant is divorcing
and has 20 years of service and accrued a benefit of $1000 per month. A QDRO
awarded the former spouse a 50% interest in the participant’s monthly-accrued
benefit as of the date of divorce. Assume over the next 10 years the participant’s
benefit increases to $2000 per month and the QDRO provided for a 50% joint and
survivor annuity to his “former spouse”. Subsequently, the participant dies
43 See Mausing v. Mausing 146 Wis. 2d 92, 429 N.W.2d 768 (1988) 44 See 29 U.S.C. § 1055(a)(2) Provides joint and survivor annuity to spouse regardless if death occurs before or after retirement
prematurely and now his former spouse now receives $1000 per month (50%
survivor) and his current widow receives nothing.
B. Disability of Participant
In some plans the disability of a participant can trigger commencement of
retirement benefits, regardless of age. If a participant becomes disabled and
pension eligible, then the alternate payee becomes eligible to receive pension
benefits, even if the disability is prior to the earliest retirement age. Conversely,
the disability of a participant could also prohibit an alternate payee from
commencing receipt of her benefit until the date on which the participant would
have attained the normal retirement age under the plan. For example, if disability
triggers a benefit unrelated to the pension, such as an insurance benefit, the terms
of the plan may read that the participant will not become eligible to commence his
benefit until his age 65. If these are the terms and conditions of the plan, then the
alternate payee will not be eligible to commence receipt of her benefit until the
participant reaches age 65.
PRACTICE TIP: A general clause that requires the alternate payee’s benefit be
payable at the time and in the manner described, regardless of a participant’s
disability, should be sufficient for the Plan to notify you if the terms of the Plan
are contradictory to the intent of the parties. In general, if the plan provides for
disability benefits payable from the plan, special language needs to be inserted
regarding the allocation of those disability benefits. If disability is paid from a
separate insurance policy for example, a QDRO does not generally need to
address disability, other than the consequence with a Shared Interest QDRO and
disability could trigger a delay in benefits.
C. Termination of Employment of Participant
Termination of employment prior to retirement eligibility will generally not cause
benefits to become payable under a defined benefit plan. However, the terms and
conditions of the plan will apply. Normally the participant and alternate payee
must wait until the participant attains the earliest retirement age under the plan
before either of them can begin receiving benefits. Some plans require a
terminated employee to wait until the normal retirement age before they become
pension eligible. Language to the effect that the alternate payee is allowed to
select the earliest retirement age of the participant under the plan is sufficient to
facilitate a distribution at the participant’s termination, provided the plan will
recognize the participant as retirement-eligible upon termination.
D. Death of Alternate Payee
In a defined benefit plan, if the alternate payee dies prior to the commencement of
benefits, said benefits will usually revert to the participant or be forfeited to the
plan. If the alternate payee dies after commencement of benefits, the form of
benefit elected at retirement will determine whether any amounts are payable
following death. Often an alternate payee is limited to selecting a single life only
option, which means that nothing further will be payable after death. In the event
the Plan allows for payment under a period certain option, such as one that
provides guaranteed payments for a specified period of months regardless of the
survival of the payee, then an alternate payee may elect such option and designate
a beneficiary, including a subsequent spouse.
Generally beneficiary designations are not allowed by an alternate payee in a
defined benefit plan unless a specific death benefit is payable. Several plans pay
lump sum death benefits, a proportionate amount of which can be awarded to an
alternate payee in a QDRO. The terms and conditions of the Plan will apply.
Although a plan administrator is not required to accept a QDRO that names the
children of the marriage as “contingent alternate payees”, some will. I.R.C. §
414(p)(8) states that the order must name each alternate payee. It does not limit a
QDRO to name a single alternate payee. The same Code also states that an
alternate payee may be a spouse, former spouse, child or other dependent of the
participant. If a plan accepts a QDRO with contingent alternate payees, usually it
is only for the pre-retirement period that such contingent alternate payees will be
recognized. In other words, the children of the marriage may receive the alternate
payee’s benefits if the alternate payee dies prior to alternate payee
commencement of benefits. However, once the primary alternate payee begins to
receive benefits, the form of benefit elected will determine whether or not
amounts will be payable after death.
