The 7 Steps in the QDRO Process

The preparation, filing and approval of a Qualified Domestic Relations Order (QDRO) takes time and care. Completion usually takes one to six months, but it can take longer, depending on the complexity of the Plan, the clarity and precision of the wording of the Divorce Decree (Judgement) or Settlement Agreement, and the cooperation of the other spouse.

Here are the steps:

1. Gathering information.

The QDRO practitioner needs information about both spouses, including names, addresses, Social Security numbers, dates of marriage and divorce, etc. This includes copies of the divorce decree or separation agreement, so the practitioner can determine the share going to each party. In addition, except in military or Federal Civil Service Plans, the practitioner needs a copy of the Summary Plan Description (SPD) and Written QDRO Procedures (WQP).

2. Drafting your QDRO.

The QDRO practitioner drafts the QDRO, and the client reviews and approves it. Depending on the plan, the domestic relations order may have a variety of names; however, 

the different types of orders are basically similar to each other; but there are significant differences. All of them are informally referred to as QDROs, even when they are technically called something else.

3. Approval by the other party.

The draft is sent to the spouse or his or her attorney for review and approval. The other party should, if he or she acts reasonably, accept the QDRO, as long as it accurately reflects the underlying provisions of the divorce decree or separation agreement. At this point, however, neither party should sign the QDRO.

4.  Approval by Plan as draft.

The draft of the QDRO is sent to the pension plan administrator for approval. The Plan Administrator may request changes in the draft QDRO. If the Plan Administrator requests any changes in the QDRO, the practitioner negotiates them. It is not unusual for Plan Administrator to request changes in QDROs; in fact, this happens in about half the time. These usually involve minor changes in wording, not the amounts involved. A few corporate plans also decline to review draft QDROs. In such cases, this is omitted and you proceed directly to the next step.

5. Signature of QDRO by Judge of the State Divorce Court.

Once the QDRO has been approved in draft form, both parties sign it, and it presented to the State Divorce Court for signature by a Judge.

6. Obtain a certified copy of the QDRO.

Once the judge signs the QDRO, the alternate payee should obtain several certified copies of the QDRO. A certified copy is one that bears the original signature and seal of the clerk of the court. A certified copy usually may be obtained from the clerk of the court. A certified copy is sent to the Plan Administrator for final approval, acceptance and payment.

7. Final acceptance by the plan.

Final approval happens very quickly, especially if the plan has already reviewed the QDRO as a draft.

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Pensions and the Do-It-Yourself (DIY) Divorce

People file their own divorce because they can’t afford to hire an attorney, or they agree with their spouse about all divorce issues and can file a relatively simple uncontested divorce. One of the most popular ways to file your own divorce is with a online divorce provider. An online divorce requires completion of questionnaires that provide the information required in the jurisdiction for the completion of the paperwork required for filing. Some online companies mail the divorce paperwork back; others return it instantly online. It is then the petitioner’s responsibility to file the paperwork in his or her local court. Doing a divorce online generally costs around $300 plus court fees.

In a pro se divorce, the petitioner, or plaintiff, follows the same procedures as any practitioners and completes and files all the legal forms. The pro se filer must be careful to do everything the practitioner does – including taking care of the pension. A good online divorce solution will address the pensions or retirement accounts, but they do not prepare the QDRO.

After real estate, retirement plans are usually the largest asset in a marriage. In general, retirement assets earned during a marriage are marital property in the same way a house and a savings account are. This includes pension benefits earned during a marriage; retirement savings accounts funded during a marriage; and the earnings on these accounts that accumulated during the marriage.

Yet, amazingly, divorcing spouses often overlook pensions and retirement plans during divorce because a divorce happens years before retirement. When retirement lies down the road, couples may neglect to pay the necessary attention to pensions and retirement plans when they decide to split up. Practitioners often hear the lamentations of people who remember retirement plans only after their divorces are finalized. As a result, a former spouse can lose out on a significant portion of the marital assets.

