Most of what we have after working our lives can found in our homes and retirements. Considering the housing market today most families have just one asset.
In your divorce do not let your divorce attorney treat your only assets the retirement as an after though to be considered only at the end.
Look at the contrast spousal support is vigorously negotiated, businesses are duly valued, and child custody issues are given their due. But in most divorces the specific terms on dividing the retirement plans are not negotioated.
Divorce lawyer lazily use the same boilerplate text inserting it nto the Judgment to divide up retirement plans as if they are all one and the same. In the profession there is still a lack of education in this area that often leads to post-judgment issues and malpractice claims.
Terry Ray Bankert is a Michigan Attorney specializing in Family Law, and works as a Flint Divorce Attorney, Flint Divorce lawyer, Genesee Divorce Lawyer and Genesee Divorce Attorney.(SEO) For help with your questions call 810-235-1970. Or http://www.attorneybankert.com/ . Principle Source ICLE 09/16/10
WHAT ARE RETIREMENT PLANS
There are three basic types of retirement plans; qualified, non-qualified and tax advantaged.
THE EMPLOYER PUTS AWAY MONEY FOR THE EMPLOYEE
QUALIFIED PLANS THAT ARE DIVISABLE BY A QDRO ARE ERISA PLANS 401K, 403B'S, 4577, PROFIT SHARING AND THE GRANDDADDY OF THEM ALL THE QUALIFIED BENEFIT PENSION PLAN
QUALIFIED PLANS ARE DIVISABLE BY A QDRO- are those that are covered by ERISA (the Employee Retirement Income Security Act of 1974, as amended) and receive special tax-qualified treatment. They must abide by certain rules and regulations set forth by ERISA and the IRS Code. For example, in order to remain “qualified”, the plan administrator must follow requirements in terms of funding the plan, anti-discrimination rules (i.e. not putting in 5 times as much money for your favorite executives), and tax reporting. Depending on the type of plan set up, employees (and/or employers) put money away for the employee (plan “participant”) and those funds are earmarked for retirement. Some examples of qualified plans are 401k’s, certain 403b’s, 457 plans, profit sharing plans and qualified defined benefit pension plans.
THE EMPLOYER PUTS AWAY MONEY FOR THE EMPLOYEE BUT IS OUT OF COMPLAINANCE AS TO A FEW RULES
A non-qualified plan , THIS IS NOT DIVISABLE BY A QDRO, does not comply with ERISA regulations. Funds set aside in non-qualified plans are still ear-marked for retirement; however, they often don’t receive the same protection and special tax treatment as funds in a qualified plan.
NON QUALIFIED PLANS; STATE OF MICHGIAN, CIVIL SERVICE, MILITARY, RAILROAD SOME PRIVATE THESE ARE N OT DIVISABLE BY A QDRO
Examples of non-qualified plans include the State of Michigan plans, Civil Service, Military and Railroad Board Plans. In addition, corporate employers will sometimes create non-qualified plans that only benefit highly paid employees. For example, suppose employer XYZ wants to retain certain employees but they are already fully funded in their qualified plan benefits. XYZ may choose to set up a non-qualified deferred compensation plan as a special incentive for those employees to stay with the firm. These types of plans, again, are not covered by ERISA nor are the funds guaranteed to be paid to the employees.
TAX ADVANTAGE PLANS, NO QDRO NECESSARY, EXAMPLES ARE; IRA, ROTH IRA, SEP IRA AND NON QUALIFIED ANNUITIES
The third basic type of plan is a tax advantaged plan. These are not generally sponsored by an employer, however, the funds do grow income tax deferred until retirement. Examples include regular IRA’s, Roth IRA’s, SEP IRA’s and non-qualified annuities. A tax-advantaged plan typically can be divided as a non-taxable event (Per IRS Code Section 408d); however, a QDRO is not necessary for the division. (see Appendix G). However, it is very important that the attorney determines (while the case is pending) what documentation will be needed by the account custodian. Examples include a transfer letter signed by both parties, a True Copy of the JOD and/or a specific form provided by the custodian. As is true with any asset transfer, it’s best to assume there will not be much cooperation between the parties after the judgment has been entered.
ONLY QUALIFIED PLANS ARE DIVISABLE BY A QDRO
It is extremely important to keep in mind that only qualified plans are divisible via a Qualified Domestic Relations Order (QDRO). In other words, you may (or may not) be able to divide the assets in a non-qualified plan with a different instrument, but attorneys should expect that a QDRO will not be acceptable and that the assets may not be divisible at all. This is a common mistake made by attorneys who assume that all plan assets are divisible. The worst time to discover that this isn’t the case is after the judgment has been finalized.
