We have been
providing assistance in the preparation of QDROs
since 1986. We have prepared over 15,000 Domestic
Relations Orders for our clients. It is important to
note that we are a full service firm. We prepare the
DRO based upon the specifics of the agreement. Upon
approval of the requesting attorney that the DRO
accurately reflects the terms of the agreement, we
then forward the draft to the appropriate
pension/retirement plan to obtain pre-approval. This
is a very time consuming but important step in the
process. It has been our experience that if there is
the slightest inconsistency in conforming to the
plan’s rules, the plan will not pre-qualify the
Order. We will not stop working for you until your
DRO is pre-approved by the plan and ready for the
Court’s certification. Many of our competitors will
provide you with the DRO, but will not provide the
extra service of having it pre-approved by the plan.
If a Court certified Order is rejected by the plan,
the whole process must be repeated.
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ERISA Plan Guidelines
The spouse, former spouse or
dependent of the plan participant is known as the
alternate payee. Under the Act the alternate payee
is entitled to certain benefits, some of which are
as follows: a) under Defined Benefit plans the
alternate payee would be entitled to a portion of
the accrued pension benefit for his/her lifetime,
beginning at the participant's normal retirement
date or earliest retirement date (usually with an
actuarial reduction), whether or not the participant
had actually retired; b) the payments would be made
as a life annuity to the alternate payee and he/she
would even be entitled to choose a payment option
which would provide death benefit payment to a
beneficiary of their choice (other than a joint &
survivor annuity with a new spouse) and c) should
the participant die prior to attaining retirement
eligibility, the alternate payee retains a pro-rata
share of any pre-retirement survivorship rights.
ERISA plans can be divided under two forms, as a
“Separate Interest” or a “Shared Interest” benefit.
Under the Separate Interest form of distribution,
the alternate payee may commence benefits at any
time after the participant becomes eligible for the
benefit, even if the participant continues in
employment. The alternate payee effectively becomes
a participant in the plan at the time he/she chooses
to commence benefits. The alternate payee is even
allowed to designate a beneficiary to the portion of
the benefit awarded to him/her. Any necessary
actuarial adjustments, as determined by the plan,
will be made to the alternate payee’s portion only.
The participant retains his/her remaining portion,
and is free to receive their portion in any form
available under the plan. Under the Shared Interest
form of distribution, the alternate payee must wait
until the participant actually retires before
commencing their portion of the benefit, the benefit
is payable only for the life of the participant and
the alternate payee does not have the opportunity to
designate a beneficiary. If the participant is to
designate the alternate payee as a beneficiary at
the time of retirement, specific language must be
inserted in the agreement. If the participant is
already retired when the QDRO is prepared, then the
Shared Interest is the only form of distribution
allowed. This is because the form of benefit was
chosen at the time of retirement and cannot be
modified. The Shared Interest is the only form of
benefit allowable under governmental plans.
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Non-ERISA
Governmental Plans
ERISA was
established to regulate employer pension plans. The
Act specifically excluded "governmental plans" which
include all municipal, state and federal plans
(including railroad plans). Consequently, former
spouses do not enjoy the same rights or benefits
under these plans. The only form of benefit
available to alternate payees under governmental
plans is a Shared Interest benefit. Therefore, there
are two significant differences between ERISA and
governmental plans. The first being that under a
governmental plan, the alternate payee cannot begin
collection of his/her portion of the benefits until
the participant actually retires. And the second
being that payments to the alternate payee will be
made only for the lifetime of the participant. In
order to provide lifetime protection to the
alternate payee, the participant must choose a death
benefit option which will provide such protection.
Remaining silent on this issue would allow the
participant to choose an option which would cause
all benefit payments to cease upon the participant's
death, or worse, to provide a benefit to another
beneficiary while reducing the monthly benefit to
the alternate payee during the participant's
lifetime. It is important to include specific
provisions regarding beneficiary designations in the
initial agreement. Spouses of federal employees
enjoy slightly more protection than municipal and
state employees in that they are covered under the
Civil Service Retirement Spouse Equity Act of 1984
and the Federal Employees Benefits Improvement Act
of 1986.
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U.S. Government
- Military Plans
The Uniformed Services Former Spouse Protection Act
(USFSPA) gave state courts the authority to divide
Military Retired Pay. However, there are many issues
and potential problem areas that may be encountered.
