QDRO Basics was developed from on-line sources and my research & experience preparing QDROS and other retirement division orders over the past 25 years in Arizona. Lawyers, mediators, and those daring (or foolish) enough to prepare their own dissolution paperwork without professional assistance are welcome to call with general questions regarding retirement division information.
Retirement division can be complicated, especially when there are both separate and community elements to a retirement plan. Orders allocating interests in retirement plans should be prepared by someone experienced and qualified to do so; otherwise, the division of interests intended by the Decree may never come to pass.
The most common retirement division language in an Arizona decree is something like this: “The parties shall equally divide the community interests in any retirement plans and equally share the costs of any necessary Qualified Domestic Relations Orders (QDROs).” While expedient, and certainly in conformity with the law, this phrase ignores major issues and leaves the parties at risk of having to return to court or further mediation to resolve questions that must be answered in order to “equitably” divide retirement assets.
The competent practitioner will be aware of the following and incorporate necessary information into the retirement division portion of a decree or memorandum of understanding.
- Basic information as to each plan being divided is vital to proper retirement division, such as:
- The full name of the plan (e.g. NOT the ‘Intel Retirement Plan’ or the ‘Godaddy 401(k)’, but the “Intel Retirement Contribution Plan” and the “Godaddy.com, LLC 401(k) Plan”);
- The date “Participant” (sometimes “member” or “employee”) began accruing benefits (typically, the date employment began);
- The date the community interest is to be valued or divided (the “Valuation Date” or the “Division Date”) (typically, the date of acceptance or service of process, see A.R.S. §§ 25-211 & 25-213); and
- The date Participant ceased accruing benefits (typically, the date of employment termination or retirement).
- There are two (2) fundamentally different types of retirement plans: Defined Contribution and Defined Benefit. Each is treated differently for division purposes. Often the decree or settlement agreement simply refers to “retirement plans,” without specifying whether they are defined benefit or defined contribution plans.
- A “defined benefit” plan is commonly referred to as a “pension,” wherein the Participant will receive a lifetime guaranteed amount of money upon retirement, based upon earnings, years of service, and age at retirement. Some plans provide for a lump sum payment or other options. In benefit plans, issues such as surviving spouse benefits and cost of living increases should be addressed.
- A “defined contribution” plan is a cash-type plan, such as a 401(k) or IRA. The Participant has an account into which funds are contributed during employment by either the employer or employee or both. Usually, the amount in the account will fluctuate with the market or other investments made within the account. There is no guarantee of how much money will be in the account when the employee retires, or how much the employee will receive monthly after retirement. In contribution plans, issues such earnings and losses from the Division Date to the “Segregation Date” or “Distribution Date” and any loans from the plan should be addressed. The Segregation Date is the date the party who is to receive the distribution (the “Alternate Payee,” sometimes “spouse” or “former spouse”) has the funds transferred into their name.
- The difference between benefit and contribution plans is important because the parties need to know what is being divided: a right to receive monthly payments in the future, or part of a cash fund with a balance that may fluctuate.
It is surprising how often settlement agreements contain statements such as, “Wife shall receive one-half of Husband’s Pension Plan as of the date of the divorce, plus or minus earnings and losses from that date until the date the account is divided.” This presents a problem, since the concept of “earnings and losses” does not apply to pension (defined benefit) plans. As discussed above, payments under defined benefit plans do not fluctuate with the market, and thus there are no “earnings and losses.” (NOTE: I once had to deal with two self-represented parties who had awarded the alternate payee “$10,000.00 of participant’s interest in the ASRS pension,” which is an impossibility.)
- Not every retirement plan requires a QDRO. Settlement agreements often provide that an IRA (“Individual Retirement Account”) will be divided by QDRO, but a QDRO is not necessary to divide an IRA or SEP (“Simplified Employee Plan”) account. Division of an IRA should normally only involve a letter of instruction from the Participant (frequently an internal institutional form), along with a copy of the Decree/Property Settlement, provided the decree/property settlement contains language sufficient to divide the account pursuant to IRS Code section 408. But if the decree/property settlement is not specific enough for the IRA trustee to make a transfer pursuant to IRS Code section 408, the institution will require a clarifying domestic relations order (DRO).