THE HISTORY OF QDRO
Qualified Plans and Divorce: Historical Perspective
ANTI A;LIENATION CLAUSES CAUSED MUCH CONFUSION
"Prior to 1984 and the implementation of the Retirement Equity Act, which amended ERISA, if a plan assigned away an interest in a qualified plan from one person to another, this was viewed as a violation of ERISA’s “anti-alienation” clauses and disqualified the plan for tax purposes. In other words, before 1984, if Acme Widgets allowed Joe Smith to transfer to his ex-wife a portion of his 401k plan to her, pursuant to his divorce, the entire plan would become disqualified. In plain English; all plan participants (not just Joe) would receive their plan contributions and earnings back and would owe taxes and penalties on it."
"ERISA’s anti-alienation clause created a tremendous problem for divorcing spouses and their attorneys. Additionally, the IRS, the Department of Labor and each individual State had their own opinion as to whether or not non-divisible retirement assets should actually be included as marital property in a divorce."
IN 1984 QDRO SOLVED MUCH OF THE PROBLEM
"Then, in 1984, the Retirement Equity Act amended ERISA to allow for transfer of qualified plan assets from the employee (or plan participant) to an alternate payee pursuant to a domestic relations matter. However, the only document acceptable for effectuating the transfer would be a Qualified Domestic Relations Order, which of course needed to follow some very specific and strict rules in order for the plan to retain its qualified status."
WHAT IS A QUALIFIED DOMESTIC RELATIONS ORDER OR QDRO?
"A QDRO is a domestic relations order which creates or recognizes an alternate payee’s rights to receive benefits payable to a participant under a specific retirement plan. It is technically only a DRO (Domestic Relations Order) until it is approved by the Plan administrator (not the state court judge). ERISA awarded the Plan Administrator the power to determine if an Order is a DRO or a QDRO. Consequently, this authority gives an outside, third party a tremendous amount of power to effect outcomes in divorce cases. Their role cannot and should not be underestimated by the attorneys involved in the case."
SPOUSES AND CHILDREN CAN USE THIS INSTURMENT
"As to who qualifies as an alternate payee, it must be a spouse, former spouse, child or dependant of the participant. Therefore, it can be inferred that as long as a case is pending, a QDRO can be entered and approved (and the funds distributed) even if the parties are still married. If the purpose of the QDRO is to pay for child support in arrears, the child would be the alternate payee and any taxes owed."
BASIC COMPONENTS OF QDRO
"In order to be a QDRO, on a very basic level, it must be signed by a State court judge (thus mandating the involvement of the State) and it must be pursuant to marital property rights, alimony or child support. Additionally, the QDRO must state which of the three purposes the QDRO is being used for or it will likely get rejected."
DEFINED CONTRIBUTION PLANS
A. What Is a Defined Contribution Plan?
"For simplification purposes, there are two general types of qualified plans. There are actually hybrid plans as well, but that goes beyond the scope of this presentation. The first is a defined contribution plan and the second is a defined benefit plan."
EMPLOYER PUTS MONEY AWAY PRE TAX
"In a defined contribution plan, the employee and sometimes the employer, put money away on a pre-tax (and sometimes post-tax) basis into an investment account that will grow income tax deferred until retirement."
THE VALUE CHANGES BASED ON THE CONTRIBUTION AND THE INVESTMENT TOOLS USED.
" The value of the account will fluctuate based on the investment performance of the underlying assets, be they mutual funds, stocks, bonds or cash. The management of the account is generally up to the employee. There is generally a 10% penalty assessed for withdrawal of these plan assets when the employee is younger than 59 1/2.
WHAT IRS REGULATION HAVE TO BE COMPLIED WITH?
One of the most interesting aspects of dividing defined contribution plans pursuant to a divorce is the little known exception to the 10% penalty that normally applies to pre-59 1/2 distributions. Pursuant to IRS Regulation 72t2c, a distribution to an alternate payee, pursuant to a QDRO will avoid payment of the 10% penalty."
QDRO CAN ALLOCATE WITH OUT 10% PENALTY
" Ordinary income taxes will still be assessed to the alternate payee, at his or her highest marginal tax rate, however, the 10% penalty will not apply.
"This presents a unique opportunity for spouses to pay off debt, free up cash in a non-liquid estate or even pay legal fees."
"Pitfalls: Loan Balances, Vesting, Delayed Plan Contributions, etc.
The first potential pitfall is addressing whether or not loan balances will be included or excluded in the divisible amount when calculating the alternate payee’s share."
"Vesting must also be considered when dividing a defined contribution plan. The vested amount is the amount an employee can take with them when they leave the company. Employees are always 100% vested in their own contributions and the earnings they generate. "
"Another issue that needs to be considered is delayed plan contributions."
"Another often overlooked issue is potential surrender charges. Often times, a school employee will have a qualified 403b plan that is invested inside of an annuity contract. Generally, annuity contracts have surrender charges to get out of them, depending on how long the money has been there. This needs to be addressed in the context of a divorce. Who pays the surrender charge or is it going to be shared? Does anyone even know if there is a surrender charge? Again, attorneys need to do their homework during the Discovery process and find out."