If an alternate payee is awarded a portion of a defined contribution plan, often the
award is distributable immediately, and there is no concern over how the alternate
payee’s share will be paid in the event of death. However, some defined
contributions require that a separate account be maintained for the alternate
payee’s award, and alternate payee is restricted from taking a distribution until the
participant terminates employment, dies, becomes disabled or is eligible to retire.
In such circumstance, the alternate payee should be allowed to name a beneficiary
to the proceeds of alternate payee account. The beneficiary may be any person
that the alternate payee may choose, including a subsequent spouse. It is also
possible to require the alternate payee to maintain the former spouse as the
beneficiary, which could be used to secure or guarantee support payments in the
event of a premature death for example. Nonetheless, it is often an overlooked
bargaining tool.
PRACTICE TIP: In a defined benefit plan, don’t risk complete forfeiture of the
alternate payee’s benefits if alternate payee dies prior to commencement of
benefits. A QDRO can specify that the alternate payee’s benefits shall revert to
the participant in the event of alternate payee pre-retirement death. While not all
plans will approve this provision, in most cases it is worth an attempt. The
alternate payee gains nothing from this reversion clause except that additional
concessions could be secured for the alternate payee in exchange for including it.
If a plan will recognize the children of the marriage as contingent alternate
payees, the drafter of the QDRO may wish to confirm how the plan interprets
“child of the participant”. Some plans will recognize a child of the participant
regardless of their age. Other plans will define such term as a minor child, and
once that child reaches the age of majority they are no longer eligible to be
considered a contingent alternate payee, regardless of the fact that he or she is still
the child of the participant. If allowed, you could effectively get an alternate
payee’s awarded share to the alternate payee’s children in the event of premature
death before benefits commence. It is possible that the participant may remarry.
You need to be certain with the language that you are not giving away the entire
survivorship benefit to the alternate payee. Therefore language should be
included to limit the alternate payee’s awarded share to the date of divorce if that
is desired.
E. Early/Late Retirement Benefits
Subsidized early retirement benefits are often offered by employers as
enticements to retire early. In other words, if an employer wants to reduce the
work force, it may offer an increase in retirement benefits to induce more
employees to retire early. Sometimes these types of benefits are referred to as
supplemental social security benefits or temporary benefits. In some cases, an
employer will offer the same benefit payment otherwise payable at age 65 to an
employee that is only age 60, without any reduction for early retirement. The
difference between the total benefit payable at age 65 and the reduced benefit that
would otherwise be payable at age 60 is the subsidized portion of the benefit. In
many cases the plan allows for a social security subsidy in that the plan pays a
benefit prior to age 62 that is the equivalent of the total benefit plus social security
at age 62. In other words, the benefit is reduced by the amount of social security
paid at age 62 to allow for better budgeting and consistent cash flow through the
retirement years.
A subsidized benefit is often offered as a result of the number of years of service
performed by a participant. It can be argued that the alternate payee is entitled to
receive a proportionate amount of any early retirement subsidy paid to the
participant. However, an alternate payee generally cannot receive any portion of
a subsidized early retirement benefit until the participant is actually receiving
subsidized retirement benefits and a QDRO assigns45 her a proportionate share of
the same. If an alternate payee begins to receive benefits prior to the retirement of
the participant, and the participant subsequently retires with subsidized early
retirement benefits, many plan administrators will recalculate the alternate
payee’s benefit upon the participant’s retirement so that the alternate payee also
receives a share of the subsidy that the participant has started to receive, if the
QDRO so directs.
Subsidized benefits may not be freely disclosed by the plan, and as such can be
difficult to identify. Even if a plan denies payment of subsidized early retirement
benefits in the past, it is very possible that it could happen in the future. QDRO’s
can provide for the division of subsidy, even if it is not payable at the time.