A pension plan is a tax deferred savings plan. Typically, during years of employment, monetary contributions are made by the employee and/or by the employer to a retirement plan. The contributions and the earnings generated accumulate tax free, until retirement. Upon retirement, the employee receives a specific monthly income for life or a lump sum payment. There are two general types of retirement plans: the Defined Benefit Plan and Defined Contribution Plan. Pension and retirement benefits earned during a couple’s marriage are of great value. Divorcing couples married for a long time often build up significant marital assets in defined benefit pension or defined contribution plans.

The division of retirement benefits in a divorce requires a QDRO – a Qualified Domestic Relations Order. A QDRO is a legal order   included in a divorce agreement that allows a divorced spouse to receive all or a portion of a qualified retirement plan from a former spouse. The employee whose interest is being transferred is the participant; the individual receiving the interest is the alternate payee.

A signed agreement does not in itself make it a domestic relations order. The order becomes qualified when it is reviewed and approved by the employer’s plan administrator in the form of a QDRO. Until this happens it is just an order and cannot be legally enforced as part of the final judgment or decree. Until a signed court order (QDRO) has been approved and processed by the plan administrator the benefits of the alternate payee are not protected.

The QDRO should be prepared simultaneously with the divorce because many plan administrators may take a considerable amount of time to review a draft QDRO. Moreover, processing by the courts may take time. The division of a pension should not be ignored or postponed. Even competent lawyers may be tempted to ignore QDRO issues. A highly competent and well-respected attorney once said, “I don’t want to deal with QDRO issues — it’s too much liability. I tell my clients that they need to hire the QDRO expert on their own after the divorce is over.” This is a dangerous attitude for attorneys to take.

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Security for the Alternate Payee’s Share of the Retirement Account

The order requires that the participant pay the benefits to the alternate payee within a specified period of time. Naming the participant as a constructive trustee does not relieve the Plan Administrator of responsibility to pay the benefits under a properly drafted and accepted order.

All qualified plans are required to have procedures in place for the receipt, notice acceptance and rejection of orders served upon it. It is rare that these procedures break down; however, the alternate payee’s benefits may be paid to the participant. This can happen, for example, when an amended order was not transmitted or sent until after benefits to the participant had begun.

Even though the order may require the participant to pay the benefits, generally the repayment of alternate payee’s benefit creates an enforcement problem. One way to solve this potential problem is to include in the order a provision that requires the Plan Administrator to withhold from future benefits of the participant until the amounts due to the alternate payee have been recouped.

A QDRO can include a make-up provision that anticipates that the participant may receive benefits due to an alternate payee. Upon notice by the alternate payee, the provision directs the Plan Administrator to withhold payments from the participant to make up the past due to the alternate payee under the constructive trust provisions of an order. The Plan Administrator can only activate the make-up provision subsequent to the acceptance of a QDRO. Make-up provisions are a form of revocable assignment contemplated by IRC Section 414(p).

Here is a model of a make-up provision:

“If for any reason the Plan fails to make payments required to the Alternate Payee pursuant to this Order and makes the full payment to the Plan Participant, it is the Plan Participant’s obligation, and Participant hereby agrees to make such payment to the Alternate Payee, and to so notify the Plan Administrator of the error, and to continue to make the required payments to the Alternate Payee until such time as the administrative error is corrected. If the Plan Participant fails to notify the Plan Administrator or fails to make the payments necessary to the Alternate Payee, the Plan Participant hereby authorizes the Plan Administrator to withhold future payments from the Participant’s Plan distributions until such time as the amounts owed to the Alternate Payee are recouped.”

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Forcing a Pension “Cash Out” Upon Divorce

When the spouses have sufficient assets, the offset method – trading the pension in exchange for, say, a mutual fund – may be more advantageous than a QDRO and a share of the participant’s pension; however, the participant cannot force his or her spouse to accept a “cash out” of his or her share of the pension.

