Archived Questions:

August 2005

Q:
I got so excited about your August 2005 Tip-of-the-Month on the division of military retirement benefits that my leg started to shake. Do you have any other “gems” to share?

A:
I don’t know why I put up with you. Try these “gems.”

Here are some issues to be aware of as you proceed with the division of a military retirement benefit. This list is not all-inclusive, but highlights a number of issues.

1. In the case of a division of property (the retirement benefit), the payment to a former spouse (their version of Alternate Payee) must be expressed in dollars or as a percentage of “disposable retired pay” (the total monthly retired pay to which a member is entitled less certain amounts).

2. If a fixed $ amount (e.g., $20,000) is used, the former spouse does not get COLAs so the % (e.g., 50% of disposable retired pay) works better. In fact, make sure you put in a % split in the divorce decree rather than a dollar amount so that the former spouse gets a pro rata share of COLAs which is only fair.

The formula might be something like: the % split x # of months in marriage during the member’s credited service/member’s total months of creditable military service. But you only need to put in the % split.

3. A former spouse is limited to 50% of disposable retired pay; and can go to 65% if there is also a garnishment to enforce child support or alimony.

4. A former spouse can only begin to receive benefits when the member retires and commences to receive benefits.

5. Here’s a big issue that is often missed for the former spouse----- the former spouse can continue to receive benefits only until the earlier of the death of the member or the former spouse UNLESS Survivor Benefit Plan (SBP) protection is secured for her.

The only way to provide a former spouse with continued benefit payments after the death of the member is through the SBP. If the divorce decree does not include SBP protection for the former spouse, her share of benefits will cease at the member’s death.

For the former spouse’s protection, the divorce decree should include this because it is unclear whether this can be drafted into a military retirement order after the fact.

There is a one-year timeframe from the date of divorce to notify the military folks of the SBP election. There are also deemed election rules if the member refuses to make the election.

6. There is a “10/10” rule that must be met up front. There can not be a division of a military retirement benefit if the member and former spouse were not married 10 years during which the member performed at least 10 years of creditable military service.

This is really a jurisdictional requirement.

7. There are different rules for folks on active duty and who are retired; and those differences bear directly on the benefits to the former spouse.

These are the key points, but there are other rules to know. The military retirement plan and related court orders dividing the benefit are very different from regular retirement plans. There are dangerous traps here.

August 2005

Q:
I am preparing to draft a judgment of divorce. Can I divide a military pension by stating in the judgment of divorce “Respondent’s interest in the U.S. Army as of the date of this decree shall be divided as follows: equally.”

A:
No … no … no ... no ……. no. The rules for dividing a military benefit are very complex and the Defense Finance Accounting Service (DFAS) has its own unique rules. If you do not know these rules and how to apply them, you will find yourself in major trouble with your client. First, military benefits can only be divided by dollar amount or percentage and then you need to know which one to use. So, “equally” will not work unless the DFAS reviewer is asleep at the wheel. Second, your language will result in the denial of any survivor benefits.

Attempting to draft language in a judgment of divorce without knowing DFAS’ rules and then attempting to draft an Order implementing the judgment is a serious malpractice trap. PLEASE call me in advance if you have questions about language to include in a judgment.

June 2005

Q:
Here we go again. It's July 19th and I'm still waiting for the June 2005 QDRO Tip-of-the-Month. What's up with that and what's up with you? So here's my question. You told us that a division of an IRA in a divorce does not require a QDRO. My client tells me that to divide her husband's SEP IRA she needs a QDRO. Maybe she should do the QDRO Tip-of-the-Month.

A:
That's not a question, but if it was (or is that “were”?), here's the answer. Under the Internal Revenue Code, the division of an IRA in a divorce or legal separation - no matter what kind of IRA - does not require a QDRO. Typically all an attorney needs to do - even you could probably handle this - is make sure the client/owner of the IRA contacts his IRA custodian and put the division process in place; or the attorney can take care of that.

What has happened recently - due to litigation and Patriot Act concerns - is that brokerage houses (as IRA custodian), such as the American Funds and UBS, are requiring QDROs as a matter of internal policy. So, if an IRA custodian requires a QDRO for the division of an IRA, a QDRO must be drafted.