- Is a QDRO reasonable? Another point to consider is that it often does not make financial sense to agree to a division of assets which will require a QDRO when the (defined contribution) account to be divided does not have enough money in it to make a QDRO worthwhile. If the account is only worth $3,000, it may be uneconomical to engage in a QDRO process (which frequently costs more than $1,000 in fees & costs) to give each party $1,500. Although there are some cases in which the parties insist that every account be divided in half, regardless of the cost and inefficiency involved, in many cases the parties could save themselves some money and aggravation simply by agreeing to transfer funds from an IRA or other asset rather than from a defined contribution plan. If the parties have other assets to choose from, consider whether it is absolutely necessary before agreeing to divide a small retirement plan by QDRO.
- Does the plan allow a QDRO? Some plans are not divisible by QDRO. Under some state laws, state and local government plans cannot be divided by QDRO or other means. Note that, since government and church plans are exempt from ERISA*, they do not contain certain protections found in ERISA plans. However, in Arizona all state, county, and municipal plans can be divided by an “approved” Domestic Relations Order. (*ERISA is the Employee Retirement Income Security Act of 1974 and the amendments thereto. For those of you old enough to remember, I whimsically refer to ERISA as Jimmy Hoffa’s parting gift to the American working man – see: http://www.longtermdisabilityanderisablog.com/faq-what-is-erisa).
And some employees participate in “non-qualified” retirement plans which are also not divisible by QDRO. A non-qualified plan is a retirement plan which is not subject to ERISA, and thus not required to accept QDROs. These plans are usually set up by corporations in addition to their qualified retirement plans in order to provide higher-paid employees with more retirement benefits than the tax code will permit under qualified plans. They are sometimes referred to as “supplemental” plans because they are intended to supplement the retirement funds the employee will receive from the company’s qualified retirement plans. Some non-qualified retirement plans accept QDROs, but many do not, so it is a good idea to find this out before agreeing to divide a non-qualified plan in a divorce action. And if you can’t discover whether a particular plan is subject to a QDRO, consider setting up an alternative mechanism in the settlement agreement for dividing the funds. “In the event that the Wife’s XYZ Corporation Non-Qualified Supplemental Retirement Plan (‘the Plan’) cannot be divided by Qualified Domestic Relations Order, the parties agree that the Husband shall receive $5,000 from the Wife’s IRA in lieu of the funds awarded to him herein from the Plan.”
- Adjustment for earnings and losses should be addressed. There is usually a delay of several months (and sometimes years) between the date of division and the date of segregation. Bear in mind that during the dissolution process the Participant will be a constructive trustee of Alternate Payee’s share, and that Alternate Payee has no ability to direct or protect the investment. Equitably, shouldn’t the Alternate Payee’s share be subject to the same market fluctuations, up or down, as Participant? For example, what if an agreement provides that the funds shall be divided as of July 1, 2018, but this division does not actually take place until the QDRO is entered the following December? If the Agreement states that Wife shall receive 50 percent of the Husband’s 401(k) plan balance as of July 1, 2018, and the account was worth $100,000 on July 1, 2018, but has grown to $106,000 by December, what should the Wife receive when the account is divided? $50,000.00 or $53,000.00? And what if the year is like 2009 and the account is diminished by 30% between division and segregation? The agreement must specify what happens to earnings and losses on the amount awarded to the Wife between the date of division and the date of distribution or segregation.
- Who is the surviving spouse in a benefit plan? The surviving spouse designation is a difficult QDRO issue. And, there is a great difference in the nature of the surviving spouse designation between a contribution plan and benefit plan. Further, there is a distinction in benefit plans between surviving spouse benefits before the employee retires and after retirement.
In a contribution plan, surviving spouse benefits are relatively simple: there generally aren’t any. There is a certain amount of money in the account, and once the funds are transferred, the death of either spouse will not affect either party’s account. When you designate the non-employee spouse as the “surviving spouse” of a contribution plan, you are really just making sure that she gets the portion awarded to her, even if the employee spouse dies before the funds are transferred to her. The agreement should state that “Wife shall receive her portion of the 401(k) Plan without regard to the death of the Husband.” If you designate the non-employee spouse as the surviving spouse with respect only to her benefit, she will receive exactly what she was awarded in the agreement. If you designate her as the surviving spouse with respect to the Husband’s entire benefit, she will probably get the whole account balance if Husband dies before her portion is transferred to her.
