Picking a Valuation Date

Every order dividing a retirement account or pension plan needs a valuation date. For accounts such as 401k, 403, 401a, etc., the valuation date tells the plan as of which date to apply the award to the former spouse. If earnings, gains, and losses are included in the former spouse’s award, as of when to begin that calculation.

When picking the valuation date for one of these types of accounts things to consider are:

1. Is the date selected one in which there will be a value? Many plans only value the accounts on business days. So, it may be convenient to say the end of the month in which the Agreement is signed or divorce is entered. If the last day of that month happens to be a Sunday, then the parties may have to agree to the prior Friday, or the following Monday. While this small change seems trivial in a vacuum there could be larger implications. Specifically, if one party is paid on the following Monday, those new contributions would be included in the division, whereas if the valuation date was the Sunday the new contributions would not be included.

2. Is the account actively being funded by a current employer (or by personal IRA contributions)? If yes, then the valuation date will impact whether new contributions from the employer are included. An employer cannot stop making contributions, however, by picking a valuation date, future contributions can be excluded from an equalization calculation.

   If no, then the valuation date has less of an impact. This is because there will not be any new funds being added to the account. The only way the account’s value will change is by gains and losses from the investments within the account. If the account is invested in cash-like stable funds, the balance will likely not change by much. If, however, the account is invested in stocks, then the balance may change dramatically with the performance of those stocks.

3. Are gains and losses to be included in the transfer amount? If yes, then for accounts that are not receiving contributions, it is easiest to reduce the transfer amount to a percent as of the date of transfer. For example, “the Alternate Payee will receive 20% of the Participant’s vested account balance as of the date of transfer to the Alternate Payee.” A growing trend is that financial institutions and retirement plans will not calculate gains and losses on a transfer amount. Therefore, reducing the amount to a percent as of the date of transfer will allow for the Alternate payee to receive the gains and losses without making the financial institution or plan run the calculation.

   If, however, the plan is actively receiving contributions, then reducing the transfer amount to a percent as of the date of transfer will also include future contributions made between the date the percent is determined (likely while negotiating the agreement) and the date the transfer is made (likely a few weeks later, after the divorce is entered and the QDRO is processed by the plan). Such a description of the transfer amount may provide greater benefits to the former spouse than agreed upon.  

   If there is only the one account available to fund the transfer and it is receiving contributions AND the QDRO processer will not calculation gains and losses, the attorney drafting the QDRO should advise their client that the agreement cannot be implemented exactly. If appropriate based on the QDRO attorney’s retainer, they may suggest alternative ideas to get as close as possible to the parties’ agreement.

4. Is the valuation date in the future? If so, to protect both parties, it is best to include language in the agreement to prohibit the parties from taking a loan or withdrawal from their account(s) until the transfer is complete. If a party is to take a loan or withdrawal, it could substantially skew the calculation, resulting in a transfer amount that is different than intended. In fact, this language is good in all situations, even ones where the valuation date is in the past. If a participant withdraws funds from the account that is supposed to transfer the funds to the former spouse, they may withdraw too much, thereby frustrating the transfer.  

If you have a QDRO need, contact us at 240-396-4373 to schedule a consultation. We have attorneys who focus their practice on the division of retirement and preparation of QDROs who can help resolve these issues.

What is a QDRO?

A Qualified Domestic Relations Order (QDRO) is a legal document that outlines how retirement benefits will be divided between divorcing spouses. It establishes the rights of an alternate payee (the non-employee spouse) to receive a portion of the retirement benefits earned by the employee spouse during the marriage.

Importance of QDROs in Divorce Proceedings

1. Division of Retirement Benefits: Retirement accounts, such as 401(k) plans, pensions, and other qualified plans, are often significant assets accumulated during a marriage. A QDRO ensures that these assets are divided between the spouses, in accordance with federal and state laws, as well as the parties’ agreement or judgment of divorce.

2. Compliance with ERISA: The Employee Retirement Income Security Act (ERISA) governs many retirement plans in the United States and sets forth rules regarding the division of retirement benefits in divorce. A QDRO must comply with ERISA guidelines to ensure that the division of benefits is legally enforceable. See also our blog post from February 5, 2024 titled Major Differences in ERISA Governed Plans and Non-ERISA Governed Plans.

3. Protection of Benefits: Without a QDRO, a retirement plan administrator will likely refuse to distribute benefits to anyone other than the employee spouse, even if a divorce decree mandates the division of assets. A QDRO provides the necessary authorization for the plan administrator to divide the benefits as specified.