PRACTICE TIP: To avoid possible disagreements, negotiations with the parties
prior to QDRO preparation should include whether and how to divide potential
subsidized early retirement benefits. Subsidized early retirement benefits are
often a function of all of the years of service a participant completes. The most
equitable means of dividing a subsidy may be to limit the alternate payee’s
entitlement to an amount that is proportionate to her awarded share of the
participant’s benefit, as compared to the total unsubsidized retirement benefit.
45 See Alby v. Alby 155 Wis. 2d 286, 445 N.W.2d 632 (Ct. App. 1990)
APPENDIX A
Sample defined benefit QDRO:
STATE OF WISCONSIN CIRCUIT COURT
FAMILY COURT BRANCH WAUKESHA COUNTY
In re the Marriage of: Barbie Mattel, Petitioner, And Ken Mattel, Respondent.
Case No. 00-FA-0000
QUALIFIED DOMESTIC RELATIONS ORDER
This matter having been brought before the Court with the Honorable Judge presiding on Any date, by the petitioner, Barbie Mattel, and the respondent, Ken Mattel, and with the Circuit Court of Waukesha County having approved the distribution of an amount determined herein from the Any Plan EMPLOYEE RETIREMENT PLAN ("Plan"), to which this Domestic Relations Order (“Order”) applies. PARTICIPANT: ALTERNATE PAYEE:
Ken Mattel Any Address Waukesha, Wisconsin 00000 Social Security # 000-00-0000 Date of Birth 00/00/00 Barbie Mattel Any Address Waukesha, Wisconsin 00000 Social Security # 000-00-0000 Date of Birth 00/00/00
PLAN TO WHICH ORDER APPLIES:
Any Plan. EMPLOYEE RETIREMENT PLAN (hereinafter referred to as "Plan")
The Plan Administrator is directed to recognize an independent interest for the Alternate
Payee in the accrued benefit of the Participant under the Plan as of Any Date to the extent
of fifty percent (50%) of such accrued benefit. Should the Plan provide for any
percentage cost of living adjustments to the Participant's benefit, if any, said percentage
cost of living adjustments shall also apply to the Alternate Payee's awarded benefit in the
same percentage amount. Should the Plan provide for any fixed dollar post-retirement
increases to the Participant's benefit, if any, said fixed dollar post-retirement increases
shall also apply to the Alternate Payee's awarded benefit in an amount proportionate to
her awarded share as compared to the total accrued benefit of the Participant at
retirement. This paragraph is not to be construed to require the Plan to provide increased
benefits to the Alternate Payee determined on the basis of actuarial value.
The independent interest of the Alternate Payee shall be payable to her under the terms and conditions of the Plan. The Alternate Payee may elect benefits to be paid in any form available to the Participant under the Plan, other than a joint and survivor annuity with a subsequent spouse. The awarded benefit shall be actuarially adjusted to be based upon the life expectancy of the Alternate Payee under the terms of the Plan. The number or period of payments made to the Alternate Payee will depend on the form of benefit chosen in which the distribution is to be made. In the absence of an election, the single life annuity payable over the life of the Alternate Payee will be the option selected. If the Alternate Payee elects a single lump-sum distribution from the Plan, if any, said lump-sum distribution shall fully satisfy the Alternate Payee’s portion awarded in this Order. Alternate Payee may elect the earliest retirement age of the Participant or later as the time that her benefits are to commence, provided the Participant has attained (or would have attained) said earliest retirement age regardless of whether or not he has commenced benefits. The Alternate Payee's benefit shall be subject to actuarial reduction for early commencement of benefits based on the terms and conditions of the Plan. Pursuant to §414(p)(4)(B) of the Internal Revenue Code (IRC), the term "earliest retirement age" means the earliest of:
a. the date on which the Participant is entitled to a distribution under the Plan, or b. the later of:
(i) the date the Participant reaches age 50, or (ii) the earliest date on which the Participant could begin receiving benefits under the Plan if the Participant separated from service.