A pension is a marital asset acquired during the economic partnership of a marriage. In the division of marital property, the plan participant – the participant – does not have a greater right to the asset than his or her spouse. Forcing a spouse out of a pension distribution may deprive him or her fair share of the pension’s growth. Sometimes the participant becomes very protective of his or her pension, arguing that he or she worked for it. No so. The pension belongs to both spouses.

A cash out or QDRO is often the first big decision the divorcing spouses must make after the pension appraisers determine the present value of the pension, but the decision must be made without coercion. The non-employee spouse should remember that the participant’s pension might be more valuable than the marital home. Present value, which is also called the time value of money, is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows.

The present value — or cash out value — makes it easy to use the pension during settlement negotiations. This routine awards the non-employee spouse (alternate payee) a lump sum settlement – or a marital asset of equal value – at the time of the divorce in return for the employee’s keeping the pension.

Since a pension is a marital asset, both spouses must know what the pension is worth, particularly the non-employee spouse who must know the present value of the pension to make a trade-off work to his or her advantage. The present value of a defined benefit pension cannot be ascertained by the projected monthly benefit. Annual benefit statements are misleading because they are often based on the assumption that the participant works until retirement, which can result in a large overstatement in the present value. Annual benefit statements do not replace the need for a pension appraisal, which some courts routinely require.

Most pensions are paid monthly over the worker’s lifetime and start at retirement age. The amount a participant is to receive generally depends on how many years he or she worked, how much he or she earned, how old he or she is when upon retirement, and how long a person his or her age is expected to live after retirement. For example, a pension of $1500 a month payable to a retiree who is now 65 years old might be considered to have a lump sum value of $130,000.

Trading away a pension plan requires careful thought of both short-term and long-term considerations. For example, even if a pension is divided 50/50, the division may produce what are termed “disparate results” because the ages of the payee, the worker spouse, and the alternate payee, the nonworker spouse, are different (and often the latter is significant younger than the former). Trading a house for a share of a pension often produces such unfairly unequal results.

Even though the participant collects his or her benefit as a monthly pension, the non-employee spouse needs to know the present value of the pension today to make an informed and intelligent decision about whether he or she might want to trade off his or her share of the pension for other marital property of the same value.

When both spouses have pensions, each has latitude to use them for the horse-trading that happens in divorce negotiations. Just as Susan has a claim against Sam’s pension at ABC Co., so Sam has a claim against her pension at XYZ Inc. Rather than dividing Sam’s ABC pension and Susan’s XYZ pension, he and she may decide to tradeoff another asset, for example, a portion of Sam’s share of the marital home. Susan may be tempted to trade away her share of her Sam’s pension for the marital home without appreciating that a house is a barren asset that costs money just to occupy.

Care must be taken in making sure that the buyout accurately reflects the value of what is traded off. In her book Survival Manual to Divorce, Carol Ann Wilson describes how a wife took a $12,000 baby grand piano, but passed up her chance for half of her husband’s $2,300 per month defined benefit pension, which had a present value of $250,000. “[S]he could have exchanged her half of Frank’s pension upfront for $125,000 worth of another asset…or she could have waited until Frank retires to obtain her share of the marital portion of his benefit. What seemed to have been a few thousand dollars on the surface proved to be a costly mistake in the end,” Wilson writes.

Considerations other than the value of the pension may influence the decision. More than twice as many men as woman have retirement benefits, and the benefits for men are generally much larger than those for women. Women, therefore, find themselves in a position to trade spousal pension rights for other assets. For example, the middle-aged homemaker may be very concerned that she faces the prospect of retirement without a pension and opt for a QDRO, which gives her a share of her former husband’s pension. A childless professional couple may take the pension division off the table by agreeing that each keeps his or her pensions.

Basically, however, the decision to go for a buyout or a QDRO has pluses and minuses for both the pension owner and the nonworking spouse. For the participant, a buyout means he or she enjoys all the benefits earned because of future increases in salary and continued years of service. For the non-employee spouse, a buyout provides cash in hand now. On the other hand, for the pension owner, deferred distribution via a QDRO avoids argument over the discussion and analysis involved in the pension appraisal. For the nonowning spouse, deferred distribution via a QDRO means the nonowning spouse may share in future salary and years of service earned by his or her former spouse.

