In the majority of cases, a Qualified Domestic Relations Order (QDRO) is drafted after the divorce has taken place, and generally without considering what exactly will be divided. All too often, the Marital Settlement Agreement (MSA) has only one statement about pensions: that is, the pension will be divided 50-50.
A QDRO is a court order dividing retirement benefits of your pension plan, and awarding a portion to a non-participant (your spouse, child, or other dependent). QDRO's are limited to private non-governmental plans, since governmental plans are exempt from QDRO provisions.
Although some governmental plans may accept the title Qualified Domestic Relations Orders, or QDRO, the same rights and provisions cannot be secured for the Alternate Payee in a government court order. An Alternate Payee is typically the ex-spouse of the pension plan participant.
Should the settlement agreement fail to address:
How the pension will be divided
If the QDRO is drafted without awarding gains, interest, or earnings
Whether cost-of-living-adjustments should be taken into consideration
You will undoubtedly put your client’s position at risk as it leaves the spouse’s share uncertain which may be to the disadvantage or advantage of either party.
A Defined Contribution Plan is defined by the account balance, such as 401(k) savings plans, profit sharing plans, or ESOP's. This excludes governmental plans, which sometimes have what appears to be an account balance associated with them, but government pension plans only reveal the employee contributions which is not the value.
Defined Contribution Plans are seemingly the easier plans to deal with in terms of offsetting the value against other marital assets or dividing the account balance by way of a QDRO. However, issues related to these types of plans still need to be addressed in the settlement agreement, e.g. who determines the marital portion.
A Defined Benefit Plan is the one most often misunderstood. It is a pension that has no account balance. Instead, it pays a specific monthly retirement benefit at certain retirement age, most often based on years of service and salary. Dividing a monthly benefit as opposed to an account balance requires two distinctly different QDROs and settlement language.
The problem we find most often with Defined Benefit Plans is when an attorney representing the Alternate Payee doesn't include what will happen if the plan participant dies unexpectedly, and their spouse has not been specified as a “survivor” or beneficiary of their spouse, and may not be eligible to claim the awards of the pension.
When the distribution policy of a retirement plan is not what the spouse expectedMarriage Settlement Agreements can also be very problematic if the pension plan will not make a distribution to the non-participant spouse until sometime in the future. Many times, the plan will specify a certain age, such as age 50 or 55, as the earliest age at which a distribution can be made.
In another example, 401(k) and similar plans, which may or may not be divided as of a specific date, may only make distributions once per year or semi-annually. Because of this, the settlement agreement language should not specify a date or an age at which distribution should be made, nor make the payment of marital debt contingent upon an assumed immediate distribution.
If you need help understanding what may be involved with the disbursement of a retirement plan pursuant to a QDRO, Voit Econometrics Group, Inc. can help.
Marriage Settlement Agreements can also be very problematic if the pension plan won’t distribute to the non-participant spouse until sometime in the future. Many times, the plan will specify a certain age, such as age 50 or 55, as the earliest age at which a distribution can be made.
In another example, a profit sharing plan will have an account balance, which may or may not be divided as of a specific date, usually only on the plan's valuation dates. Because of this, the settlement agreement language should specify that the account balance should be divided on the date of divorce or, if not allowed by the plan, the closest valuation date of the plan.
If you need help understanding what may be involved with your pension’s disbursement in an MSA, our team at Vecon can be your guide.
With regard to Military or Federal Government retirement plans, few attorneys and even financial professionals understand the complexity of dividing the plans b a court order.
Both types of plans will not allow the non-participant to receive their portion until the participant spouse does. Problems also arise when the non-participant spouse isn’t named as the beneficiary or surviving spouse, when the court order dividing the retirement benefit says otherwise, e.g. remarriage prior to age 55 forfeits and/or suspends survivor benefits.
The Military will only allow one spouse to be named as a survivor, unlike many traditional private pension plans, which allow more than one spouse to be deemed a survivor to proportionate shares of a pension.
To reinforce the Military Order dividing the retirement benefit, the settlement agreement should clearly state whether or not the non-participant spouse should be awarded any survivor benefits, death benefits, aside from the core retirement benefit.
Lastly, many of the municipal plans cannot be divided. We can help you carefully check the details of your client’s retirement plan, or their spouse’s, to ensure that expectations are met or at least the options are understood.
We can help you with your pension valuations, QRDOs, and answer any investment questions. Fill out the from below for a free consultation and let’s get started.