May 2005

Q:
Dear QDRO Guy: I hope we don't have to wait another 4 months for one of your sterling Tips-of-the-Month. Here goes-I represent a man in a divorce and his wife refuses to provide information regarding her retirement benefits. We asked for this information in a Request for Production of Documents. My client is so fed up he just wants to sign the judgment, split benefits 50/50, and get it over with. What do you think?

A:
What am I going to do with you? File a Motion to Compel and for Sanctions. That way at least you will get the information. Never sign a judgment without retirement plan information. For example, if you divide a profit-sharing plan account 50/50, you naturally think that your client will get 50% of the account. However, if his wife is not fully vested in her account balance and/or has loans, his expected-50% share will be a lot less. And if you don't know what retirement plans in which she is a participant, what are you going to divide?

March 2005

Q:
Dear QDRO Guy: Where have you been? Not one tip-of-the-month since last November. What’s up with that? I heard you wrote an article for Commerce Clearing House, Inc., on QDROs that got national distribution. Like I’m impressed or something. Can you send it to me anyhow?

A:
While you may be pathetic, my article was not. Here it is. (HTML | MS Word)

October 2004

Q:
It’s October 18th already, where is the September 2004 QDRO Tip-of-the-Month? And since I’m asking, my client’s husband has 25 years with the federal government and is covered under the Civil Service Retirement System. He is 53 and in bad health. In the draft judgment, I divided his benefit by 50% and split the cost of preparing the Order equally. Is there anything to worry about with that language?

A:
Yes; worry about your tuchas. With your proposed language when your client’s soon-to-be-ex dies, your client’s rights to further benefits die with him. Under the CSRS, the judgment of divorce – as the first Order in the divorce – MUST contain language providing for a former spouse survivor annuity. A later Court Order Acceptable for Processing (COAP—OPM’s name for their QDRO) dividing the CSRS benefit must also provide for a former spouse survivor annuity but the COAP can not bootstrap – on its own – a former spouse survivor annuity. Sometimes this slips by a reviewer at OPM, but that is pure luck.

August 2004

Q:
Dear QDRO Guy. My client’s wife has worked for the federal government for 20 years and they have been married even longer. What do I need to do to get him a share of her federal retirement benefits?

A:
Buy two Jack Daniels and meet me at the bar. Then buy yourself a drink. The federal retirement system is a monster and has more traps than Pebble Beach. Here are a couple of things you must ALWAYS do:

1. Request through discovery the most recent year-end compensation and benefits statement of the Member and also her most recent pay stub.

2. Then review them thoroughly. You must determine in which of the retirement programs she is a Member—the Civil Service Retirement System; Federal Employees Retirement System; the Thrift Savings Plan; or a combination. You will also find what other benefits she is receiving and therefore in which your client has been benefiting during their marriage.

3. Review the statements to determine account balances under the TSP or benefit accruals under the CSRS or FERS.

4. Determine whether your client has independent health insurance because there is a brief window period for continuing coverage as a former spouse after the divorce is finalized.

5. If you draft a general judgment of dissolution of marriage make sure that, in representing the former spouse, you provide the former spouse a survivor annuity. If this language is not in the general judgment, OPM will not grant a former spouse survivor annuity after the death of the Member.

My strong advice with dividing federal retirement/benefits is get assistance from either yours truly or some other attorney thoroughly versed in QDROs/benefits early in the proceedings so that everything is in place – benefits-wise – when it is time to finalize the agreement between the parties.

July 2004

Q:
Dear QDRO Guy. I am drafting a judgment of divorce and want to use the following language as a valuation date for dividing a 401k plan account balance equally----- “the valuation date shall be the most administratively feasible date for the plan administrator to make the division.” How’s that sound?

A:
It makes perfect sense on its face, but it won’t work. Plan Administrators expect to be provided the specific date upon which to value retirement plan accounts. They will not choose a valuation date for the parties and will reject a QDRO that does not provide one; certainly so when percentage divisions are used. Attorneys should make sure that they have reviewed all account balance statements and find the valuation date most favorable to their client. With defined contribution plans, investments are generally in stocks and mutual funds which fluctuate all the time these days. Pick an informed date because it can be worth a lot of money.

June 2004

Q:
Dear QDRO Guy. I’m dealing with a divorce in which the wife is a participant in the Ohio State Teachers’ Retirement System. I’m treating it like PERS. Am I close?