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Working Well With the Plan Administrator

In divorce negotiations, a client is going to ask what he or she can expect to receive from his or her spouse’s retirement plan. In order to answer, an attorney must be familiar with the plan because he or she cannot mediate or negotiate a settlement without an understanding of its type and value. Sometimes lawyers and clients negotiate a settlement involving a pension plan, only to discover later that the division will not work or cannot be done at all. Judges rely on lawyers for correct information on pension plans in order to make a fair and valid division. Making an error in the division of a pension, especially when it is a major asset of the divorcing couple, can devastate a client who is starting anew.

In contested divorces, most clients, whether they are the plan participant (the worker) or the alternate payee, (his or her spouse) know whether or not a pension, retirement, 401k or similar plan exists. They may not know much about it, but most are aware of its existence. Unless the spouses have already agreed not to divide the plans, or each have plans that are similar in value, the attorney should, from the beginning of the case, gather basic information about the existence and nature of any deferred compensation plans.

In preparing for negotiations, lawyer and client review the marital assets and the client’s expectations of their division. The lawyer must be cautious about the information the client offers because participants may not know much or may purposefully fail to mention one of the plans and identify others. Spouses may have little information, be unaware of recent, significant plan changes, or not be aware of all the plans the spouse participates in. Client information is only a start.

Almost all pension plans provide the participant with a summary of the plan. A copy of the actual plan document can be obtained, but it is not really necessary because the plan summary packet or booklet identifies all the plans in which an employee may participate and their proper names, the administrator’s name, phone and address. Most plan summaries also contain a section on QDROs and alternate payees and may provide some important information on this aspect.

If the lawyer cannot obtain a plan summary from the client or the opposing party, the plan administrator or employer will provide a summary. Some may refuse without a signed release from the participant or a subpoena. The attitude and cooperation of plans and their administrators vary. The plan administrator may or may not be cooperative, but as a rule, if the questions are posed hypothetically, or only seek general information about the plan, most will cooperate.

The lawyer must contact the plan administrator or the employer and ask some basic questions, and it is important to remember not to treat the plan administrator in an adversarial way. He or she is the person who approves or rejects a QDRO.

In ERISA, a 1974 law that established rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets, Congress gave plan administrators discretionary authority for approving QDROs. According to Investopedia, a ‘pension plan administrator is “[a]n individual responsible for managing the day-to-day affairs and the strategic decisions involved with a group’s pension fund/plan. More specifically, the plan administrator ensures that money is being contributed into the fund, the proper asset allocation decisions are made and that payouts are promptly distributed among all qualified plan participants or beneficiaries.”

In smaller companies for simplicity and cost savings, the employer may   be the company’s pension plan administrator. However, as the number of employees grows, the task becomes more time consuming and complex, so an employer normally hires a professional pension plan administrator. 

In terms of fiduciary duty, the pension plan administrator has a duty to act in the interest of the plan’s participants, not the sponsoring company. 






ERISA requires accountability of plan fiduciaries, and it defines a fiduciary as “anyone who exercises discretionary authority or control over a plan’s management or assets, including anyone who provides investment advice to the plan.“

Contacting the plan administrator is not discovery. Specific information about a particular participant requires a signed release. Some plans will not give specific information about an account, such as a current balance or benefit, but may tell whether or not the employee participates in certain plans. This is helpful if there are some unidentified plans in the case.

The plan administrator is the party an attorney must contact when pension when benefits are divided in a divorce. This issue should be addressed in the original settlement or decree.  In order to receive benefits, recipients must obtain a qualified domestic relations order (QDRO).

A plan administrator may make very generous interpretations of a draft QDRO in order to have it approved. For example, the plan administrator may overlook technical or nonsubstantive deficiencies that otherwise would lead to a rejected order. “Making an enemy of the plan administrator could cause him or her to apply stricter requirements to your QDRO, or even delay the review process,” says one QDRO authority.