The Alternate Payee shall be entitled to a pro-rata share of any early retirement subsidy provided to the Participant on the date of his retirement (including any temporary, supplemental payments made to the Participant). In the event the Participant retires early after the Alternate Payee has already commenced benefits on an unsubsidized basis, the amounts payable to the Alternate Payee shall be recalculated according to the Plan Administrator’s practices and the Plan’s actuarial principles, in order to provide the Alternate Payee with a pro-rata share of such subsidy (including a pro-rata share of any temporary supplement payable to the Participant). The Alternate Payee shall only receive her portion of any temporary supplement as long as the Participant is eligible for and receiving such supplemental payments.
Covenants regarding the Non-Alienation of Benefits: Pursuant to §414(p)(3) of the IRC, this Order:
a. does not require the Plan to provide any type or form of benefit or any option not otherwise provided under the Plan,
b. does not require the Plan to provide increased benefits determined on the basis of actuarial value, and
c. does not require the Plan to pay benefits to Alternate Payee which are required to be paid to another alternate payee under an order previously determined to be a Qualified Domestic Relations Order.
No death benefits or Plan benefits will be payable to the Alternate Payee if she dies prior to commencement of benefit awarded in this Order. Alternate Payee's awarded benefit shall revert to the Participant if she predeceases the commencement of her benefit awarded in this Order. Upon the Alternate Payee’s death after benefit commencement, the form of benefit selected by the Alternate Payee shall determine whether any amounts are owed to any beneficiary upon her death. The assignment of an independent interest of the Participant's benefits to the Alternate Payee herein shall not be reduced, abated or terminated as a result of the death, disability or the termination of employment of the Participant. Plan benefits shall be payable to the Alternate Payee even if the Participant dies prior to, or after, commencement of Alternate Payee’s benefit, or prior to the commencement of the Participant’s benefit.
The Alternate Payee shall include all of the taxable portion of said retirement benefits if, as and when received in her gross taxable income. For purposes of §72 and 402(e)(1)(A) of the Code, the Alternate Payee's portion shall be allocated on a pro rata basis between the present value of such distribution and the present value of all other benefits payable with respect to the Participant. Said retirement benefits when paid, shall not be taxable income or tax deductible on the Participant’s income tax returns. If the Alternate Payee does not receive retirement benefits as and when provided for herein, or if at any time after the benefits are paid they shall thereafter cease, and in either event, the benefits intended for the Alternate Payee are paid to the Participant, the Participant will make payments out of his separate income, assets or both, equal in all respects to those payments provided for herein. Participant shall continue to make the payments until the retirement benefits begin or resume directly to the Alternate Payee.
In the event that the Pension Plan to which this Order applies is terminated with an unfunded liability and Pension Benefit Guaranty Corporation (PBGC) pays benefits in connection with such plan, and if the amount of the total benefit to be paid to both the Participant and Alternate Payee is thus decreased, then the Participant's benefit and the Alternate Payee's benefit each will be decreased proportionately in accordance with the formula set forth under paragraph 1 above. It shall be the responsibility of the Participant and the Alternate Payee to keep the Plan Administrator of the Plan advised of their respective current addresses. The Plan is administered by Except as set forth herein, all rights in and to Participant’s benefits under the Plan are awarded to the Participant. IT IS FURTHER ORDERED that a true copy of this Order be served upon the Plan Administrator and the Order shall take effect immediately and shall remain in effect until further order of the Court. Jurisdiction is retained by this Court until the awarded benefits are paid to the Alternate Payee by the Plan Administrator.
Ordered on the Any Date, but
dated this ___________ day of ________________________________, 2004.
