QDRO Corner: Describing the Amount to Transfer to the Alternate Payee

A necessary element of any QDRO is the amount that the Plan should pay to the
Alternate Payee. The amount is described one way for defined benefit plans (pensions,
annuities, etc.) and another way for defined contribution plans (401k, 403b, TPS, etc.).

Defined Contribution Plans

Defined contribution plans have separate accounts that hold funds designated for a
single, specific person. The transfer amount should be described in terms of a specific
dollar figure or a percentage of the total account balance, as of a specific date. All other
considerations, such as a premarital interest, using the retirement accounts to equalize
or buy-out interest is other assets, etc. should be described in detail within the
Agreement, and ultimately boiled down to a specific dollar amount or percentage to be
used within the QDRO.

Exception: The Federal Thrift Savings Plan is an exception here, as this plan will also
accept awards described as a percentage of the account accumulated between two
dates. This description allows attorneys to divide the TSP on its own, and have the TSP
Board do the math to avoid dividing any premarital or post marital contributions.

Defined Benefit Plans

Defined benefit plans are large funds in which many people have an interest, but funds
are typically not set aside or designated for a single person. Awards to an alternate
payee for these plans should be described as either a flat dollar amount, a percentage
of payments received, or as a fraction.

It is important to keep in mind here that these plans are typically monthly benefits and
many have provisions limiting how much of the benefit can be given to an alternate
payee. So, if using a flat dollar description, it is important to know how much the
participant is receiving, and if there a restriction.

Exception: There are cash-balance defined benefit plans. These plans are a sort of
hybrid between a traditional defined benefit plan and a traditional defined contribution
plan. Some are divided using a defined benefit structure and others are divided using a
defined contribution structure.

At the end of the day, it’s important to know what type of plan is being divided to know
how to describe the award to the alternate payee in a way that the plan will accept. To
do this, it is best to obtain the information regarding the plan during negotiation of the
agreement and to prepare the QDRO along with the Agreement.

We can help with obtaining information from the plan, reviewing draft agreement
language, and preparing QDROs while the agreement is being negotiated.  Contact our office at 240-396-4373.

QDRO Corner: ERISA and Pensions in Pay Status

It is best practice to submit a QDRO as soon as possible following a divorce for many reasons. In the case of the alternate payee of a pension that’s already being paid out to the retired participant, the number of reasons increase. The sooner the QDRO is accepted and processed by the plan, the sooner the alternate payee can receive their share directly from the plan – or start receiving their share at all if the retired participant isn’t making payments to the alternate payee in the meantime.

The Employee Retirement Income Security Act (ERISA) contemplated this situation and includes provisions to protect the funds for the alternate payee. Once a draft QDRO is submitted to a pension plan that is already making payments to a retired participant, the plan is required to withhold the amount of funds awarded to the alternate payee. This withholding will last for a period of 18 months or until receipt of a final, court-executed QDRO is accepted by the plan, whichever first occurs. If the 18 months expires and no final order is received, the withheld funds will be paid to the retired participant. If a final order is received and accepted by the plan, the withheld funds will be paid to the alternate payee according to the provisions in the final court order.

Therefore, the best way to preserve the alternate payee’s share of a pension which is in pay-status is to submit a draft order to the plan right away, even if the terms may change between the draft and the final order.   

QDRO Corner: What is the Process to Draft a QDRO?

A QDRO or COAP is specifically drafted for each retirement plan. Federal law requires that certain items be included in the QDRO, such as the participant and alternate payee’s last known mailing addresses, and the amount to be transferred to the alternate payee. However, plans can require that additional, more administrative language be included in the QDRO, such as what happens if the plan over or under pays the alternate payee, or when the alternate payee is allowed to designate a beneficiary.

In order to know the special requirements of each plan, we have to receive these terms from the plan. Some plans have these terms readily available to share and can email them upon request. Other plans require that the plan participant request the terms and share them with us.  Other plans insist on mailing the terms rather than emailing. The speed with which a plan can provide the information greatly impacts how quickly the QDRO can be prepared.  

Once we have these terms from the plan, we’ll draft the QDRO in accordance with the settlement agreement or court order. For any required term that is not addressed by the settlement agreement or court order, we’ll advise as to the options of how to address it. Sometimes there are terms in the settlement agreement or court order that are prohibited by the plan, and we’ll consult with the client to figure out the closest allowable option. We’ll also have a call with the client to review the QDRO to ensure the client understands the QDRO, and how the company will handle processing the QDRO once it is finalized. 

In addition, many plans will review a draft QDRO (ie: before it is submitted to Court) to ensure its compliance with federal law and the terms of the plan. This is beneficial for multiple reasons, but mostly to ensure that once a document is executed by the Court, the parties know that it will be accepted by the plan. However, the biggest down side is that many plans take 30-45 days to complete the review and then mail a letter describing the outcome of the review to our office. In many cases, the letter from the plan states that once the QDRO is signed by the judge, it will be accepted by the plan.

Alternatively, if a QDRO does need to be revised before it can be accepted by the plan, the letter from the plan will clearly state what changes need to be made. As a matter of course, we submit the draft to the plan to review, and the leave it to the client if they would like to wait for the response before submitting to the Court.