4. Tax Considerations: Properly structured QDROs can help avoid tax implications for both parties. Specifically, the QDRO shifts the burden of the taxes on the distribution from the employee spouse to the alternate payee. The alternate payee can delay tax payments on the receipt of the funds through a rollover to an IRA. Alternatively, if the alternate payee receives the funds directly, they can avoid the early withdrawal penalty if younger than 59 ½ years of age.

5. Retirement Planning: QDROs play a crucial role in the long-term financial planning of both parties post-divorce. By ensuring a division of retirement benefits, spouses can better prepare for their financial futures and maintain financial stability in retirement.

How to Obtain a QDRO

Obtaining a QDRO generally involves the following steps:

- Drafting: The QDRO must be carefully drafted to comply with both state divorce laws, federal retirement plan regulations, and individual plan rules. It is advisable to seek the assistance of an attorney experienced in QDRO preparation. Most divorce attorneys do not prepare QDROs. If you have retained a divorce attorney to represent you, they may refer you to another attorney for your QDRO. 

- Approval: Once drafted, the QDRO must be submitted to the court for approval as part of the divorce proceedings. The court will review the document to ensure that it meets all legal requirements.

- Implementation: After approval, the QDRO is submitted to the retirement plan administrator for implementation. If the administrator approves the QDRO, the administrator will then divide the retirement benefits according to the terms outlined in the QDRO. If the administrator rejects the QDRO, the administrator will notify the parties of the defects, which must be resolved and an amended QDRO must be prepared.

In divorce proceedings, the division of assets can be a complex and contentious process. A Qualified Domestic Relations Order (QDRO) is a vital tool that ensures the distribution of retirement benefits between divorcing spouses. By understanding the importance of QDROs and seeking appropriate legal guidance from an experienced attorney, divorcing couples can navigate this aspect of the divorce process with greater clarity and confidence, paving the way for a smoother transition into their post-divorce financial futures.

Markham Law Firm employs attorneys who prepare QDROs and work in the division of retirement benefits on a regular basis. If you are in need of a QDRO please call us at 240-396-4373.

Reciprocal Pension Awards

When both parties in a divorce have a pension that was earned during the marriage, it sounds like a great idea to say to your client that the goal of any final agreement would be for each party to receive a reciprocal award from the other’s pension. To quote Captain Jack Sparrow from Pirates of the Caribbean, that’s “a fine goal, to be sure.” But as we all know, the devil is in the details.  

If the parties have an interest in the same pension plan, then the goal is easy to accomplish. By having the same pension interest on both sides, the same rules for division of that interest will apply. Therefore, even if the plan has a unique or difficult to handle rule, it will apply to both parties.

If, however, the parties have an interest in different plans, they are likely dealing with different rules, and it may be that an exact, reciprocal award is not possible. Alternatively, it may simply take some creative solutions to get to a reciprocal award, or as close as possible thereto.

Major Considerations that may thwart a reciprocal pension award:  

1.         Being Divisible by QDRO. If one party’s pension is not divisible by QDRO, EDRO, COAP, or any other court order any agreement will require a consideration of tax payments. This necessity is because when a party is paid their share of a pension for property division purposes through a QDRO (or similar order) the recipient will pay income tax on those funds when received.  However, when the pension is not divisible by QDRO (or similar order) only the participant is being taxed, so the parties must figure out by how much the other spouse’s share will be reduced to account for taxes, and if (and how) the parties will reconcile such reduction.

2.          Amount of Annuity Payable to the Former Spouse. Some pensions have restrictions on how much of the participant’s’ pension can be awarded to a former spouse. If a limit is placed on one party, how will that impact the award to the other party? Will the reciprocal awards simply be similarly reduced, or will there be a direct payment from one party to the other to make up for the limitation on payment from the plan?

3.         Amount of Survivor Benefit Payable. Some plans have set amounts of a survivor benefit that can be paid; other plans allow the survivor benefit to be divided into any size slice. It is important here to ensure the amount of survivor benefit agreed upon is available in both plans.

4.       Cost of the Survivor Benefit. Most plans require the pension during the participant’s lifetime (while in pay status) to be reduced to provide funds for the survivor benefit. Some plans allow for this cost to be shifted easily between the parties through the Court Order. Others only allow for this reduction to be handled in a certain way.

5.       Shared or Separate Interest Division. If the parties agree to divide the pensions as a separate interest, and later find out only one can be divided in such a manner, it can bring all of the above listed issues back on the negotiating table in order to figure out how to reach a new reciprocal award.