BY THE COURT _______________________________________ Circuit Court Judge, Waukesha County
APPROVED AS TO FORM ONLY: ______________________________________________________________________________ Attorney Kantluze Attorney Willuze Attorneys for Petitioner Attorneys for Respondent
APPENDIX B
Sample Defined Contribution QDRO
STATE OF WISCONSIN CIRCUIT COURT FAMILY COURT BRANCH
MILWAUKEE COUNTY
In Re the Marriage of: BARBIE MATTEL, Petitioner, And KEN MATTEL Respondent.
Case No. 005-FA-0000000
QUALIFIED DOMESTIC RELATIONS ORDER
This matter having been brought before the Court with the Honorable Judge presiding on Any Date, by the petitioner, Barbie Mattel, and the respondent, Ken Mattel, and with the Circuit Court of Milwaukee County having approved the distribution of an amount determined herein from the ANY PLAN 401(k) PLAN (“Plan”), to which this Domestic Relations Order (“Order”) applies. IT IS SO ORDERED as of this Any Date that pursuant to Internal Revenue Code ("IRC") §414(p), and §206(d)(3)(B) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), the following Order is intended to constitute a Qualified Domestic Relations Order ("QDRO"), as it relates to the Participant's provision of child support, alimony payments or marital property rights to Alternate Payee and is made in accordance with the State of Wisconsin domestic relations law. The term "Participant" means Ken Mattel, whose Social Security Number is 000-00-0000, whose date of birth is 00/00/00, whose last known mailing address is 0000 South Any Street, Milwaukee, Wisconsin 00000, and who is a Participant in the Plan that is administered by the ANY PLAN 401(k) Board of Trustees, located at 00000 West Any Street, Suite 000, Milwaukee, Wisconsin 00000.
The term "Alternate Payee" means Barbie Mattel, former spouse of the Participant, whose Social Security Number is 000-00-0000, whose date of birth is 00/00/00, and whose last known mailing address is 0000 West Any Street, Milwaukee, Wisconsin 00000-0000. Alternate Payee is recognized by this Order as having the right to receive all or a portion of the benefits payable under the Plan with respect to the Participant.
The amount assigned to Alternate Payee shall be equal to fifty percent (50%) of all account balances in the Plan with respect to the Participant as of the date of divorce, Any Date or the Plan valuation date closest to the date of divorce. Alternate Payee shall receive her portion of the Participant's account balance stated above in Article 3 in a single lump sum payment after this Order has been accepted by the Plan Administrator as a Qualified Domestic Relations Order and Alternate Payee has completed such notice of application for distribution of benefits as required under the terms and conditions of the Plan and in the manner in which Alternate Payee requests to receive and/or transfer said account balances. Such distribution shall fully satisfy the Alternate Payee's rights under this QDRO.
The lump sum payment to Alternate Payee may be made as soon as practicable after this Order has been approved as a Qualified Domestic Relations Order. The lump sum amount stated in paragraph 3 above shall be adjusted for any market value and/or investment gains or losses from the effective valuation date of the award to the date of valuation for distribution to the Alternate Payee. Any distribution from the Plan pursuant to this QDRO shall be made in accordance with normal Plan procedures.
Nothing contained in the Order shall be construed to require any Plan or Plan Administrator to:
a) provide any type or form of benefit, or any option, not otherwise provided under the Plan
b) provide increased benefits (determined on the basis of actuarial value), or c) pay benefits to Alternate Payee which are required to be paid to another
alternate payee under another order previously determined to be a qualified domestic relations order.
Copies of this Order must be promptly served upon the Plan Administrator, who shall within a reasonable period after receipt of this Order, determine whether this Order is a QDRO and notify Participant and each Alternate Payee of such determination.
The Alternate Payee shall include all of the taxable portion of said retirement benefits if, as and when received in her gross taxable income. For purposes of §72 and 402(e)(1)(A) of the Code, the Alternate Payee's portion shall be allocated on a pro rata basis between the present value of such distribution and the present value of all other benefits payable with respect to the Participant. Said retirement benefits when paid, shall not be taxable income or tax deductible on the Participant’s income tax returns.