Whether an attorney represents the plan participant (the worker) or the alternate payee, it is imperative to remember that the plan administrator is not a party in the divorce action; therefore, “it is essential that [the lawyer] treat the plan administrator in a nonadverserial manner.”

Moreover, sometimes an attorney must contact the plan administrator for other reasons, such as:

> Payments are lower than expected. The plan administrator verifies its calculations, and then compares those figures with the original plan documents. If there is a discrepancy or dispute, an independent actuary or an employment attorney may enter the action.

> Pension plan denied a claim for benefits. Normally, this includes an appeal process to challenge a denial of benefits.

> A party was overpaid and owes money to the plan. This can even occur years after the overpayment. When this happens as a result of inaccurate information, a party may have to repay the money. However, if plan staff made the mistake, it may be required to make restitution to the plan.

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Are Military Disability Pensions a Marital Asset?

A veteran’s disability pension cannot be divided in a divorce because it is not considered a marital asset. In fact, Federal law expressly prohibits state courts from dividing a veteran’s disability pension as part of the divorce decree, so a state divorce court cannot decide that a portion of each month’s disability pay belongs to the civilian divorcing spouse, nor can the court treat the disability pay as a marital asset or community property.

In Mansell v. Mansell, the United States Supreme Court ruled that even if a servicemember voluntarily opts for disability in lieu of retired pay, the Uniformed Services Former Spouse Protection Act (USFSPA) prohibits state courts from treating disability as property divisible in a divorce.

Veterans’ disability pensions, much like Social Security disability benefits, compensate disabled individuals who can no longer work. However, veterans’ disability pensions are only for those who served in the U.S. military. Veterans who receive disability pension money are entitled to receive additional amounts each month if they are married, but this entitlement ends in the event of divorce.

A disabled veteran may opt for disability benefits in lieu of military pay for tax reasons. Military retirement pay based on age or length of service is considered taxable income for federal income taxes. However, military disability retirement pay and veterans’ benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income. Soldiers with service-connected disabilities may be eligible for federal income tax exclusions of veterans’ benefits and disability pension payments.

Moreover, an angry spouse may use the disability route as a way circumventing marital entitlements to the other spouse.

In the Mansell decision, the high court read USFSPA very closely. USFSPA gives state courts express authority to treat military retired pay as community property. The court held that other compensation, even those received by a servicemember in lieu of retired pay, should not be divisible.

While federal law governs a veteran’s eligibility for a disability pension, as well as the amount of the pension, state law varies with regard to what happens to that pension in the event of a divorce. While federal law governs the treatment of the disability pay during the division of the marital estate, state law governs how a veteran’s disability pay affects orders for spousal support.

Many people mistakenly believe that because veterans’ disability pay cannot be directly awarded to a divorcing spouse, it also cannot be considered when awarding or setting the amount of spousal support. Most states allow or require a judge to consider all sources of income when determining spousal support — including veterans’ disability even if the disability pay is the only income the veteran has that can be used to comply with the order of spousal support. A very few states, such as Arizona, Texas and Vermont, prohibit judges from using this income in setting spousal support.

 Until the Concurrent Retirement and Disability Pay (CRDP) program began in January of 2004, military retirees were prohibited from receiving both military retired pay and Veterans Affairs (VA) compensation. This is applicable to all retirees who have a VA service connected disability of 50 percent or higher with the exception of disability retirees with less than 20 years of service and retirees who have combined their military and civil service time to qualify for a civil service retirement.

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QDRO Used to Establish Security Interest in a Plan

One little known use of QDROs is to provide a security interest in a participant’s qualified plan benefits to the non-participant spouse.

Often in divorce settlements, security interests are granted in property awarded to the other spouse. This happens when there is a disproportionate division of community property and parties attempt to equalize the division by awarding one spouse a note for the difference. A note without security is an unsecured promise to pay, however, and it is at risk of the claims of other creditors on par with the spouse.