Defined benefit plans present much more complicated issues with regard to surviving spouse benefits. The consequences of handling this incorrectly can be enormous, so it is important to grasp the basic issues. In many benefit plans, if the non-employee spouse is not designated as the surviving spouse in the event of the employee spouse’s death before retirement, the non-employee spouse will get nothing if the employee spouse happens to die prior to retirement. This is often something that neither the parties nor counsel understand or intend, and it is almost always irrevocable by the time this mistake is discovered.
There are too many variables in this area to discuss adequately here, but it is important to understand that, under ERISA and the terms of most plans, if the employee spouse dies prior to retirement, his surviving spouse will receive a Qualified Pre-Retirement Survivor Annuity (“QPSA”) which is equal to fifty percent of his benefit. Assume that you are negotiating a settlement in which the parties have agreed that the non-employee Wife should receive one-half of the pension. In most cases, if the Husband dies before he reaches retirement, Wife will either receive nothing, or twenty-five percent (25%) of the benefit, or fifty percent (50%). Under most plans, she will get nothing if she is not designated as the surviving spouse for the QPSA. She will get 25% of the benefit, instead of the 50% she expected, if she is designated as the surviving spouse for only her portion of the benefit. She will only get the full 50% that she expects if she is designated as the surviving spouse for the entire QPSA.
To make matters even more complicated, the death of the employee spouse after retirement presents a whole different set of issues. In many benefit plans, the non-employee spouse receives a completely separate benefit, such that the death of the employee spouse following retirement has no effect on the benefit (separate interest QDRO). Then there is no need for the non-employee spouse to be designated as the surviving spouse after retirement. In other plans, however, the parties’ benefits are linked, and the death of the employee spouse can affect the non-employee spouse’s benefit, so the surviving spouse issue must be addressed (shared interest QDRO). When you are dealing with a benefit plan, you need to specify whether, and to what extent, the non-employee spouse is to be designated as the surviving spouse, before and after retirement.
- How will loans from a defined contribution plan be handled? Loan balances in contribution plans are often overlooked. It is often difficult to determine whether an account has an existing loan balance, because contribution plans use different terms to refer to the total balance. Statements may show a “total balance” of $100,000 in bold type, but show elsewhere that the “total account value” is $125,000, due to an outstanding loan on the account. In most plans, an outstanding loan is considered an asset which should be added to the total balance when determining the true value of the account. However, most plans cannot award any portion of a loan balance through a QDRO.
To avoid post-divorce surprise, the parties should determine whether there are any outstanding loans from the plan you are dividing. If there are not, be sure to include language in the settlement agreement that there are no loans on the account and prohibiting the employee from taking any until after the division of the account.
If there is an existing loan, find out the purpose of the loan. If used for a community purpose, the parties might agree that the loan balance should be equally shared. In which case the loan would be excluded from calculations of the non-employee’s share. But If a party has taken $25,000 out of a 401(k) plan for a non-community purpose, the parties may agree that the loan balance should be included when calculating the non-employee’s share.
Example: Total account value is $100,000 and there is an outstanding loan of $10,000. If the loan is excluded, then ($100,000 – $10,000 = $90,000 / 2 = ) and $45,000 is the non-employee’s share.
However: If the loan is included, then ($100,000 / 2 = ) and $50,000 is the non-employee’s share.
Further, in cases in which one spouse is to receive 100% of a defined contribution plan, you must determine whether there is an outstanding loan because the plan will generally not transfer a loan to the non-employee spouse. The plan will most likely hold back sufficient funds to cover the loan. Thus, “100%” can be substantially less than that, and it pays to find this out in advance.