6.         Valuation Date. Some pension plans will allow (or require) the former spouse’s share to be determined as of the date of divorce or some date other than the date the participant commences benefits. By selecting a date prior to the benefit commencement date, the parties are in essence saying that the former spouse’s benefit is not going to increase or be impacted by any post-divorce salary increases earned by the participant. The parties may agree to this, but whether it can be (or is required to be) implemented by the plan is an important question.

While the above is a long list of issues that can arise, they can all be alleviated by requesting the plan documents early in the case to investigate and understand the plans in your case. Alternatively if reviewing plan documents is not something you want to or are comfortable doing, retaining an attorney with experience dealing with retirement plans and their division is another great option. In addition, attorneys specializing in this area may already be familiar with the plans in your case, which can alleviate the need to request information from the other party (which is an especially good benefit when the other party is not cooperative).

Markham Law Firm has attorneys specializing in the preparation of QDROs (and similar orders) and the division of retirement assets. If you need assistance, please call out office at 240.396.4373 or email qdro@markhamlegal.com to see how we can help. 

QDRO CORNER: Concurrent Payments of FERS and CSRS Pensions

When a person becomes employed by the federal government will determine whether they earn an interest in the Civil Service Retirement System (“CSRS”) or the Federal Employees’ Retirement System (“FERS”). CSRS was closed at the end of 1983 and FERS began in the beginning of 1984.

Former federal government employees may have an interest in both CSRS and FERS systems. These employees may have been an employee under CSRS, left the employ of the federal government for a period, and then returned when FERS was the pension system provided to employees.

When these benefits are paid to the retired participant, they are paid in a single, combined payment. The retired participant receives an annual statement which describes the benefit paid from each retirement system, and any COLA applied thereto. In addition, if a survivor benefit was selected at retirement (or awarded pursuant to a Court Order) the statement will show the amount of benefit and to whom it is awarded.

This annual statement is helpful for a few reasons. First, the amount awarded to the soon-to-be former spouse can easily be calculated. This knowledge will help both parties plan financially for the future.

Second, to confirm whether the retiree is receiving a benefit from one or both pension systems. Some people who were CSRS employees at the time the plans switched were required to or had the option to switch to FERS. For these participants, they would no longer have a CSRS interest, as it would have been transferred to FERS. As such, any award to a soon-to-be former spouse from CSRS in this case would worthless.

Alternatively, if the benefit is coming from both systems the parties can properly allocate the division between the plans, or shift the soon-to-be former spouse’s benefit to come entirely from one plan. Parties may want to shift the soon-to-be former spouse’s benefit to be from one plan only so that there is only one domestic relations order needed.  

Finally, the domestic relations order dividing the pension interest must state the name of the plan it is dividing. Being able to confirm if a retiree is receiving benefits from one or both retirement systems is incredibly helpful to ensure the former spouse will receive the proper amount of benefits. If this is not confirmed, the former spouse may receive less than anticipated once payments to the former spouse begin, and may have waived interest in all other benefits. This situation would leave the former spouse potentially without recourse to enforce the agreement and get what they expected.

If the annual statement is not available for any reason, it is best practice to include in the agreement as much information as possible to ensure the former spouse receives the intended amount, such as the amount that the retiree receives on a monthly basis, and the estimated amount the former spouse should receive on a monthly basis. In addition, if the parties believe but are unsure if the benefits are entirely from one retirement system, the agreement should include a paragraph that the parties will cooperate to ensure the former spouse receives they entire benefit, including, if necessary, a second Court Order to divide the other pension interest and direct payment of the difference from the retiree until the second Court Order is put in place.

Finally, a consideration here too is whether enough information is being exchanged for the parties to be making informed decisions. If the attorney has any concern that a party is not going to receive the agreed upon amount they should be sure to send their client a written communication with their concerns, recommended action, and suggested language for the agreement.  This will make clear the attorney’s concerns with the agreement and proposed solutions. This communication will help to protect the attorney against any malpractice claims in the event the agreement does not provide the former spouse with the expected benefits.

If you have a case where a party may have both benefits and you need assistance in drafting settlement agreement language, proposing language for a judgment of divorce, or determining the best way to divide the benefits to implement the parties’ intended division, call us. We offer consultations on federal benefits and flat fee retainers for defined scopes of work in this area. Contact our office at 240-396-4373 to schedule a consultation today. 

Remarriage Restrictions and Pension Payments

All retirement transfers and payments must be handled carefully.  It is critical that the parties be advised of additional steps they may need to take beyond getting the QDRO prepared and submitted. Many of these steps are simple, such as having the alternate payee provide his/her account information in order to receive the funds.  Without this,  the plan may not be able to make payment at all or will withhold an improper amount of taxes if the correct forms are not submitted.