The death of the Participant prior to the time that funds are disbursed to or for the benefit
of the Alternate Payee pursuant to the terms of this Order shall not affect in any manner
the payment to be made to the Alternate Payee as specified in this Order.
Should the Alternate Payee die before the funds to be paid to the Alternate Payee or for
the Alternate Payee’s benefit pursuant to the terms of this Order have been disbursed,
such payment shall be made to the Alternate Payee’s estate.
Except as set forth herein, all rights in and to Participant’s benefits under the Plan are awarded to the Participant. The Court retains jurisdiction over this Order to amend it in order to establish or maintain its qualification as a QDRO under the Internal Revenue Code. IT IS FURTHER ORDERED that this Order shall take effect as soon as administratively reasonable after receipt and acceptance of a court entered qualified domestic relations order and shall remain in effect until further order of the Court. Jurisdiction is retained until this Order has been accepted by the Plan Administrator, and the Alternate Payee has received her awarded share in full.
Ordered on the Any Date, but
dated this ___________ day of ________________________________, 2004.
BY THE COURT ______________________________ Circuit Court Judge, Milwaukee County
APPROVED AS TO FORM ONLY: ___________________________ ______________________________ Attorney Kantluze date Attorney Willuse date Attorneys for Petitioner Attorneys for Respondent
APPENDIX C
Sample Written QDRO Procedure:
1) The Plan Administrator of the ABC Defined Benefit Retirement Plan in
accordance with IRC § 414(p) has adopted the following procedures to
determine whether a court order qualifies as a QDRO and to administer
distributions to participants and alternate payees according to the QDRO.
2) Upon receiving legal process, the Plan shall immediately respond to said
service of process.
3) The Plan will comply with the court order only if it meets the requirements
for a QDRO as set forth in § 414(p) of the Code and any other applicable
regulations and court decisions.
4) Individuals seeking a QDRO may not rely on the Plan Administrator for
advice regarding which type of QDRO is most appropriate for them. The
Plan only provides factual information concerning the participant’s benefits
along with the terms and conditions of the Plan. Individuals should consult
with their own attorney regarding such issues.
5) Upon receiving a court order that is issued pursuant to a state domestic
relations law or a community property law that pertains to benefits under the
Plan which provides for child support, maintenance payments, or marital
property rights for the benefit of a spouse, former spouse, child or other
dependant of the participant or former participant, the Plan Administrator will
promptly do the following:
a. Notify the participant and any alternate payee of the receipt of the
QDRO
b. Send a copy of the Plan’s written procedure to the participant, the
alternate payee and each designated representative of the participant
and alternate payee and copies of any other notices or written
communication
6) The Plan Administrator will review the QDRO and have legal counsel or
other consultants review the order to determine whether or not it complies
with IRC § 414(p).
7) Such determination shall be performed in a reasonable period of time after
receipt of the order and notice to all interested parties
8) The Plan Administrator shall determine the status of the court order and
identify the participant’s account.
9) If the court order meets all the requirements pursuant to the terms and
conditions of the Plan, ERISA and the IRC § 414(p) the Plan shall then do
the following:
a. Notify the participant and alternate payee of the Plan’s findings in
writing
b. Comply with the terms of the QDRO
10) If it’s determined that the order is not a “qualified domestic relations order”
the Plan Administrator shall advise the participant, the alternate payee and
each representative in writing and state why the requirements have not been
met. If the QDRO is not revised the Plan will pay benefits to the participant
in accordance with the terms and conditions of the Plan.
11) If benefits under the Plan would have been distributed to the alternate payee
during the period while the order is being reviewed, the Plan shall separately
account for such payments.
12) If within 18months from the receipt of the QDRO the order is deemed
“qualified” the separately accounted payments shall direct those payments to
the alternate payee.
13) If the order is deemed to be not “qualified” the plan shall continue to
withhold any payments to the alternate payee until the plan receives notice
that no QDRO will be forthcoming during the 18 month period.