- What about contributions subsequent to filing for dissolution? In some defined contribution plans, employer and/or employee contributions are not made monthly or with each paycheck. Many profit sharing plans make no employer contributions until after December 31st. Receipt of a contribution for the calendar year may be dependent on whether the employee is employed by the company on December 31st. In some situations, this may prevent the non-employee spouse from receiving a considerable amount of money. For example, if the parties are dividing their assets as of Nov. 30, 2018, and they agree to split the employee spouse’s 401(k) plan in half, but the employer’s contributions for 2018 will not be made until January or February, 2019, the non-employee spouse may lose out on a substantial sum of money which is arguably marital property to be divided. In this case, the agreement should specify that the non-employee shall be entitled to a proportionate share of contributions made to the plan for the 2018 plan year attributable to the period ending Nov. 30, 2018. This way the non-employee will get half of the contributions accrued during the first 11 months of the year. If not, you may want to specify that the non-employee shall not be entitled to a share of any funds contributed to the plan following Nov. 30, 2018.
- Who is drafting the QDRO? Many agreements do not specify this, and the result is that the QDRO is never drafted or completed. I have seen cases where the QDRO wasn’t completed for twenty-two (22) years after the dissolution.
QDROs can easily be overlooked, then omitted, since they are not something most clients are familiar with, and some attorneys think they do not need to worry about how retirement division will be implemented. However, my view is that part of the role of the attorney or mediator is to protect the parties’ interests by ensuring the terms of the agreement provide for timely implementation. Otherwise, the parties (or the survivor of them) may face a costly legal battle after realization that a new spouse has (irrevocably) received all of the pension benefits following participant’s death, even though alternate payee was awarded those benefits in a settlement agreement.
Ideally, the settlement agreement should capitalize on human nature and provide that the alternate payee will be responsible for initiating implementation by selecting a qualified QDRO preparer and submitting the QDRO, to be approved by participant, to the Court and the Plan. And, because the division is for the community, the parties should consider sharing the expense equally. Thus, I recommend that the receiving party, the “alternate payee,” be tasked, in the agreement, with selecting a QDRO preparer qualified under Arizona Rules of Family Law Procedure, Rule 72, and starting the process, and that each party be ordered to cooperate with and pay as required by the QDRO preparer, or ordered to pay any fees and costs incurred as a result of failure to cooperate or pay. There is no practical incentive (other than the court order) for the “participant” to begin the process of divesting their own retirement plan.
In conclusion, QDROs are almost always going to be complicated, but they don’t have to be painful. The key to avoiding post-decree QDRO problems is to be specific in drafting the agreement. If you take the time to investigate and agree on these issues before the divorce is final, you will find yourself dealing with fewer QDRO problems after the decree has been entered. It is far better, and less costly, to address these issues during settlement than to leave the agreement vague and then fight about them when they arise after the divorce is final.
Parties should also understand that time is of the essence, because the Supreme Court has repeatedly ruled that the decree of dissolution is not binding on the plan administrator, who is legally obligated by ERISA to pay survivor benefits according to “plan documents,” typically the named beneficiary. If before, during, or after divorce the participant changes the beneficiary to someone other than the spouse or former spouse, the terms of the decree may be frustrated by the participant’s death before a QDRO has been qualified. Such an event would complicate matters, because then a post-mortem QDRO would be required, assuming the alternate payee was properly designated in the Decree, and a probate proceeding may be required, increasing the expense substantially.
And if the claiming spouse wasn’t named as an alternate payee in the decree, chances are that former spouse would receive nothing from the Plan, unless he or she remained the beneficiary after divorce. The U.S. Supreme Court held in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009) 129 S.Ct. 865, that although the former wife of a deceased retirement plan participant legally waived her right to receive benefits from the participant’s retirement plan pursuant to a divorce decree; nonetheless, plan administrators were correct to disregard her waiver and distribute benefits to her upon the participant’s death. The Court held that plan administrators are duty-bound under ERISA to pay benefits in accordance with the governing plan documents and should not be required to search outside those documents for evidence of a purported waiver. Or, I might add, a state Decree awarding an interest to a former spouse.
This ruling supported an earlier Supreme Court ruling upholding the tenet that distributions from ERISA governed plans will be made pursuant to the plan documents, and not pursuant to state law; state marital property and probate laws are not controlling.