A very important rule that some pension plans have is a restriction regarding the remarriage of the former spouse. Typically, the restriction is that if the former spouse remarries prior to reaching a certain age, then the payments to the former spouse of his/her share of the employee’s annuity (during the employee’s lifetime) will terminate. Under certain plans, the payment can be resumed upon proof that the former spouse’s subsequent marriage has ended by death or divorce. With other plans, the payment cannot be resumed and is in fact terminated forever. If a former spouse is relying heavily on these payments, this is a very important piece of information that should be conveyed to the client not only in discussions to ensure they understand but also with a follow-up written communication. The follow-up letter will serve as a reference to the client and also help protect the attorney from a potential malpractice claim. Since the income received from a spouse’s pension is typically a substantial sum to the former spouse, the recipient must be put on notice of any decisions that could impact their ability to receive such funds.

Another consequence of remarriage before a certain age is that some plans will terminate a survivor benefit award that may have been made to the former spouse. Some plans will terminate the survivor benefit award forever, whlle others will allow it to be resurrected upon proof that the subsequent marriage has ended by death or divorce. A warning to the client verbally and a follow-up in writing is similarly important here for the same reasons as those listed above.

Some former spouses will receive a minimal share of a pension plan and/or survivor benefit to secure their entitlement to health insurance coverage. For these former spouses, a remarriage may not be important in terms of the income they expect to receive but very important as it relates to other benefits, such as health insurance. If they remarry and lose their survivor benefit, then they could also lose their entitlement to these other benefits.

Here are some examples of plans with remarriage restrictions:

Federal Employees’ Retirement System and Civil Service Retirement System: If the former spouse remarries before age 55, then they will lose their survivor benefit unless they were married to the employee for 30 years or more. If the former spouse’s subsequent marriage ends by death or divorce, they can reinstate their entitlement to the survivor benefit.

Military Pension: If the former spouse remarries before age 55, then they will lose their survivor benefit. If the former spouse’s subsequent marriage ends by death or divorce, they can reinstate their entitlement to the survivor benefit.

Foreign Service Pension System: If the former spouse remarries before age 60 they will lose their entitlement to the employee’s annuity (during the employee’s lifetime) forever. Entitlement to a survivor benefit will be terminated, however it can be reinstated if the subsequent marriage ends in death or divorce.

Other plans such as the Inter-American Development Bank Staff Retirement Plan require that the parties determine whether payment to the former spouse will be impacted by their remarriage.

What about the remarriage of the employee/participant?

The Inter-American Development Bank Staff Retirement Plan will require that the parties determine whether payments to the former spouse will be impacted by the participant’s remarriage. This is rare. 

For most plans, the remarriage of the participant does not impact payment of the employee’s annuity or the survivor benefits to the former spouse if all paperwork has been timely submitted and accepted.

With a military pension, the former spouse must be designated within one-year from the date of divorce to receive the survivor benefit. If not, when the military member remarries, the new spouse will automatically be the beneficiary of the survivor benefit on the one-year anniversary of their marriage to the military member.

Other plans may not impose any impact on the former spouse if the participant remarries. For the participant though, they will want to look into timely designating the new spouse for any survivorship benefits – even if the full amount was awarded to the former spouse. This is because some plans, like FERS and CSRS will allow the new spouse to be a sort-of back-up designee, in the event the former spouse dies before the participant – then the new spouse will be the recipient of the survivor benefit upon the participant’s death.

Overall, the key takeaway here is that all plans are different and have their own rules. These rules may cause major changes to a participant or former spouse’s benefit, and therefore the attorneys must ensure that the parties are carefully advised of all the potential implications of their future actions.

QDRO Corner: FERS Annuity Supplement – MSPB Decision!

The MSPB is the Merit System Protection Board. It is a quasi-judicial agency existing within the executive branch of the federal government. One of its tasks is to review the “significant actions of the Office of Personnel Management.” The Office of Personnel Management (OPM) is the administrator of the Federal Employees’ Retirement System (FERS).

A part of the FERS pension is the Annuity Supplement. This is a benefit paid to certain employees upon their retirement and is meant to act as an early social security payment to encourage these employees to retire early. Such employees this applies to are law enforcement, air traffic controllers, firefighters, and the like. This Annuity Supplement is paid between the person’s retirement and age 62 when the full payment from the FERS pension is paid.