QDRO Corner: Federal Pension Plans

There are 34 federal pension plans (according to a 1996 report by the General Accounting Office). Of these pension plans, approximately 97% of the federal workforce participate in either the Federal Employees’ Retirement System, Civil Service Retirement System, or the military pension system.

Each plan has its own set of rules for vesting, contributions, and division upon divorce. The plans also are maintained by different agencies. For example, the Office of Personnel Management manages FERS and CSRS, whereas the Defense Finance Accounting Service manages the military pension system, and the Department of State manages the Foreign Service Pension Systems. If you represent a person who has worked at any time for the federal government (as a civilian or military member) or their spouse, it is very important that you have them look into the benefits available to them. 

While approximately 97% of the federal workforce participate in one of the three plans listed above, the federal workforce is very large, so it is quite possible you may represent someone in the remaining 3%. Other common plans in the DC Metropolitan area include the Foreign Service Pension System and the Federal Reserve Plans.

Many of these plans will also allow the interest to be transferred from one plan to another, should the employee work for an agency and accrue interest in one plan, and then transfer agencies and begin to accrue interest in another plan. In a settlement agreement, it is important to address the possibility of the employee consolidating their interest into one plan, and if representing the employee, to address whether any of the interest is pre-marital.

If you think you have a client or an opposing party with a federal pension plan and need assistance determining the possible benefits or what can be divided by a court order, we can help .

QDRO Corner: Cost of Survivor Benefits

Most pension plan survivor benefits come at a cost. The reason for this is because most pension plans determine the benefit amount assuming that the payment will be made only during the life of the retiree.  In order to extend payments for an additional life, the plan will decrease the monthly benefit to apply those funds toward the survivor benefit. To be clear, this cost is taken by the plan as a deduction each month from the monthly pension benefits.  

Things to consider regarding the cost of the survivor benefit.

1. The larger the survivor benefit, typically, the larger the cost. Some plans determine the cost actuarily while other plans have a set fee schedule.

2. How does the cost for the survivor benefit get paid? There are two ways that plans can take the cost from the parties, the first option is as a reduction to both or either party’s monthly benefit and the other is ‘off the top’ of the monthly benefit.

   1. Reduction to both or either party’s benefit. Under this scheme, the parties can determine whether one party pays the entire cost, or if they will share the cost equally. This scheme results in the plan taking the cost AFTER the monthly benefit is divided between the parties.

   2. Off the top. Under this scheme, the parties cannot allocate the cost of the survivor benefit to either party. The plan takes the cost of the survivor benefit BEFORE dividing the monthly payment between the parties. In essence, this results in the parties paying their proportional share of the survivor benefit. If the parties want to shift the cost, they’ll have to determine an equalizing payment to be made on a monthly basis between themselves, separate from the QDRO.   

Some plans provide a certain amount of survivor benefits without any cost, but will charge a very high cost for any survivor benefit amount above the free survivor benefit amount.

If you don’t know if there’s a cost, it’s best to reach out to the plan in advance of signing an agreement. You’ll be able to find out if there is a cost, what the cost is, and how the plan requires the cost be paid. Such information can help the parties determine whether the benefit is worth the cost, and can save the parties from negotiating for this after everything else is resolved.

If you have any QDRO questions, please reach out to Beatriz Giglioli at bgiglioli@markhamlegal.com

QDRO Corner: Oh, what’s in a name?

In order for a QDRO to be accepted by the plan, it must refer to the plan by its proper name. It’s a simple rule but is easily violated. Plan names may appear on the regular account statement, in an online portal account, in the employee handbook/benefits statement, and in correspondence between the employer/plan and the employee. However, some of these sources may refer to a plan by an old name, or a shortened version of the name. In addition, some plans may be known generally by the name of the umbrella plan, but there are subplans and the specific subplan name must be included in the QDRO.

One large plan in the Maryland/DC area that is quite particular about this is the Maryland State Retirement and Pension System. This is the plan in which public school teachers in Maryland participate. Based on when the teacher started working for the state and a few other criteria, the teacher could be a participant in the Teachers’ Retirement System or the Teachers’ Pension System. Getting this one-word difference wrong will result in the State rejecting the order.

The best way to avoid this simple error is to obtain a statement of the plan and compare the name listed there to the plan name listed in the Summary Plan Document (which can be obtained by calling the plan and asking for it). When drafting agreements or seeking a share of a retirement benefit in court, be sure to use the correct plan name for the best specificity. This will delay any ambiguity for the QDRO drafter.

QDRO Corner: Cash Balance Plans

A cash balance plan is a hybrid plan between a defined benefit and a defined contribution plan, offered by some private employers.

A statement for a cash balance plan will look very similar to a statement for a 401(k) account, in that the statement will show a specific dollar amount in what appears to be an account for the participant as of a date certain. However, this is not a separate account for the participant with that specific amount of funds in it. Instead, this is the actuarial value of the plan based on the participant’s life.

Most cash balance plans can only be divided in the same manner as a defined benefit plan, wherein the alternate payee receives a share of the monthly payment to the participant, or receives their own share in which the monthly payment amount is actuarily determined based on the alternate payee’s life.

Some cash balance plans may be divided like a defined contribution plan, wherein the alternate payee receives a lump sum. This is the small minority of cash balance plans.

Before finalizing a separation agreement that includes the division of a cash balance plan, it is best to have the QDRO prepared and communicate with the plan to ensure that the division upon which the parties are agreeing will be accommodated by the plan.