Security interests are especially useful in securing what are called “equalization notes.” Generally, other than for the security of plan loans, a participant’s plan benefits are not subject to assignments. However, QDROs are the “gateway” through the anti-alienation provisions of IRC Section 401(a)(13). Section 401(a)(13) is the anti-assignment rule that prohibits the assignment of a participant’s retirement benefits to anyone.

Section 1.401(a)-13(c)(1)(ii) of the IRC regulations defines “assignment” broadly to include any indirect arrangement in which a party, such as a spouse, acquires from a participant, a right enforceable against the plan in all or any part of a plan’s benefits payable to the participant. A security arrangement between spouses regarding plan benefits is an assignment normally prohibited by Section 401(a)(13)(A). Section 401(a)(13)(B), however, provides that an assignment normally prohibited may be made, if the assignment is made pursuant to a QDRO. Such assignments can be made only for the benefit of an alternate payee, and these assignments do not provide any additional benefit to third party creditors.

When considering the use of a QDRO to provide for a security interest, the alternate payee and his or her lawyer must remember tax consequences, That is, if the QDRO provides that the alternate payee (who is a spouse or former spouse of the participant) can force a distribution from the plan to satisfy the debt that is secured, the distribution is taxable to the alternate payee. Moreover, in considering a QDRO to provide for a security interest, the parties must remember that the QDRO cannot contradict the provisions of § 414(p), which provides that the order cannot require the plan to provide any type or form of benefit, or any option, not otherwise provided under the plan.

Some plan administrators interpret § 414(p) to mean that when considering security interests in QDROs, he or she does not have to provide notice to either of the parties regarding the security interest.

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Common Mistakes When Valuing a Pension

A number of common mistakes can happen when valuing defined benefit and defined contribution plans – including partial offsets and tax consequences.

What’s wrong with using a present value of a defined benefit plan in a marital settlement agreement? 

In a state that uses coverture – which is roughly half the country – the marital portion is the benefit at retirement multiplied by the coverture fraction. The coverture fraction is determined at retirement, so it’s going to be a much larger benefit than the current benefit. If the alternate payee is offered a present value, he or she might get a certain sum per month until that number is reached; even if he or she gets an accrued benefit that has the present value stated, that is going to be less than the coverture formula. A perfect example of that was the Able case in New Jersey. They valued the pension at $100,000, and there wasn’t enough money for a complete immediate offset. They should have done a partial offset, but instead, they did a 50% QDRO. The mistake was compounded because they specified that she was to get $50,000 dollars – but New Jersey follows the coverture methodology, so by specifying a dollar amount, the husband argued that she wasn’t entitled to 50% of the coverture portion. So there was a dual mistake made in getting the pension present valued: not using that present value because there wasn’t enough for a complete offset, and then stating the present value in a property settlement agreement. In general, putting a present value of a pension in a property settlement agreement is a big mistake. It will shortchange the alternate payee.

Why should a defined contribution plan be valued?      

A defined benefit pension is a monthly benefit in the future. We’re valuing the defined benefit pension today, but how are we going to value the 401(k) if their cut-off date is years ago? We’ve seen cases where the cut-off date has been 20 years in the past. We can’t use a balance as of three or four years ago because that doesn’t include gains and losses since that date. It has to be brought forward with gains and losses since that date – then it can be compared to the house and the other assets.

What about tax consequences?

If you look at pension versus cash, the pension is a pre-tax asset and cash is a post-tax asset. Some jurisdictions – New York, for example – are very stringent about taking tax into effect. You have to establish exactly what the participant’s tax rate is before you can discount a pension for taxes. Other states, like Pennsylvania, are more lenient and will leave it up to the discretion of the court to discount the pension for taxes. Since the pension pays in the future, you would need to estimate a potential tax rate; we recommend the parties settle on some reasonable tax factor between 12% and 20%. Our partial offset methodology will enable you to gross-down that pension to compare it to cash.