Within the regulations governing the administration of FERS, there are sections describing how to divide each element of FERS. The provision regarding the Annuity Supplement says that it would be treated (for the purpose of any court order) in the same way the employee annuity is treated. OPM had initially understood this language to mean that if the annuity supplement was not explicitly divided within the court order (as is required for the division of the employee annuity), then it would not be divided.

Around 2016, OPM changed its interpretation and decided it would divide a retired employee’s Annuity Supplement, and that such division would apply retroactively even if the court order was silent on the matter. As such, OPM would be treating the Annuity Supplement the same as the employee annuity by dividing it in the same manner that the employee annuity is divided. The reason for this was to create continuity between FERS and its predecessor plan, the Civil Service Retirement System (CSRS). Under CSRS participants did not pay into social security, so the benefit under CSRS is larger than under FERS because CSRS was designed to include the social security benefit. Since the Annuity Supplement is an approximation of a social security payment but to certain FERS participants, OPM believed it needed to correct its approach.

This decision caused a change to a great many retiree’s benefit payments. Not only would the people receiving the Annuity Supplement have to divide those funds, but their benefits were further reduced to pay the amount of the Annuity Supplement that their former spouse should have been receiving since the employee retired.

One affected retiree appealed OPM’s decision to divide his Annuity Supplement and to retroactively adjust the payments to his former spouse in 2018. Due to a lack of quorum on the MSPB, the case had been sitting until its decision in November 2023.

The MSPB decided that OPM’s original treatment of the Annuity Supplement, i.e.: as a separate element of the FERS plan that must specifically be divided was the correct interpretation. As such, any payments that OPM adjusted during the period 2016 through the MSPB’s decision in 2023 must be reversed.

The MSPB’s analysis explains that the language of the regulations requires the treatment of the two elements under the court order to be the same. The treatment is first whether the part of the plan is divided. Second, if it is divided, how is the former spouse’s share to be calculated. The regulations do not require that the two pieces, specifically the Annuity Supplement and the employee annuity, be calculated in the same manner. More importantly, also, that OPM’s justification that the FERS and CSRS plans should have continuity in these areas was unsupported. The fact that they are different plans and interact with social security differently inherently means that the two plans should be different in their administration.

What does this mean for the attorney handling a divorce that includes a FERS pension?

As per usual, be specific. First, does the annuity supplement even apply? If the federal government employee’s job is nothing like law enforcement, air traffic control, or firefighter, chances are they are not even eligible for the benefit. If they are eligible though, be clear, and award the former spouse a share if that’s what the parties agree. Make sure the award is in the parties’ agreement and the court order dividing the FERS pension. Notably, OPM will not double-check the parties’ agreement to make sure everything made it into the FERS Order. However, OPM can reject the order if additional awards are made in the court order that are not included in the agreement or divorce decree.

If you represent a client and federal government retirement benefits are at issue, contact us at 240-396-4373 can schedule a consultation with us to discuss the benefits, how they are accrued, what can be divided, and how long the division process takes.

Sharing our Love with QDRO Tips

Roses are red, violets are blue. We love sharing QDRO Tips with you. This Valentine’s Day we are showing our love by sharing some QDRO Tips:

Earnings, Gains, and Losses are your Friend – The market is quite volatile now and has been for quite some time. Additionally, some 401k, 403b, and similar plans are taking longer than before to effectuate a division of such accounts. Including earnings, gains, and losses on a retirement transfer amount to a former spouse/alternate payee will make it seem like those funds had been in the former spouse/alternate payee’s name since the date the parties decided to value the account. Excluding earnings, gains, and losses on the transfer amount means the participant/account holder will enjoy (or suffer) all fluctuations due to market changes. Imagine, the account has $100,000 as of 2/14/2024 and the parties agree the divide it equally, excluding earnings, gains, and losses. The former spouse will always get $50,000 but if the market falls the participant will end up with less than $50,000 in the account after the transfer is complete. Since no one can predict what the market will do, including earnings, gains, and losses on the transfer amount ensure that both parties will be affected proportionally in such a transfer.

Remember the Survivor Benefit – When dividing a pension, it is important to remember there is a portion paid during the participant’s lifetime, and there is an optional portion that can be paid out after the participant’s death. To continue the payment after the participant’s death is called the survivor benefit. State law dictates whether the survivor benefit is treated the same as the payment made during the participant’s lifetime. It is best to address whether the former spouse will receive a share of the survivor benefit. In the event the parties are divorcing in a state that treats these as separate assets, failing to do so could preclude the former spouse from receiving the benefit at all.

