Is a QDRO Necessary?

There are two ways to read this question, the first being whether a QDRO is necessary for the account or interest that’s being divided. The second is whether a QDRO as a document separate from the agreement or divorce decree is necessary. 

As to the first, always check with the plan administrator. Plans governed by ERISA will need a QDRO to be divided. Plans not governed by ERISA may not need one and may not be divisible by means other than direct payment from the participant to the former spouse. If you think this is something in your case, we can help you write a separate order, or a section of the agreement to make each person’s responsibility in such a case clear. 

As to the second, the answer is a resounding “no” a QDRO as a separate document is not necessary per ERISA. However, a document that meets all of the requirements of a QDRO is necessary. So, this reasonably means that so long as all of the language required by ERISA and the plan is included in the judgment of divorce and/or agreement which is incorporated into the judgment of divorce, then no separate document is needed. 

So this begs the question, why have the QDRO be a separate document?

First, there is the matter of the parties’ privacy. The agreement and/or judgment of divorce usually includes a lot of information not related to the retirement division such as other marital property division, child custody, child support, and/or alimony provisions. If all of the necessary information is included in the agreement or judgment of divorce, then all of the non-related information will be required to be shared with the retirement plan administrator.

Second, sometimes parties will agree to complicated asset off-setting schemes which are described in detail within the agreement. When the QDRO is a separate document, these details are omitted so that the retirement plan administrator sees only the information necessary to divide the retirement plan. The retirement plan administrator does not need, nor do they want, to know the reason behind the division. They just want to know what the division is they need to implement.

Third, plan administrators are generally not attorneys, or even paralegals. They have a checklist to make sure certain provisions are included. They then review any additional provisions to see if there is anything that contradicts the plan rules, adds a burden to the Plan that the Plan is not willing to accept, or otherwise is something to which the Plan does not agree. If such a provision is included, it will cause a rejection. When parties have complicated asset off-setting schemes, sometimes the detailed description of the reason behind the division can cause confusion for the plan administrator. If the division is not clearly stated, the plan administrator will reject the order.

If is for these main reasons that we prefer to have the QDRO as a separate document from the judgment of divorce and settlement agreement.

As an additional note, some plans require that the settlement agreement be submitted to the plan with the QDRO. The reason is to safeguard the plan from future litigation.

In these circumstances, we have learned that if the parties are merely adding information to the QDRO, the plan administrator usually has no concerns. For example, if the parties state in the agreement that the former spouse is entitled to 50% of the amount accrued during the marriage as it relates to a defined contribution account, and then the QDRO states the amount being transferred to the former spouse is $50,000, that should not cause any issues with the plan administrator.

However, if the agreement says that the former spouse’s share of a defined contribution account will not include earnings, gains, and losses from the valuation date to the date of distribution, and then the QDRO says that it will include earnings, gains, and losses, the plan administrator may reject the QDRO. We have come across these cases and the parties have in good faith changed their minds about something in the agreement and simply wish to change it in the QDRO. In such circumstances we include a footnote in the QDRO to acknowledge the discrepancy between the agreement and the QDRO. The footnote makes the plan administrator aware that the parties are knowingly deviating from the agreement so that the QDRO cannot be contested in the future on the grounds of making an award that differs from the parties’ agreement.

If the plan implements an order that differs from the agreement, and a party later files to vacate or amend the order, the plan may be the subject of litigation. Whether the litigation is successful is a different question, but still it would cause legal and administrative fees to defend and therefore is something the plan will want to avoid.

If considering the need in the future for a QDRO as a separate document, consider these points with your client. 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.

Why do we use the phrase “court of competent jurisdiction”

Why do we use the phrase “court of competent jurisdiction” when referencing a court that will enter the qualified domestic relations order?

Most agreements we see prepared by other attorneys include a line such as “the parties shall promptly submit a qualified domestic relations order to a court of competent jurisdiction.” But what is that anyways, a “court of competent jurisdiction”?

As attorneys, we only seek to file for our clients’ divorce in a court that has both subject matter jurisdiction over the divorce and personal jurisdiction over the parties. Logically, that is a court of competent jurisdiction, because it has both the authority to make a decision and the means to enforce it upon the parties. However, it would appear that this is not the type of decision the Employees’ Retirement Income Security Act is referencing.

 
Specifically, ERISA 206(H)(i) states “During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined (by the plan administrator, by a court of competent jurisdiction, or otherwise), the plan administrator shall separately account for the amounts (hereinafter in this subparagraph referred to as the “segregated amounts”) which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order.”

So the court being referenced here must be one with the jurisdiction to determine if the domestic relations order prepared for the purpose of dividing the retirement account is a qualified domestic relations order. This distinction then begs the inquiry, what makes a domestic relations order qualified? According to ERISA, if the domestic relations order assigns to an alternate payee or recognizes the alternate payee’s right to receive benefits payable to a participant (ie: someone other than the alternate payee), relates to the provision of child support, alimony, or marital property rights to a spouse, former spouse, or other dependent of the participant, and is issued by a state or Tribal court (among other requirements) the domestic relations order is qualified. 29 USC 1056(d)(3).