A:
Close to what? Every state retirement system is different. You can never assume that one state’s retirement plan/system is like another or certainly like Oregon PERS. When a state retirement system is a marital asset, you really need to understand that system thoroughly and often they are very complicated. If you don’t understand the inner workings of defined benefit, defined contribution, or annuity plans, ask for help. Of course, that’s why yours truly is here.

April 2004

Q
Dear QDRO Guy. I got so excited last month about having the option of using a QDRO to get back child support, my leg started to shake uncontrollably. Does this work if the party in arrears is a participant in a defined benefit pension plan? Can we get the money now?

A:
Under federal pension law a QDRO can be used to get child support arrears. With a defined benefit pension plan, the plan participant/scofflaw’s retirement benefit can be the subject of a QDRO, but the actual dollars may not be available to satisfy the arrears until the plan participant is entitled to receive a benefit under the terms of the plan. This really is where pension attorneys earn their fees because you need to know how to navigate a solution with the plan administrator and draft a QDRO that specifically addresses the arrears and how the particular plan works. If this is done improperly you run the risk of losing the benefit as a means to satisfy the arrears.

March 2004

Q:
Dear QDRO Guy. Someone told me I could use a QDRO to get back child support. I thought he was nuts. Is he?

A:
Well he may be nuts, but he’s right on the money with this one. To the extent that the account balance in an ERISA retirement plan is vested, a QDRO can be used to enforce child support that is overdue up to 100% of the amount owed even if the plan participant-dead beat is not entitled to the money under the terms of the plan. “You-Know-Who” can draft an Order for you to get this money. By the way, always name the child as Alternate Payee and not the former spouse. This avoids income taxation on the distribution to the former spouse. The IRS Form 1099-R will be sent to the plan participant.

February 2004

Q: PLAN LOANS
Dear QDRO Guy. I represent a wife, who is an Alternate Payee. She thinks her husband is going to take 401(k) money out of the plan by making loans and not paying them back. What’s up with that?

A:
You should always get a court order up front in the divorce proceedings ordering the party who is a plan participant not to take any plan loans or otherwise attempt to receive plan distributions or change investment options without the consent of the party who is the Alternate Payee. A properly drafted QDRO will calculate the Alternate Payee’s share of the account balance without regard to existing loans.

There are all sorts of traps out there for attorneys not knowledgeable in the workings of retirement plans and how to draft QDRO language. Loans are a prime example of how an Alternate Payee’s benefit under a QDRO can be much less than the amount to which she is entitled. This also applies to pre-divorce plan loans that remain outstanding.

Also, if he does not pay back the loans they are IRS reportable taxable distributions.

January 2004

Q:
Dear QDRO Guy. Happy New Year. Would you – in one sentence each – summarize 2003’s Tips-O’-the-Month.

A:
I can do that and Happy New Year to you too.

August 2003--- Never use a model QDRO from a plan administrator because it does NOT protect your client’s interests whether you represent the plan participant or Alternate Payee.

September 2003--- I’m very serious about this issue, never use just the terms of a model QDRO because it sets you up for malpractice.

October 2003--- When negotiating a divorce where a 401(k) plan is involved, find out if there are elective deferrals, employer contributions, outstanding loans that must be repaid, and forfeitures that can be allocated to the plan participant’s account; and whether the plan has a vesting schedule for employer contributions.

November 2003--- If you represent the Alternate Payee, the discovery request should go far beyond just the name/type of each retirement plan of the plan participant.

December 2003--- If you represent the plan participant, be pro-active and make sure that you gather all the pertinent information from the client or plan administrator regarding the account balance or accrued benefit and summary plan description.

December 2003

Q:
Dear QDRO Guy. It’s me again. I represent the wife. We will be filing for divorce soon. She tells me that she has boo-coo in her 401(k)-plan and that her husband does not have a retirement plan. Should I wait until her husband’s attorney seeks discovery to find out about this marital asset?

A:
Oy, what am I going to do with you? You should gather this information from the plan administrator immediately and independently of what your client verbally tells you. You need to know in advance the following:

1. How much is in the 401(k)-plan.
2. Whether the account is made up of elective deferrals alone or together with employer contributions.
3. If there are employer contributions, the extent to which they are vested (or non-forfeitable).
4. If there are employer contributions, whether outstanding forfeitures of other employee/plan participants have been re-allocated to your client’s account.
5. Whether any loans exist and the terms of repayment.
6. 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.

