QDROs Overview

This section provides some general information about QDROs and a discussion of the pros and cons of the choice of offsetting marital assets or dividing these assets via a QDRO.

In 1974 Congress passed the Employees Retirement Income Security Act (ERISA). This act defined, clarified, standardized and protected employees’ rights to pension benefits. It also stated that pension benefits were "non-assignable", thereby shielding these pension benefits from all creditors. Realizing that there was an inequity concerning the marital property rights of spouses and former spouses, in 1984 Congress passed the Retirement Equity Act (REA). This Act defined the rights of spouses, former spouses and dependents, and stated that pension benefits could be assigned pursuant to a "Qualified Domestic Relations Order" (QDRO). As defined under the REA, a "Qualified Domestic Relations Order" (QDRO) means a Domestic Relations Order (DRO) which "creates or recognizes the existence of an alternate payee`s right to, or assigns to an alternate payee, the right to receive all or a portion of the benefits payable with respect to a participant under the plan."

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.

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.

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.

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.

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.

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:

  • 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).
  • The attorney sends a draft of the domestic relations order to the plan administrator.
  • Plan administrator sends comments, questions and suggested revisions back to attorney.
  • The domestic relations order is revised and re-submitted to the plan.
  • Plan administrator approves the draft of the order (or see step 3).
  • The attorney has the Order signed by the court and sends it back to the plan as a formal Domestic Relations Order.
  • The plan accepts the Order thereby rendering it a "Qualified Domestic Relations Order".

 

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. 

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.

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. back to top

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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    Lexington Pension Consultants, Inc.
    2078 Richmond Avenue
    Staten Island, New York 10314
        718.697.0100
        718.697.1955
        800.300.6824