A QDRO is essential, because if, while your client dilly-dallies, the former spouse dies after making someone other than the intended alternate payee the beneficiary, any death benefit may be paid pursuant to the beneficiary designation on file (“the plan documents”), notwithstanding that the Decree awarded fifty percent to the intended alternate payee. The intended alternate payee’s only remedy may then be costly litigation against the beneficiary or their former spouse’s estate in order to implement a QDRO.
To minimize this risk, I recommend that when drafting settlement language in anticipation of a DRO for any retirement benefit segregation you incorporate language providing:
“The participant spouse, (name), shall designate or maintain the non-participant (alternate payee) spouse, (name), as his/her ( __%) beneficiary under the (name of) Plan until such time as the parties are in receipt of correspondence from the Retirement Plan confirming that the DRO has been accepted (‘qualified’ or ‘approved’) and will be implemented by the Plan.”
Government (non-ERISA) Plans require special consideration.
With non-ERISA pensions, such as those provided by federal (including military), state, county, and municipal entities, post retirement survivor benefits should be addressed in the property settlement agreement.
With private, ERISA governed pensions, the plan is required to make separate interest benefits (which are segregated and paid over the lifetime of the non-employee spouse) available. Non-ERISA pensions are not required to offer this benefit to the non-employee spouse and in many cases all benefits will terminate on the death of the pensioner unless provisions are both allowable under the plan and made at the time of division. (NOTE: Locally, this issue frequently arises when the pension is one of three (3) managed by the Public Safety Personnel Retirement System (PSPRS), and survivor benefits are not available to former spouses).
Adding this language to the property settlement agreement may alleviate some of the downside to the non-employee spouse:
Participant shall elect a retirement option available under the plan which permits Alternate Payee to receive benefits throughout his or her lifetime. This option may require Participant to elect a joint and survivor retirement benefit.
RE-CAP – Key items to resolve
The Decree or PSA (“Agreement”) should include:
- accurate and complete names of all retirement plans of both parties, whether or not being divided (to avoid an ‘omitted asset’ problem in the future);
- dates of beginning participation, marriage, and termination of community or marital interest for benefit type plans (pensions) being divided;
- designate the AP as the ‘surviving spouse’ in a pension plan QDRO, either for all or her percentage of the retirement, when permissible;
- whether a joint survivor annuity option is required (especially important for marriages of long duration or where alternate payee (AP) has no pension);
- the date of division for contribution type plans (retirement savings) and whether the AP will receive “pro rata gains and losses from division to segregation;”
- whether loans are to be ‘included’ or ‘excluded’ from calculation (included if participant is paying the loan; excluded if the parties are splitting the loan);
- are year end contributions to be pro rated to date of separation (division);
- that AP is tasked with starting the QDRO process and who pays; QDRO subject to review and approval by participant and/or counsel; and
- that uncooperative party pay costs necessitated by failure to facilitate QDRO process.
QDROS can be used to collect not only retirement interests, but also child support, spousal maintenance, arrearages, property settlements (equalization or debt payments), and related attorney’s fees. Consider a provision in the settlement agreement or decree providing that if agreed or court-imposed obligations are not timely met, the aggrieved party will have recourse from the participant’s remaining retirement assets, and that the errant party will pay related costs.
I welcome questions from attorneys, mediators, or self-represented parties at any time. I don’t charge to consult in the hope that you will continue to refer your clients needing retirement division document services to JurDoc, LLC.
When self-represented parties contact JurDoc, LLC regarding retirement division, we take the position that we are ‘neutral’ providers and endeavor to divide the assets as described in the Decree or PSA, and where those documents are silent, we infer that the intent was ‘equitable division’ consistent with A.R.S. § 25-318.
We currently charge a flat fee of $849.00 per QDRO, plus actual costs (typically $49.00 for certification and service by certified mail), payable half in advance and the balance upon receipt of preliminary approval from the Plan, or prior to lodging with the court.
Hourly fees of $225 are charged for mediation of issues not resolved in the decree or settlement, for computation of community or separate interests in contribution plans, and for computing amounts to be paid when adjusting for multiple contribution plans.