14) If at the end of the 18 month period the order has not been determined to be
“qualified” the Plan Administrator shall release any segregated or withheld
amounts to the person that would have received the benefits in a manner is if
there had been no QDRO, or in accordance with the terms and conditions of
the Plan.
15) If the determination that the order is a QDRO is made more than 18 months
after the amounts have been segregated, benefits paid to the alternate payee
will be applied on a prospective basis only.
APPENDIX D
RE: Participant: Social Security #: Date of Birth:
PROFIT SHARING, PENSION PLAN AND RETIREMENT ACCOUNT
AUTHORIZATION
Consent is hereby given you to provide with a current and, if requested, yearly summary of my plan and subsequent changes and any and all of the following information required concerning any profit sharing plan, pension plan, or retirement account in which I have any right, title, or interest as required by ERISA. The information you will provide will be used to determine if my pension benefits, and the value, should be offset against other assets or divided under a court order. Therefore, it is important that the following questions be answered completely and accurately. Space has been made available for more than one plan. Plan Participant’s Signature 1. Name of Employing Entity:_______________________________________________ 2. Name plan for which the Participant above participates in: _____________________ _______________________________________________________________________ 3. Name & Address of Plan Administrator(s): __________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 4. Type of Plan (Def. Benefit, Def. Contr., Money Purchase, Etc): _________________ 5. Date Employee began participating: _______________________________________ 6. Date of Employment:
Defined Benefit Plan(s)
6. If Defined Benefit Plan, what is the Normal & Early Retirement Ages? _______________________________________________
8. If Defined Benefit plan, what is the accrued LIFE-ONLY monthly benefit, not
projected, beginning at the normal and early retirement ages. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 9. Are cost-of-living adjustments (COLA) made to the benefit(s) each year? _______ YES ________ NO a.) Statutory _______ YES ________ NO b.) based on CPI _______ YES ________ NO 10. If yes, what is the average COLA applied to retirement benefits each year?
__________ % Plan #___________ 11. Is there a provision, (e.g. 30 & out, 25 & out rule) when the employee participant
could retire? If so, at what age or date, state the benefit (e.g. full retirement benefit, reduced)
________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 12. Is there a supplemental benefit payable until the Participant commences Social
Security?
_______ YES ________ NO Plan Number: __________________
13. If necessary, can an accrued monthly benefit if defined benefit plan or contributions with interest if DC plan, be determined since the date of Marriage?
_______ YES ________ NO
14. In yes to No. 12, what is the accrued monthly benefit, or contributions made w/interest & gains, since
____ Mo. ______ Day_______ Year $______________
Defined Contribution Plan(s) / Money Purchase Plan(s)
15. Date Employee began participating or contributing to the def. Contribution plan? _____________________________________________________________________
16. Employee contributions made to date: ________________________________________________________________________ 17. Employee contributions accumulated with interest to date: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 18. Employer contributions made to date: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 19. Total Contributions accumulated with interest to date: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 20. Current total account balance (if any): ________________________________________________________________
Following pertains to all plans listed
21. Valuation Date(s) (if not daily or monthly ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________
22. Current vested interest: _________________________________________ 23. Vested percentage: ____________________________________________ 24. If not vested, date vesting will begin: ________________________________ 25. What is the number of years required for an employee to be 100% vested?
:_________________________________ 26. Amount of the current plan that remains non-vested and the value
thereof:____________________________________ 27. Earliest date employee is eligible to retire and receive early retirement benefits:
:_______________________________ 28. Amount of early retirement benefit, if any: :_________________________________ 29. Is there an outstanding loan to the participant:
________ YES __________ NO Plan # ______________ Amount repaid, if any: __________________ Amount currently owed: __________________
30. Amount currently available for loan or withdrawal: _________________________________ Note to the Attorney and/or Participant, please insert date of marriage above
Comments: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________
30. If, or pertaining to defined contribution plan(s) please attach or enclose a history of transactions, contributions, withdrawals
or allocations prior to the above date in Quest #13. (Date of Marriage) ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________
Questions relating to division by Court Order (e.g., Qualified Domestic Relations Order)
32. Is this plan subject to division by way of a Qualified Domestic Relations Order or
Qualified Court Order?