You can Withdraw from Your IRA at age 59 ½ - With the retirement age creeping ever higher for access to social security funds, parties should remember they can access other retirement funds sooner. This can really help parties trying to plan for retirement while going through a divorce. Though, these clients may also benefit from the counsel of a financial planner.

Shared or Separate Pension Interest Division – Some pensions can only be divided such that the former spouse receives money only if, as, and when the participant receives money from the pension. If that’s the case, for the former spouse to receive payments after the death of the participant they will need to be awarded a survivor benefit. Some pensions may also be divided so that the former spouse can begin to receive payments when they choose, and have the payment made for their lifetime. There are sometimes complex actuarial considerations in this decision, but ultimately is a decision the parties need to make.

401ks can Fund Alimony and Child Support Arrears Payments – If a party does not have sufficient funds to pay alimony or child support arrears directly, a court order can be entered to make such payment from the obligor’s 401k. Such court order must specify the purpose of the payment is for alimony or child support (as opposed to division of marital property) so that the tax will be charged to the obligor rather than the payee.

Get Plan Documents Early – Too often parties agree to a division of retirement benefits, only to learn that the plan does not allow for their agreed-upon plan. The parties then have to go back to the negotiating table (or court) to find a new way forward. Getting the plan documents early allows the parties to move forward knowing their options so they know what they agree upon will be allowed by the plan.

Pick Your Title: QDRO, EDRO, or COAP – “QDRO” is a term of art defined under the Employee Retirement Income Security Act (ERISA). Not all retirement plans are governed by ERISA, however, and those plans do not like to use ERISA language. As such, they have adopted other preferred titles, such as Eligible Domestic Relations Orders or Court Order Acceptable for Processing. While some plans are particular about the title of these orders submitted to them, others are not. But it is important to know that picking the wrong name could result in a rejection, even if the rest of the order would otherwise be acceptable.

Some Plans are not Divisible – Plans governed by ERISA are required to be divisible by court order in some manner. For plans not governed by ERISA though, no division mechanism is required, and in fact, the plans can have a non-alienation clause prohibiting the transfer of the asset. Many of these plans are for highly compensated individuals such as partners and shareholders of large organizations. If the funds in these accounts are marital funds that should be divided, the parties will likely need to find some other asset to transfer instead.

If you have additional questions about QDROs, contact our office at 240-396-4373.

Major Differences in ERISA Governed Plans, and Non-ERISA Governed Plans

The Employees’ Retirement Income Security Act (ERISA), as revised, includes many protections for former spouses (or soon-to-be former spouses) as it relates to the submission of QDROs. Chief among them is that once a plan is on notice of a former spouse’s viable claim to the participant’s interest in the plan, the plan has a responsibility to protect that former spouse’s interest through the submission of a court-executed QDRO or the expiration of 18 months, whichever first occurs.

What are these protections?

For a defined contribution account the plan will usually prevent the participant from taking loans or making withdrawals from the account. For defined benefit accounts the plan can go as far as preventing the participant from commencing benefits or pausing benefit payments altogether, or can begin to withhold a portion for the former spouse pending the final order. For financially dependent spouses, the submission of a draft order for the purpose of implementing these protections can be a tactic to preserve the marital estate while the divorce is pending.

What is a viable claim from a former spouse?

ERISA does not clearly define what needs to be submitted to a plan for these protections to be put in place. Most ERISA-governed plans are very cautious and will put up protections when they receive a draft DRO.

Non-ERISA governed plans, however, only have such regulations if they are specifically written into their plan rules. Non-ERISA governed plans can protect their participants much more strongly. Imagine this scenario: a draft QDRO is submitted to the plan to ensure it will be accepted by the plan once in final form. The plan takes a while to review, but then responds with a few small edits.

The former spouse makes the edits and submits the draft for a second review. The plan again takes a while to complete the review. During that time the participant retires and commences benefits. The plan then responds to the former spouse’s second draft with substantial changes due to the participant’s retirement changing the benefits being available to the former spouse. Now the former spouse has to scramble to get the QDRO entered and to chase the participant for their share of the benefits that have been paid to the participant.

Alternatively, some non-ERISA governed plans have voluntarily put stricter protections in place for more day-to-day type activities. Specifically, the Thrift Savings Plan (federal government employees and military) requires spousal consent for any withdrawal or loan. While this is great to protect the marital asset, for a person who otherwise needs access to the funds for say, paying an attorney’s retainer fee, it may be a way for the former spouse to block the participant’s access to funds in a time of need. Recently, Congress has considered adding similar protections to ERISA, though no final decision has been made.