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Forcing a Pension “Cash Out”

When the spouses have sufficient assets, the offset method – trading the pension in exchange for, say, a mutual fund – may be more advantageous than a QDRO and a share of the participant’s pension; however, the participant cannot force his or her spouse to accept a “cash out” of the participant’s pension.

A pension is a marital asset acquired during the economic partnership of a marriage. In the division of marital property, the plan participant  – does not have a greater right to the asset than his or her spouse. Forcing a spouse out of a pension distribution may deprive him or her fair share of the pension’s growth. Sometimes the participant becomes very protective of his or her pension, arguing that he or she worked for it. Not so. The pension belongs to both spouses.

A cash out or QDRO is often the first big decision the divorcing spouses must make after the pension appraisers determine the present value of the pension, but the decision must be made without coercion. The non-employee spouse should remember that the participant’s pension might be more valuable than the house they live. Present value, which is also called the time value of money, is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows.

The present value — or cash out value — makes it easy to use the pension during settlement negotiations. This routine awards the non-employee spouse (alternate payee) a lump sum settlement – or a marital asset of equal value – at the time of the divorce in return for the employee keeping the pension.

Since a pension is a marital asset, both spouses must know what the pension is worth, particularly the non-employee spouse who must know the present value of the pension to make a trade-off work to his or her advantage. The present value of a defined benefit pension cannot be ascertained by the projected monthly benefit. Annual benefit statements are misleading because they are often based on the assumption that the participant works until retirement, which can result in a large overstatement in the present value. Annual benefit statements do not replace the need for a pension appraisal, which some courts routinely require.

Most pensions are paid monthly over the worker’s lifetime and start at retirement age. The amount a participant is to receive generally depends on how many years he or she worked, how much he or she earned, how old he or she is when upon retirement, and how long a person his or her age is expected to live after retirement. For example, a pension of $1500 a month payable to a retiree who is now 65 years old might be considered to have a lump sum value of $130,000.

Trading away a pension plan requires careful thought of both short-term and long-term considerations. For example, even if a pension is divided 50/50, the division may produce what are termed “disparate results” because the ages of the payee, the worker spouse, and the alternate payee, the nonworker spouse, are different (and often the latter is significant younger than the former). Trading a house for a share of a pension often produces such unfairly unequal results.

Even though the participant collects his or her benefit as a monthly pension, the non-employee spouse needs to know the present value of the pension today to make an informed and intelligent decision about whether he or she might want to trade off his or her share of the pension for other marital property of the same value.

When both spouses have pensions, each has latitude to use them for the horse-trading that happens in divorce negotiations. Just as Susan has a claim against Sam’s pension at ABC Co., so Sam has a claim against her pension at XYZ Inc. Rather than dividing Sam’s ABC pension and Susan’s XYZ pension, he and she may decide to tradeoff another asset, for example, a portion of Sam’s share of the marital home. Susan may be tempted to trade away her share of her Sam’s pension for the marital home without appreciating that a house is a barren asset that costs money just to occupy.

Care must be taken in making sure that the buyout accurately reflects the value of what is traded off. In her book Survival Manual to Divorce, Carol Ann Wilson describes how a wife took a $12,000 baby grand piano, but passed up her chance for half of her husband’s $2,300 per month defined benefit pension, which had a present value of $250,000. “[S]he could have exchanged her half of Frank’s pension upfront for $125,000 worth of another asset…or she could have waited until Frank retires to obtain her share of the marital portion of his benefit. What seemed to have been a few thousand dollars on the surface proved to be a costly mistake in the end,” Wilson writes.

Considerations other than the value of the pension may influence the decision. More than twice as many men as woman have retirement benefits, and the benefits for men are generally much larger than those for women. Women, therefore, find themselves in a position to trade spousal pension rights for other assets. For example, the middle-aged homemaker may be very concerned that she faces the prospect of retirement without a pension and opt for a QDRO, which gives her a share of her former husband’s pension. A childless professional couple may take the pension division off the table by agreeing that each keeps his or her pensions.