If the order is qualified, then the plan administrator is required implement it and make payment to the alternate payee. If the order is not qualified, then the plan administrator is prohibited from implementing it.

Now that we know the distinction between a domestic relations order and one that is qualified, who determines whether it is qualified? ERISA 206(H)(i) above makes clear that the plan administrator or a court of competent jurisdiction will determine whether the domestic relations order is qualified. But does it matter which one makes the determination?

A domestic relations order, once entered by the court in the divorce case will be sent to the plan administrator for their determination as to whether the order qualifies. It is at this point that the plan administrator must begin to segregate the benefits for the alternate payee, pursuant to section 206(H)(i), above.

So if the plan administrator makes the determination, how could the question of whether a domestic relations order is qualified get before a court of competent jurisdiction? A plan administrator’s decision may be challenged, if either the participant or the alternate payee believes the plan administrator made a mistake. Usually there are administrative procedures to handle such a challenge, but once those are exhausted the issue could go before a court. That court would need to have jurisdiction over the plan to be able to decide if the plan administrator made the correct decision regarding the qualification of the domestic relations order.

Why does this matter? Let’s say the QDRO is for a pension, and at the time of the divorce the participant is already receiving benefits. This means that from the moment the QDRO is received by the plan administrator, all future payments must be divided for the alternate payee. If the plan administrator determines the order to be qualified and the participant objects, then pursuant to Section 206(H)(i), the plan administrator is required to continue to segregate the payments for the alternate payee through the final appeal of the question. Further, if the court of competent jurisdiction agrees with the plan administrator that the order is qualified, then all of the benefit that has been segregated for the alternate payee shall be paid to the alternate payee. This procedure ensures that the participant cannot challenge the plan administrator’s decision regarding qualification of the order in hopes of delaying the implementation of the order. It discourages disingenuous challenges by protecting the alternate payee’s benefit until such time that the decision is final.  

So, attorneys must have latched on to the phrase “court of competent jurisdiction” at some point and decided to use it in separation agreements.  Since it is not a defined term in ERISA, it is not necessarily wrong to use in agreements, because the agreement could be that the domestic relations order will first be submitted to a court with jurisdiction over the divorce and the parties. However, since it is not a term seen elsewhere, its use in separation agreements is not necessary.

If you or your client needs a QDRO, please give us a call at 240-396-4373 to discuss your case specifically and what you or your client needs.

Determining the Non-Marital Portion of a Pension

Pensions are hard to divide when the participant is not yet receiving the payments. Without knowing the amount of the benefit, how are the parties supposed to know how much was earned during the marriage, and thus the amount to transfer to the alternate payee?

States have determined what is referred to as a ‘coverture fraction’ or ‘marital share formula’ which resolves this issue. In Maryland it is referred to as the Bangs Formula, because that is the case that first figured out a version of this formula in Maryland (59 Md. App. 350, 475 A.2d 1214 (1984)). However, for Maryland attorneys it is important to remember that the formula was updated in Pleasant v. Pleasant, 97 Md. App. 711, 632 A.2d 202 (1993).

In Maryland, the Bangs Formula (as updated by Pleasant) is as follows: (1) the total monthly benefitreceived by the participant times (2) a percent times (3) a fraction. The fraction is defined such that the numerator (the top number) is the total number of months of service credited toward retirement earned during the marriage, and the denominator (the bottom number of the fraction) is the total number of months of service credited toward retirement as of a certain date.

Certain parts of the formula above are bolded. This is because those are variable based on which pension is being divided, or as the parties may agree. But, first to break down the entire formula.

(1) The total benefit received by the participant. Typically, this is the largest, unreduced amount earned by the participant. So this number is pre-tax, pre-division for any other QDROs (if applicable), and pre-deductions (if the participant is paying for health insurance deductibles, life insurance deductibles, or other benefits from their pension). Alternatively, the parties could agree to divide a smaller amount, such as the net amount after all of the deductions and withholdings are made. Not all plans will allow a division of any smaller amount, so it is important to get plan QDRO procedures in advance to make sure the parties are agreeing to an amount that can be implemented.

(2) A percent. This percent is the share of the marital portion that will be awarded to the former spouse. Typically this percent is 50%, however parties can agree to any percent they wish. Reasons parties agree to an amount other than 50% is to offset for another asset or decrease for the anticipated cost of survivor benefits.