This way when the hit comes, you and your client will be prepared. And by having this information, you can adjust your negotiating strategy accordingly.

November 2003

Q:
Dear QDRO Guy. Even though last month your Tip was brilliant beyond anything I could have ever imagined, you really wrote too much. You gave me a headache. Keep it simple this time. I represent an Alternate Payee in a divorce and want to know what I should request in discovery to best protect her interests. What do you suggest?

A:
It’s you again. You should request the following documents and information:

(a) 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.

(b) The name, address, and telephone number of the plan administrator for each retirement or deferred compensation plan.

(c) The most recent account balance or annual statement, whichever is appropriate for the particular plan, including a statement of any outstanding plan loans.

(d) Copy of the Summary Plan Description.

(e) 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.

(f) 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. That way when you retain me to draft and consult on the QDRO – you will do that … right -- we will have the necessary information to make the drafting process go more quickly and efficiently. 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.

October 2003

Q:
Dear QDRO guy. For the last two months, you have been ranting and raving about not using model QDRO language from plan administrators. OK, I get it already. I’ll hire you instead. Does that make you feel better? What I want to know is if my client – an Alternate Payee-to-be – will actually receive 50% of her husband’s profit-sharing/401(k) plan. There is $110,000 in the account and she wants $55,000, in the worst way. I told her it’s as good as in the bank.

A:
Uh-oh. I feel better for me, but you’re in trouble. A profit-sharing/401(k) – which is a defined contribution plan because there is a readily identifiable account balance – generally has two types of contributions. One is the 401(k) element made up of elective deferrals, also known as salary reduction contributions. For example, if Johnny earns $10 and contributes $2 to his 401(k) plan, his W-2 gross income is $8 and $2 of elective deferrals goes to the retirement plan to grow in a tax-deferred account. These elective deferrals are always 100% vested (or nonforfeitable) pursuant to the Internal Revenue Code (IRC). In other words, they can not be taken away by the occurrence of any event.

There may also be matching employer contributions that are geared to the 401(k) contributions or employer contributions that are based on profits at the end of the year. These employer contributions are NOT required by the IRC to be 100% vested. In fact the IRC provides for various bottom line vesting schedules for employer contributions. An employer can provide in the retirement plan that employer contributions are 100% vested, but they almost never do. Therefore if a plan participant is 60% vested in employer contributions in the year that benefits are effectively divided under a QDRO, then the Alternate Payee is only going to receive an assignment of benefits to the extent that employer contributions (and therefore her share of those contributions) are vested.

The following example shows how this works. There is $110,000 with the account balance to be divided 50/50 as of December 31, 2002. Of that amount, $70,000 is in elective deferrals and $40,000, is in employer contributions. As of 12/31/02, 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 soon-to-be-ex keeps the difference between the $20,000 and $12,000, in his retirement account. If Mr. Ex separates from service in 2003 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 if she wants her money now; not $55,000. If the plan administrator allows Sally to stay in the plan, as an Alternate Payee, as the vesting schedule increases to 100%, Sally's share will eventually become 100% vested.

MORAL OF THE STORY
As my late father-in-law used to say: you only “got” the money when it’s burning a hole in your pocket. During discovery always find out if the defined contribution plan has both elective deferrals and employer contributions. This applies to plans described as 401(k) plans, profit-sharing/401(k) plans, and 403(b) tax-sheltered annuities. If there are employer contributions, find out the retirement plan’s vesting schedule and the extent to which employer contributions are vested in the year of proposed division of this marital asset.

September 2003

Q:
In the August 2003 QDRO Tip-of-the-Month you stated that a QDRO should never be solely the language provided by the plan administrator. I told this to a plan administrator and he assured me that everything I needed was in their model form. Is he correct?

A:
A: No. Nein. Nischt. Nyet. Everything the plan administrator needs is in their model language. What your clients need is something else and much more extensive.

I noted in the QDRO Tip-of-the-Month for August 2003 that the plan administrator’s obligation is to comply with its statutory obligation under federal pension law, the Employee Retirement Income Security Act of 1974 (ERISA). Beyond that obligation, there is no statutory responsibility to either party in the divorce. While some of the model language will benefit the parties, a model QDRO is not drafted with the interests of either the plan participant or Alternate Payee in mind. A model QDRO will NOT protect your client – whether the plan participant or Alternate Payee – the way you have protected them throughout the divorce process.