Basically, however, the decision to go for a buyout or a QDRO has pluses and minuses for both the pension owner and his or her spouse. For the participant, a buyout means he or she enjoys all the benefits earned because of future increases in salary and continued years of service. For the non-employee spouse, a buyout provides cash in hand now. On the other hand, for the pension owner, deferred distribution via a QDRO avoids argument over the discussion and analysis involved in the pension appraisal. For the nonowning spouse, deferred distribution via a QDRO means the nonowning spouse may share in future salary and years of service earned by his or her former spouse.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Fees Charged by Certain Plan Administrators

A little-noticed change to the federal Employee Retirement Security Act (ERISA) permits plan administrators to charge QDRO processing fees for a 401(k) to plan participants and alternate payees.

Prior to May 2003, the federal regulations precluded plan administrators from charging individual accounts for the review, approval and implementation of QDROs. As of May 2003 the federal regulations were changed to permit administrators or employers to charge the employee for this service. 
 This change in a 1994 Field Advisory Opinion has raised concerns among divorce lawyers, 401(k) plan administrators and firms hired to process QDROs over the reasonableness of fees and potential violations of the plan administrator’s fiduciary responsibilities.

Some outsourcing firms charge significantly higher fees if a QDRO does not exactly conform to the company model – fees that may run well over $1,000, sometimes three of four times higher than those processing the company model. For example, the former US Airways Group Inc., which outsourced QDRO processing to Fidelity, began charging individual accounts in June — $300 if employees use one of Fidelity’s Web-based QDROs and more if they don’t.

To be sure, such charges may barely be noticeable, considering the cost of divorces in the United States today. But QDRO fees can get very high if employers don’t have set charges. For example, processing can run up to $10,000 if an employee repeatedly sends in an incorrect QDRO or up to $30,000 if disputes arise between employees and employers over how plans can be split, lawyers say.

Basic to ERISA’s designation of plan administrators as fiduciaries is the assumption that they act “solely for the benefit of plan participants and certainly not as a ‘cash cow’ for an outside entity.” In challenging the higher charges, an attorney may argue that they are “a violation of the plan’s fiduciary responsibility to operate ‘solely in the interest of participants.’” According to the Department of Labor (DOL), “….if the method of allocation has no reasonable relationship to the services furnished….a case might be made that the fiduciary breached his fiduciary responsibility to act prudently and ‘solely in the interests of the participants’ in selecting the allocation model.”

Usually, one of the attorneys or a pension consultant prepares the QDRO, which is the order dividing a spouse’s pension, retirement benefits or 401K accounts at the time of a divorce, and submits it to the plan administrator for review, approval and implementation, which is called qualifying. Under federal law, a QDRO doesn’t technically become qualified until an employer makes sure it fits certain requirements of the tax code. This processing that can run from hundreds to thousands of dollars, depending on how much legal advice a company needs. According to The Wall Street Journal, pension plans and employers are now regularly deducting the costs related to the QDRO from the plan. By charging higher fees to clients who use their own QDROs, outsourcing firms are “essentially undermining the rights of plan participants and alternate payees.”

Attorneys for divorce litigants must be aware of this change and bargain for the allocation of these costs just as they do the allocation of the costs of preparing the QDRO. Otherwise, the plan owner may have the full cost assessed against them.

In challenging the charges, an attorney for a client who faces higher fees for an attorney- drafted QDRO should review the DOL Field Assistance Bulletin as a first step, then contract the plan’s sponsor’s legal or human resources department to plead the case.

A lawyer should write the plan administrator asking for an itemized explanation of the processing costs for a 401(k) QDRO, including the level of personnel review for a lawyer-drafted QDRO, their pay, the number of hours required for the review. When QDRO processing is outsourced, the lawyer should write directly to the plan fiduciary, the plan administrator, to question if the practice is in keeping with their responsibility to act as prudent fiduciaries.

 

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