Again here, not all plans will allow for an amount greater than 50% of the entire pension, or even 50% of the amount earned during the marriage to be transferred to the alternate payee. This is only a restriction on what the plan will pay to the alternate payee directly. It is not under any circumstances a limitation on the amount that can be awarded to the alternate payee. If the parties agree to award the alternate payee more than the plan will pay directly, then they parties must agree on a way for the participant to pay the additional amount directly to the alternate payee.

(3) A Fraction. The fraction is the total number of [unit of measurement] earned by the participant during the marriage divided by the total number of [unit of measurement] earned by the participant as of [insert date]. The result of the fraction will be the percent of the pension that was earned during the marriage.

Many retirement plans will use months of service that count as credit in the retirement plan as the unit of measurement. These plans are for the more typical types of employment such as teachers, government employees, executives, and skilled labor union members where the work is more predictable in terms of the effort is expended on a day-to-day basis.

Some plans have other units of measurement. For example, the reserve military members accrue retirement points based on drills completed throughout the year (or time served in active duty). Some months the member will earn more than others, and therefore counting the points earned, rather than months served is a more accurate means to determine how much effort was expended during the marriage to earn the marital portion of the pension. As an example, some reserve programs used to advertise as requiring only one weekend per month and two weeks during the summer. Using the points unit of measurement, the month in which the 2 weeks is served is properly weighted more heavily than the months in which only a weekend is served.

Finally, the date the parties pick can also alter the fraction. Picking the amount of service earned as of the date of the participant’s retirement may mean only the months of service actually worked and earned as credit in the retirement system will be used for the denominator of the fraction. Alternatively, picking the amount of service earned as of the date the participant begins to receive benefits may inflate the denominator to include unused sick or vacation leave accrued by the participant. Typically, a retirement plan’s QDRO procedures will not describe the plans’ default setting here, nor will it flag this as a potential area that the parties may change. Some plans may not allow for the parties to pick between these two dates and may require a certain date be used. As mentioned above, when in doubt (or just to double check), always ask for more information from the plan.  

If your case involves a pension division, the attorneys at Markham Law Firm are available to assist by drafting the retirement order (QDRO), consulting on the retirement division and drafting proposed language for a settlement agreement or proposed judgment of divorce, or consulting on certain plans.

Things to Know When Calling a QDRO Attorney

If dividing retirement assets as a part of their divorce, client will likely need to reach out to an QDRO attorney (if their divorce attorney does not prepare these orders). Many clients are hesitant during this call because they are already in a dealing with many life changes. To add to the amount of change, they need to add a QDRO attorney to their divorce team of professionals. Understandably, the whole process can seem quite daunting.

Here are some tips to help that conversation go smoother and to prepare the client for that call:

1. The QDRO attorney will need to acquaint themselves to the case that the client and their divorce attorney know very well. The QDRO attorney will need some basic facts about the marriage and the parties to get oriented. Such information will likely include the date of marriage, ages of the parties, jurisdiction of the case, and the negotiation or litigation status. Some attorneys may want dates of birth and social security numbers for both parties. Many plan administrators will require this information before sharing any general plan information with the QDRO attorney. Other QDRO attorneys will ask for this information only if it is necessary.

2. The QDRO attorney will also need to know basic information about the type of division(s) that are needed. For example, is it an equalization of multiple 401k-type accounts or is there a pension? The best information here is to be able to tell the QDRO attorney the name of the plans that will be divided, and/or the financial institutions involved.

3. Relationships. The QDRO attorney will likely want to know how is the relationship between the counsel or the parties. Is everyone cooperating so there will be a free flow of information, or will it be like pulling teeth to get information from the other side?

4. Timeline. Sometimes in highly contested cases the Court will issue a deadline by which they want any QDROs to be submitted after the Judgment of Divorce is entered. A good QDRO attorney should be able to provide a time estimate in the initial phone call so that the counsel can advise the court early if an extension will be necessary.

With the above information, a QDRO attorney should be able to have a substantive conversation with a new client.

For the clients or counsel who have not dealt with many QDROs, here are some questions to ask the QDRO attorney which can help gauge the attorney’s experience, but also to set expectations for the process:

1. What does the whole process look like from signing the retainer to the final transfer of the funds?

2. What is the timeline or anticipated time frame for each step of the process?  

3. Are there any additional steps that must be taken to finalize the transfer that are not covered in the QDRO attorney’s retainer?

It is important to remember that although the QDRO attorney will be reaching out to the retirement plan administrator directly and obtaining information about the plan in general the plan will not provide account specific information without the participant’s express approval. For example, if the balance of the account as of a certain date is needed, and the participant is not willingly sharing that information, the plan will not share that information directly to the QDRO attorney. All rules of confidentiality and safe guarding of each participant’s account still apply to the plan administrator. This is why the QDRO attorney can usually get information about the plan and their QDRO procedures in general, but not specific information about the participant’s account.

If you or your client needs a QDRO, please give us a call at 240-396-4373 to discuss your case specifically and what you or your client needs.

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.