________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 33. Is there a current alternate payee pursuant to a prior Qualified Domestic Relations
Order or Qualified Court Order? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 34. If the plan(s) is subject to division by way of a Qualified Domestic Relations Order,
have you developed any procedures, policies or forms with respect to the drafting of a QDRO? (If yes, please furnish copies of such procedures, policies and/or forms)
_______ YES ________ NO
35. If the plan(s) is subject to division by QDRO, does the plan allow for an immediate
lump-sum distribution to an alternate payee?
_______ YES ________ NO
36. If not within a reasonable time after a QDRO or otherwise has been entered, when is the Alternate Payee eligible for a distribution?
37. Can an amount, defined contribution plan or otherwise, be awarded which would
exceed 50%. _______ YES ________ NO
38. If a defined benefit plan, can the Alternate Payee be awarded an independent interest,
i.e. separate interest? (Benefit payable over the life of the Alternate Payee independent of the participant’s life expectancy)
_______ YES ________ NO
39. If an independent interest is not possible under the terms and condition of the plan(s), can the Alternate Payee be named as a survivor to:
a.) post-retirement survivor benefit _______ YES ________ NO b.) pre-retirement survivor benefits _______ YES ________ NO c.) pre-retirement survivor annuity _______ YES ________ NO d.) lump-sum death benefit _______ YES ________ NO
Comments: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 40. If an independent interest is possible under the terms and conditions of the plan, is it
possible to secure or grant pre-retirement survivor benefits? (i.e. if the Participant predeceases his/her retirement would the Alt. Payee receive their awarded portion over Alt. Payee’s life?)
_______ YES ________ NO
41. If an independent interest is possible under the terms and conditions of the plan, will the Alternate Payee receive her awarded share of the retirement benefit regardless of the survival of the Participant before/after retirement?
_______ YES ________ NO
42. Would the Participant be eligible for any early retirement supplement?
_______ YES ________ NO
43. If the Participant receives disability pay in lieu of retirement pay, will the plan allow
the alternate payee to receive a portion of the disability pay?
_______ YES ________ NO
44. Does the Plan(s) offer any other form or type of subsidy?
_______ YES ________ NO
45. Would the Alternate Payee be entitled to any such subsidized benefit should it be
addressed in the QDRO?
_______ YES ________ NO 46. Are contingent Alternate Payees permitted to be named in a QDRO, or can the A/P
name a beneficiary to their portion? 47. Are early retirement benefits made available to terminated employee under the
plan(s)?
_______ YES ________ NO
48. Is the Plan Participant Retired at this time (i.e. is the plan in pay status?)
_______ YES ________ NO
49. If yes to question 47, please indicate the survivor election made and the name of the
survivor/beneficiary. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 50. Are there any other plans, terminated, frozen, or otherwise, that the participant is, or
may have, an accrued benefit in which may have resulted in a merger, acquisition, or the creation of a new plan?
_______ YES ________ NO
51. If the answer to No. 49 is yes, please provide the name of the plan, and the name and
telephone number of the plan administrator ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________
52. Name of each plan employee has been a participant in since their initial date of
employment: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 53. Is the employee an active participant in any stock option, executive deferred
compensation, equity participation plan or program?
_______ YES ________ NO
54. Does the employee participant or named individual (page 1) have ownership equity in the company for which he is employed?
_______ YES ________ NO
55. As of what date is this information current?
___________________________________ BY:____________________________________ Title:____________________________________ Date:___________________________________ Telephone:_______________________________ Please attach a copy of the summary plan description, which upon request must be furnished to a plan participant as required by the Pension Reform Act of 1974.