Why would these restrictions not be in the existing draft of ERISA?

Perhaps because the title of the statute is the Employees’ Retirement Income Security Act – as some courts have noted, the intent is to protect the asset of the employee, not their beneficiary. However, the protections exist once the former spouse’s claim is raised perhaps because the statute recognizes the need to transfer retirement funds to a more financially dependent spouse. After all, the need for QDROs and QDRO protections arose as divorce became more acceptable and there was one party with substantial retirement assets from employment and the other party had little to no retirement due to being a fulltime homemaker. As a former spouse has a marital claim to the retirement asset, they have a different standing from any other beneficiary.

As attorneys, what can we do to best protect our clients?

Gather information about the plan as early as possible. Figure out what are the plan’s procedures and how quickly they review and implement QDROs. If there is any concern regarding depletion of assets ask the plan what is required to freeze the account. Get the QDROs drafted in advance of a divorce. If there is no freeze on the account from any action prior to the divorce, then upon divorce the plan is unaware of any claim from the former spouse and will allow the participant to make any decision allowed under the plan rules. Not only does this protect the former spouse as best as possible, but it also gets the transfer done as close to the divorce as possible. It allows the parties to move forward from the divorce without the need to go back and get this done later, and as unattached as possible.

Have additional questions?  Contact our office at 240-396-4373. 

Intergovernmental Organizations: Basic Elements to Consider

Intergovernmental Organizations, such as the World Bank, Inter-American Development Bank, the International Monetary Fund, the Asian Development Bank, and the United Nations (to name only a few), have retirement programs with unique rules for division pursuant to a divorce.

First, it is important to note that these organizations are not bound by US law, and therefore are not required to accept a US or state court order dividing one of their employee’s retirement interests. Many of these organizations, including the ones listed above do accept court orders for the purpose, so long as it conforms to the organization’s rules and regulations. The reason is because they want to promote law-abiding behaviors without waiving their privileges and immunities that they enjoy through their status as an intergovernmental organization.

Major points to consider in negotiating or arguing for retirement benefits provided by this organizations:

1. Survivor benefits. Most of these organizations will not allow a court order dividing the pension benefit to reference survivor benefits. Typically, these organizations require a former spouse survivor benefit be secured by the filing of a beneficiary designation form with the plan’s administrating office. Thus, it is important to require the participant to fill out and submit such form timely, and that such requirement is included in an enforceable document other than the order dividing the retirement benefits.

2.  Cost of survivor benefits. Most of these organizations do not allow for the cost to provide the survivor benefits to the former spouse to be shifted, and may require that the reduction be taken from the participant’s portion of the pension benefit. Where this is the case, parties can usually determine an equal amount by which they reduce the former spouse’s share of the benefit to effectively shift the reduction for the survivor benefits. However, since this involves more work and clear language in the separation agreement (or presentation of evidence to the court) it is wise to advise your client of the potential need for this early on, or to obtain as much information as possible so this is not a surprise after everything is resolved.

3.  Limitations on total award from the retirement plan. Many of these organizations include a limit on how much a participant’s retirement benefit can be reduced from all sources. In effect, the organization wants to secure some amount of the retirement benefit for the participant. The result in dividing it for a divorce means that sometimes the amount awarded to the former spouse must be reduced so that the participant still receives the minimum amount required from the plan. Specifically, imagine a case where the entire service is marital so the former spouse would receive 50% of the entire pension benefit. Then, the former spouse also wants a survivor benefit, but the reduction for the survivor benefit must come from the participant’s share of the pension. This would result in the participant receiving less than 50% of the pension benefit during their lifetime, which violates the plan’s rule that the participant cannot receive less than 50% of their pension benefit. So, in order for the plan to accept the division, the former spouse must either reduce their share of the pension to effectively shift the cost of the survivor benefit to the former spouse, or the former spouse must waive the survivor benefit.

   • This limit applies to all reductions, so if the participant has multiple marriages and is providing survivor benefits and a share of the pension to multiple former spouses or a current spouse, it is important to check that this rule is followed. Typically, if a draft order is submitted to these plans, they will advise if there is an issue here.

4.  Title of the Court Order. Since the plans are not bound by US laws, they will reject any document (even if otherwise acceptable) if it is called a Qualified Domestic Relations Order because that is a term specific to the Employee Retirement Income Security Act. Some organizations, like the World Bank, require the payment to the former spouse be called Spousal Support. Other organizations simply prohibit the term QDRO but will accept anything else. Especially if dealing with the World Bank, it is important to use the correct terminology in the agreement or other court orders.