"Defined Benefit Plans
A. What Is a Defined Benefit Plan?
"A defined benefit (pension) plan is the type of plan where the employer promises the employee “X” dollars per month for the rest of their life in retirement. In general, the longer they stay at the company and the higher their salary, the larger the monthly payment. Qualified pension plan benefits are guaranteed by the Pension Benefit Guarantee Corporation (PBGC) up to a set monthly dollar amount ($3,971.59 as a Single Life annuity for those age 65 and older for plans terminating in 2006). Some companies allow their employees to contribute to the pension plans in order to increase the monthly payments. It is extremely important to note that the present value of the employee’s contributions is NOT the actuarial equivalent of the pension’s present value. It is generally worth much more than that and should be evaluated by a pension expert."
HOW SHOULD PENSIONS BE DELT WITH IN A DIVORCE
"There are several ways to address pensions in the context of divorce cases."
GIVE IT A PRESENT DAY VALUE
"The first is to place an actuarial value on the pension and assign it to one party with an offset to the other.
USE A QDRO
"The second is deferred division, which happens via a QDRO.
Division via QDRO: Separate Interest vs. Shared Benefit
" Deferred Division, or QDRO approach. There are two basic ways a pension can be divided via a QDRO, although, again, there are plan-specific exceptions."
THE SEPARATE INTEREST APPROACH
In this approach, the alternate payee controls the timing and receipt of his or her benefits. In other words, the alternate payee may initiate payments upon the participant’s earliest retirement date whether the participant is in pay status or not. Payments are generally based on the alternate payee’s life expectancy and once begun will not cease, even upon the subsequent death of the participant. It’s important to keep in mind that even in this method of division, pre-retirement survivor benefits must be preserved to protect the alternate payee’s interest in the plan. It is often possible for the alternate payee to name a subsequent beneficiary to their benefits upon their death."
"the shared benefit approach. In this approach of division, the alternate payee may not commence benefits until the participant is in pay status and benefits will be based on the joint life of the parties. Both pre and post retirement survivor benefits must be set aside for the alternate payee in order that payments can continue beyond the death of the participant. Upon the death of the alternate payee, there is an automatic reversion of benefits to the participant, either pre or post-retirement. It’s important to note that if the participant is already retired, this is the only option available to the parties."
"Why is it important to know the different division methods when negotiating pension divisions in divorce cases? If you represent the alternate payee, he or she may want to access the benefits at the earliest possible date and be very surprised if they can’t. Alternatively, the participant may feel strongly that their ex-spouse not touch a penny of their retirement until they actually retire! Again, the participant may assume that upon his/her death, the benefits assigned to the alternate payee may revert to him/her. Any of these issues could present an unpleasant surprise that leads to a post-judgment lawsuit. The important thing to remember, again, is that it’s imperative that these issues be discussed, agreed upon and written in the judgment of divorce so that it’s perfectly clear what will and will not happen in the future."
"Entry of the QDRO"
"Most plans will have a QDRO model that they’d like you to use. It’s recommended that you look at the model during the Discovery process for insight into what the plan is looking for, however, it’s not advisable to use it. In fact, the model usually doesn’t benefit the participant or the alternate payee, but rather it actually benefits the plan. It’s easier and less expensive for the plan to review cookie cutter orders instead of actually having skilled employees read individualized QDRO’s. We’ve even seen models that benefit the Alternate Payee at the expense of the Participant. Each QDRO you prepare or review for a client should be tailored to the case at hand and the specific plan you are dealing with."
"Keep in mind that timing for entry of the QDRO is critical. Once the participant has retired or re-married certain options that you were counting on for the alternate payee may no longer be available. Even more important is entry prior to the death of the participant. Remember, the only document that can assign benefits to an alternate payee is a QDRO. The Judgment of Divorce is not sufficient. If the QDRO isn’t entered and approved prior to the death of the participant, you can assume that the alternate payee will receive nothing."
"Once the QDRO arrives at the plan’s front door, it can sit on someone’s desk for as long as they deem reasonable before they make a decision. That could be 2 weeks, 6 months or a year. There is no time limit unless the participant is retired and then they have 18 months to make a decision. It’s a good idea to tell your clients of this timing issue so they know not to expect a distribution 2 weeks post-decree."
"Lastly, when dealing with the Plan, make sure that the plan’s interpretation letter is read and complies with the parties’ agreement. This is an often over-looked last step that must be taken. Even if the QDRO is perfectly prepared, if the plan interprets it wrong, your client could be out of luck. Again, involve your expert to review the Interpretation Letter."
Terry Ray Bankert is a Michigan Attorney specializing in Family Law, and works as a Flint Divorce Attorney, Flint Divorce lawyer, Genesee Divorce Lawyer and Genesee Divorce Attorney.(SEO) For help with your questions call 810-235-1970. Or http://www.attorneybankert.com . Principle Source ICLE 09/16/10