Congress passed the USFSPA in 1982 in response to
the U. S. Supreme Court’s 1981 decision in McCarty
v. McCarty. The McCarty decision prohibited state
courts from dividing military retired pay as an
asset of the marriage. The USFSPA preempts the
Court's decision and gives state courts the
authority to treat military retired pay as marital
property and divide it between the Spouses.
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Negotiating a Settlement
Occasionally the final terms of the
property settlement are decided by the judge, but in
the vast majority of cases, the QDRO will be based
upon the terms specified in the Settlement Agreement
or Property Agreement. Therefore, it is vitally
important to include specific pension distribution
terms in this agreement. This is especially true
with governmental plans. Based upon our extensive
experience, Lexington Pension Consultants, Inc. is
able to provide attorneys and their clients with
specific information which will enable them to
structure a settlement that will insure that all
pension/retirement assets are adequately addressed,
and that the terms of the agreement will conform to
the rules of the particular retirement plans.
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Steps to a successful QDRO
Obviously we’re here to provide QDRO preparation
services. We will provide advice and consulting from
beginning (how to best structure your settlement
agreement), to end (pre-approved Order on legal
ruled paper, ready for the judge’s signature).
However, if you feel that you must do it yourself,
here’s how it will go:
1. Parties agree to the division of the future
pension, when, how much and under what conditions
(be sure to include specifics about death benefit
options with governmental plans).
2. The attorney sends a draft of the domestic
relations order to the plan administrator.
3. Plan administrator sends comments, questions and
suggested revisions back to attorney.
4. The domestic relations order is revised and
re-submitted to the plan.
5. Plan administrator approves the draft of the
order (or see step 3).
6. The attorney has the Order signed by the court
and sends it back to the plan as a formal Domestic
Relations Order.
7. The plan accepts the Order thereby rendering it a
"Qualified Domestic Relations Order".
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Pros and Cons of the Various Methods of Pension
Distribution. For the purpose of this discussion, we will assume
that the husband is the employed pension holder.
Immediate
Offset of Assets - Present Value Analysis (Pros and
Cons)
PROS
• Assets are distributed or offset immediately, no
need for further involvement of parties, settlement
is achieved quickly and the parties can get on with
their lives.
• Each spouse has full control of his or her assets.
• If a lump-sum offset is made, the wife can
purchase a lifetime annuity with the money.
• Should she die, the wife's estate receives full
value of the asset.
• In most cases the distribution is not taxable.
• The husband receives an unreduced pension or he
may choose any option he wishes, e.g. if he
remarries he can provide full survivor benefits to
his new spouse.
CONS
• Immediate distribution of assets may cause
financial hardship on the husband.
• Wife will not receive a monthly retirement
annuity.
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Deferred
Distribution of Pension Assets - ERISA Plans - QDROs
(Pros and Cons)
PROS
• Wife receives a monthly annuity for her lifetime,
beginning at the husband's retirement eligibility
date.
• The wife may begin to receive her portion of the
benefit at any time after the husband’s earliest
retirement date. She does not have to wait until he
actually retires.
• Should the husband pre-decease the wife, she
retains pre-retirement and sometimes,
post-retirement survivorship rights to her pro-rata
share of the death benefit.
CONS
• The wife may have to wait many years to
collection.
• If the settlement is not structured correctly, the
value of her benefit may be worth a lot less in
terms of current value.
• The wife's benefit under a defined benefit plan
often has limited survivorship rights.
• The monthly benefit may be actuarially reduced.
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Deferred Distribution of
Pension - Non ERISA "Government" Plans (Pros and
Cons)
PROS
• Wife receives a monthly annuity for her lifetime
(if you’ve negotiated death benefits), beginning at
the husband's actual retirement date.
• Should the husband pre-decease the wife, she
retains pre-retirement and sometimes,
post-retirement survivorship rights to her pro-rata
share of the death benefit.
CONS
• Since governmental plans are not subject to ERISA,
they will not comply with many "normal" guidelines
and requests. Many uncertainties exist.
• The wife cannot begin receiving a pension
distribution until the husband actually decides to
retire. If the husband chooses to work until a later
age, the wife must wait until he retires to begin
collecting benefits. He could conceivably work until
age 70.
• The wife's portion of the pension has no survivor
benefits. If the wife dies prior to the husband's
retirement, or any time after the commencement of
benefits, her estate gets nothing.
• The court cannot order the husband to retire.
• Under the Civil Service Retirement System, if the
wife remarries prior to age 55, she receives no
death benefits.
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