   •  A special note here, there are cases in both Maryland and DC that state even though the World Bank requires the phrase “Spousal Support” to be used in their orders, that the courts can divide the benefits pursuant to the jurisdiction’s property division statutes similar to US-based retirement programs.

5.  Cash Balance and Commuted Benefits. Some of these programs include a cash balance benefit or allow the participant to receive a lump sum benefit at the beginning of their retirement followed by a monthly benefit. The organizations may require that these benefits each be discussed separately in the pension division order. Therefore, it is important to discuss in trial or in an agreement.

While there are other aspects to each plan that should be given special consideration these are the major points that come up frequently in these cases. As with all retirement benefits, the most important step is getting all the information early in the case to know all the elements that need to be addressed during the divorce process. We can assist in obtaining plan documents and determining benefits available for division in these types of cases. Depending on your needs, we can provide some services on a flat fee basis. For assistance and information regarding fees, please contact us at 240-396-4373.

QDRO Corner: The Only Certainties are Death and Taxes

Many of our clients tend to skim over the details of their agreements, instead focusing on the big items, such as how much will a retirement equalization amount be, but they ignore the details of how the funds will actually be transferred.  

1.    A Domestic Relations Order is Needed

Yes, many attorneys still forget to tell their clients that a QDRO (or similar order) is usually needed to transfer retirement assets after the divorce is final, or fails to explain the consequences of delaying.  As this firm states regularly, the best practice is to draft the order with the Agreement, and submit it to the court at the divorce hearing, or submit it as soon as possible after receiving the final order from a trial. If a client prefers to wait for any reason, be sure they are advised of the potential issues related thereto. 

The biggest issue if a party decides to wait on the QDRO is the death of the account holder before the QDRO transfer occurs. After a divorce, the account holder can change the beneficiary for their retirement accounts without consent from the former spouse. A retirement plan will appropriately pay the beneficiary(ies) listed upon being notified of their participant’s death. Once the funds leave the plan’s control and are sent to the beneficiary(ies) a QDRO is not helpful. The former spouse’s only option at that point is to sue the beneficiary(ies) for the funds. That is a less-than-ideal scenario for everyone involved.

Alternatively, the plan participant may not want to share their retirement assets with their former spouse and may move them to other accounts, or even cash them out to make the funds harder to find. In the case where the funds are simply moved to another retirement account, a QDRO can still be used. The problem is that information from the new account would have to be obtained. If the funds were withdrawn, then the former spouse has to chase through the participant’s finances and likely determine the post-tax equivalent they should receive. And, if the participant didn’t want to share the asset to start, the passage of time will not likely change their mind and make them suddenly cooperative. Many former spouses in this situation end up spending lots of money on attorneys’ fees to figure out what happened, and then figure out an alternative method to be made whole.

2.    Tax

Most agreements will describe the retirement equalization transfer as being “tax-free” because it is incident to divorce. As attorneys, it is our job to instruct clients that the transfer is “tax-free” to the spouse who owns the account from which the funds will be taken so long as the funds leave the account due to a QDRO (or similar order).

The transfer is also “tax-free” to the spouse receiving the funds if the funds are rolled over into an eligible retirement account. The spouse receiving the funds should be made aware that when the spouse takes the funds out of the retirement account, the spouse will then be taxed on the funds as if they had been that spouse’s funds all along. In addition, if the spouse receiving the funds takes the funds as cash, instead of rolling them into an eligible retirement account, then the funds will be taxed.

The “tax-free” transfer language is not a means to exempt the funds being transferred from being taxed ever, instead, it is simply notice that so long as the funds are transferred from one retirement account to another that at the time of the transfer no taxes will be paid, and particularly that however the former spouse decides to receive the funds, the participant will not suffer any tax consequences.

Ultimately how the former spouse wants to receive the funds is up to the former spouse (unless they have agreed to something specific in the settlement agreement). Whether they want to roll the funds over to a retirement account or take some or all of the funds as cash is a question they may want to discuss with a tax professional or financial planner so they can have a better idea of the tax implications they may be facing.

While some cases may have special circumstances in which the delay of a QDRO is the best practice, those situations from our experience are quite rare.  If that is the case, then language protecting the former spouse’s interest and outlining the next steps and timing should be clearly explained in the agreement.

Contact our office at 240-396-4373 if you need assistance with your QDRO.

Note: While the bulk of this article is specific to ERISA-covered plans such as 401k, 403b, etc., the same logic applies to retirement plans not covered by ERISA such as IRAs. The method of the transfer may be different, however.