Most model QDRO language is developed for defined benefit pension plans (**and government plans). This is more likely where these pension plans are union negotiated. These model QDROs generally do not have language creating a “separate interest” approach or “share interest” approach under a defined benefit pension plan because the parties have to decide which approach is best for their clients. This decision is critical and, if appropriate language is omitted by the attorney, this can be devastating to a client’s interest. In addition, most model QDROs do not include language regarding benefits at early retirement or early retirement subsidies, cost-of-living adjustments or other changes in benefits, the method of dividing benefits, protection to the Alternate Payee from a manipulative plan participant spouse, protection in the event of death, beneficiary designations, and other protective clauses.

Verbatim acceptance of a model QDRO or QDRO language will not protect your client. A QDRO must be drafted and tailored to your client’s needs.

** More on government plans and related Domestic Relations Orders in the following months.

August 2003
Q:
The plan administrator has sent me their form QDRO to use. Is that sufficient?

A:
No. You should never use a plan administrator’s form-QDRO as the sole source for a QDRO. These forms only protect the plan administrator by complying with its obligations under Title I of the Employee Retirement Income Security Act of 1974 (ERISA). They do not protect your client, whether the participant or Alternate Payee. A QDRO must not only spell out the division of the retirement plan as a marital asset, but it must also clearly set forth the obligations and rights of the parties and instruct the plan administrator as to its responsibilities.

July 2003: Post-Enron Law
Q:
Is an employer, board of directors, and investment committee liable to 401(k) plan participants for investment losses due to a decline in the stock market?

A:
Maybe. If any of these parties is a fiduciary under federal pension law, they can be liable for breach of a fiduciary duty to plan participants. The penalty can be severe. These breaches of duty can include the failure to prudently select investment vehicles, to monitor investments, to periodically evaluate fund performance, and to replace underperforming investments, including employer securities. It is the conduct of the fiduciary, not the performance of the investments, that results in the breach of duty. It is wise to consult a pension attorney to establish procedures and standards of conduct for anyone who is involved in plan investments.

June 2003

Q:
I am getting divorced. How much of my pension plan must I give to my husband?

A:
Your retirement plan benefit is only one part of the marital property that must be considered in a negotiated property settlement. True pension plans have complicated retirement benefit formulas that always provide a benefit at "normal retirement" which is generally age 65. However the plan may also have an early retirement benefit which will reduce the monthly benefit because it is being paid out over a longer period of time. And the plan may have an early retirement subsidy where companies essentially pay off older employees to retire by increasing early benefit benefits. A pension attorney can determine whether these or other options exist in the plan, the benefit each ultimately provides, and draft a Qualified Domestic Relations Order as required by Federal pension law. Without knowing these benefits, you can not properly negotiate a property settlement.

May 2003

Q:
I am getting divorced. What happens to my 401(k) plan and pension plan? My spouse has not worked outside the home and has raised our children.

A:
Federal pension law requires that every divorce decree include a Qualified Domestic Relations Order (QDRO) stating how retirement plan assets are to be distributed. Your spouse must receive a share of the pension and 401(k) plans' assets whether or not she has contributed to the plan or she can specifically waive her rights to those assets in the
QDRO.

In my practice where I work with divorce attorneys, mediators, financial planners, and their clients, I review all benefit, distribution, and rollover options, and current account balances; and draft the terms of the QDRO document. The parties to the divorce should understand all
their options and receive the maximum plan benefit so that these amounts can be reflected in the division of all property. There must be a thorough understanding of federal pension law and state law. For example, in the state of Oregon where I practice law, Oregon PERS and the Oregon deferred compensation plan must be reviewed in order to advise the parties regarding the distribution of these assets.

"Steve is a thorough and thoughtful author who comes to the table with a great deal of real world experience and practical know-how concerning IRS enforcement and relief programs for tax qualified plans."

-- David Mustone, Esq., Partner in Hunton & Williams in McLean, VA; former attorney, IRS Tax Litigation Division; and Chairman of the EPCRS and Administrative Practices Subcommittee of the Employee Benefits Committee of the American Bar Association's Section on Taxation. (Washington, D.C.)