VESTING SCHEDULES MUST ALWAYS BE TAKEN INTO ACCOUNT

What looks simple on its face is often where the worst traps lay. This occurs with the division of a defined contribution plan where the parties agree to split the account balance as of a date certain and both parties believe they will be getting the dollar amount reflected by the percentage split. If the participant is less than 100% vested and the attorney for the Alternate Payee does not take the vesting schedule into account the Alternate Payee will be in for a rude awakening. Here is how it plays out.

Example: Assume there is $110,000 with the account balance to be divided 50/50 as of December 31, 2004. Of that amount, $70,000 is in elective deferrals and $40,000, is in employer contributions. As of 12/31/04, employer contributions are 60% vested. Sally is dreaming of $55,000, but dream on. She will get less.
First, take the $70,000 in elective deferrals and divide it by 50%. Sally gets $35,000, because elective deferrals are always 100% vested.

Second, take the $40,000, in employer contributions and divide it by 50%. That gives Sally $20,000. BUT there is one more step. Sally will get only 60% x $20,000, which is $12,000. She only gets $12,000, because employer contributions in the year of division are 60% vested. Her ex keeps the difference between the $20,000 and $12,000 in his retirement account. If the Participant separates from service in 2005 and his account balance in employer contributions is still 60% vested, he too will receive only $12,000, from this account. The remaining $8,000 will be forfeited and re-allocated to the other plan participants.

So Sally gets $35,000 + $12,000 = $47,000; not $55,000. If the plan administrator allows Sally to stay in the plan as an Alternate Payee and the Participant also remains in the plan, as the vesting schedule increases to 100%, Sally's share will eventually become 100% vested.

FAILURE OF PROPER DISCOVERY

One of the worst omissions is the failure to request proper discovery during the beginning of the divorce proceedings. If you represent the non-participant spouse you need to learn everything you can about the other party's retirement plans. Too often a judgment of divorce d will simply divide a retirement plan by a dollar or percentage amount without taking into account any other factors. This is a disaster waiting to happen for the Alternate Payee.
At a minimum a divorce attorney for the Alternate Payee should request the following information:

1. The type and name of each retirement or deferred compensation plan in which the party is a plan participant, including but not limited to pension plans, 401(k) and profit-sharing plans, any governmental retirement plan, tax-sheltered annuities (403(b)-plans), and IRAs.
2. The name, address, and telephone number of the plan administrator for each retirement or deferred compensation plan.
3. The most recent account balance or annual statement, whichever is appropriate for the particular plan, including a statement of any outstanding plan loans.
4. Copy of the Summary Plan Description.
5. Any actuarial evaluations performed by the plan administrator or an independent party regarding the other party's accrued benefit, including the right to, and amount of, early retirement benefits.
6. Whatever else you think is appropriate in a given case.

When you have this information, you will have a pretty good picture of the other party's retirement benefits and the potential share for your client as Alternate Payee. You should also make sure you have a court order prohibiting the other party from changing investments without your consent or taking any distributions or loans from the plan(s) while the divorce is pending.

When you do gather this information from the plan administrator, you will learn:
1. What kind of plans the parties have.
2. If a defined contribution plan, how much is in the account balance. If a defined benefit plan, what is the accrued benefit.
3. If a defined contribution plan, whether the account is made up of elective deferrals alone or together with employer contributions.
4. If there are employer contributions, the extent to which they are vested (or non-forfeitable).
5. If there are employer contributions, whether outstanding forfeitures of other employee/plan participants have been re-allocated to your client's account or may be re-allocated in the following year BUT are attributable to the period covered by the division of the retirement benefit.
6. Whether any loans exist and the terms of repayment.
7. The number of years (including fractional years) in which your client was a plan participant and how many years (including fractional years) she was married to her current spouse during the period she was a plan participant.

By having this information, you can adjust your negotiating strategy accordingly.

QDRO ADMINISTRATORS OFTEN DON'T KNOW PENSION LAW

Never - ever - fully trust a QDRO administrator. Always be courteous and respectful to the QDRO administrator because they have all the control. And they also have information regarding account balances/annual statements, Summary Plan Descriptions, QDRO procedures, and generally how the plan works.

But never fully trust them because generally they do not have complete knowledge about QDROs or nor will they tell you how to draft a judgment in order to best protect your client's interests. They may know the plan, but they often do not know federal pension law. The absolute worst case of QDRO administrator incompetence was where I was retained to review a QDRO drafted by another attorney.

The QDRO - a model QDRO provided by the QDRO administrator to the attorney - was drafted as if the plan was a defined contribution plan. After I reviewed the Summary Plan Description I learned that the plan was a defined benefit plan; not a defined contribution plan. By the way, when I was brought into the case by the Alternate Payee, this QDRO administrator had already pre-approved the QDRO.

I called the QDRO administrator and asked him how he could have approved the QDRO when it was drafted for a defined contribution plan. He told me that I should not worry because he would administer the QDRO as if it was written for a defined benefit plan. When I told him that he could only administer a QDRO as written and then asked for the head of his department, he finally relented.

Most QDRO administrators are competent and helpful. But they do not represent your client. You do. I would add that the attorney who drafted the QDRO used the Model Language provided by the plan administrator and acted at his direction. This particular attorney - who also does not do divorce work - is highly capable attorney in many areas of the law, but he did not have benefits or QDRO experience. This was not about his competence. Rather it is about the complexity of the area of benefits law and QDRO drafting.

CIVIL SERVICE RETIREMENT SYSTEM

The CSRS is a monster and requires careful review before any judgment of divorce is signed. Two of the worst failures under the CSRS that I have seen are (1) the failure to provide for a former spouse survivor annuity in the judgment of divorce and (2) the failure to make certain that the non-participant spouse has continued health coverage after the divorce.

A "Court Order Acceptable for Processing" (COAP for short) is the term for a Court Order dividing a CSRS benefit. If the Former Spouse has an expectation that she will continue to have a retirement benefit until her spouse's death, the judgment of divorce must set forth language providing for a former spouse survivor annuity. The COAP can not be the first document to provide the survivor annuity. If the judgment of divorce does not contain this language, OPM will reject the survivor annuity. Try explaining that to your client.

While health benefit coverage is not a COAP issue, it is essential that the divorce attorney explore post-divorce health coverage for the non-participant spouse. Sec. 8901 et seq. of Title 5, U.S.C. The former spouse can not continue under the Employee's coverage because she is no longer a family member. However she can sign up for continued health coverage in her own right if she meets the following criteria:

1. She must have been a family member under the Employee's/Retiree's health enrollment for at least one day during the 18 months prior to divorce.
2. She must be entitled to receive a portion of the annuity after the Employee retires or a survivor annuity at the time the Employee/Retiree dies.
3. Within 60 days after the divorce, she must apply for continued health coverage in her own right.
4. She can not remarry prior to age 55.

Both these issues are critical to the Former Spouse and must be negotiated during the divorce process. Waiting until after the divorce can be fatal to your client's interests.

CONCLUSION

Drafting QDROs requires thorough discovery, advance planning, a complete review of plan documents and statements, and a thorough understanding of federal (and state) benefits law. All this must be done prior to the time the judgment of divorce is finalized. A QDRO should always be drafted by a professional skilled in this area of law and, whenever possible, before the judgment of divorce is finalized. Once the judgment is finalized, it is almost always too late to correct errors or omissions that should have caught prior to the judgment of divorce being finalized.

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