Category: Retirement Accounts
Questions/Answers
Should there be reference to the QDRO terms in the separation agreement.
While it is best to submit the QDRO for approval by the Court at the same time as the separation agreement, if for some reason the QDRO is not submitted to the Court or is not approved by the Court, if the essential language of the QDRO protecting the rights of the alternate payee is included in the separation agreement, then if the Participant should die or become disabled, there is a greater likelihood that the Plan administrator will honor the language in the separation agreement for the purposes of division.
How are IRA accounts divided upon divorce?
There are two methods for transferring an IRA to a former spouse incident to a divorce. 1. By changing the name on the IRA. Use this method if the entire IRA is to be transferred from one spouse to the other. Thereafter, for all purposes, the former spouse is the owner of the IRA. 2. Direct transfer. The IRA account owner directs the IRA custodian or trustee to transfer a fixed dollar amount or a percentage of the owner’s IRA directly to the trustee or custodian of a new or existing traditional IRA established in the name of the former spouse. In both situations, once the transfer is complete, the former spouse, i.e., the transferee spouse, is free to then make withdrawals from the IRA, subject to regular income taxation as well as the 10% penalty if the transferee spouse is younger than age 591/2.
What is a Domestic Relations Order (DRO)?
A DRO is the same set of instructions as a QDRO except it is written against a plan that is not qualified under certain federal statutes. DROs are typically written against governmental plans.
When should a QDRO be drafted?
Immediately. The process of obtaining the appropriate information and drafting of the QDRO should take place early in the divorce process, and occur at the same time the parties negotiate the other terms of their settlement. Since it sometimes takes several weeks to obtain the necessary information, it is important to begin this process early so that the provisions regarding the retirement benefits can be included in the agreement of the parties. The ideal situation would be to have the court certify the QDRO at the same time the decree of divorce is entered. If the divorce has already occurred, it is important to begin and complete this process as soon as possible.
What is a Qualified Domestic Relations Order (QDRO)?
In basic terms, a QDRO is a written set of instructions that explains to a plan administrator that two parties are dividing pension benefits due to equitable distribution. The instructions set forth a method for the plan administrator to determine how much of the benefits are to be paid to each party, when such benefits can be paid, how such benefits should be paid, etc.
What is a defined contribution plan?
A defined contribution plan is a retirement plan whereby the employer, employee or both make contributions towards an individual account established on behalf of the employee. Such funds can be invested, and upon retirement, the employee will receive either a lump sum payment of the amount held in the account or such balance will be converted to a monthly annuity payable for the lifetime of the employee. Examples of some defined contribution plans are as follows: 401(k) Plan, Savings and Investment Plan, Profit Sharing Plan, Money Purchase Pension Plan, Employee Stock Ownership Plan (ESOP), and Tax Reduction Act Stock Ownership Plan (TRASOP).
What is a coverture fraction?
A coverture fraction is a tool used by an appraiser to separate that portion of the benefits which was earned during the marriage, from that portion of the benefits which were earned outside of the period of marriage. The coverture fraction represents that portion of the value of the benefits attributable to the marriage. The numerator of the fraction represents the total period of time the pensionholder participated in the plan during the marriage, and the denominator is the total period of time the pensionholder participated in the plan as of the cut-off date.
What is a cost-of-living adjustment (COLA)?
A cost-of-living adjustment is a small incremental increase made to a retiree’s monthly pension benefit in an attempt to keep his/her benefits in line with inflation. COLA increases are not applicable to every plan. Therefore, adjustments for COLAs would only be applicable in a present value analysis of benefits that have COLA adjustments guaranteed under the terms of the plan.
What is the "Valuation Date"?
The valuation date dictates the interest rate to be utilized in the analysis. For example, if the GATT Method of valuation is being used to generate a present value, and the valuation date is August 1, 2001, the interest rate utilized would be 30-Year Treasury Bond Rate in effect in the market on August 1, 2001. By using the interest rate in effect on the valuation date, the present value of the benefits corresponds to the value of the dollar (in the market) as of that particular date.
What is present value?
Present Value is the current worth of a stream of income to be received in the future. In basic terms, the present value, as it applies to pensions, describes the amount of money which would have to be invested or set aside by the pension plan today, so that sufficient funds would be available to pay out the pension amount throughout the employee’s years of retirement. In order to determine present value, the appraiser will employ an appropriate discount rate and estimate the length of time the payments will be received by the pensionholder.
What is a defined benefit plan?
A defined benefit plan provides a retiree with a monthly payment beginning at retirement for the remainder of the retiree’s lifetime. The benefit that is payable upon retirement is calculated using a formula. Such formula is defined within the context of the Plan. A defined benefit plan is the type of plan most commonly thought of when talking about pensions. It is paid monthly for the lifetime of the retiree starting at retirement.
What is the Deferred Distribution Method?
The Deferred Distribution Method of dividing a pension provides for the division of benefits to take place at a later date, when the benefits are actually being paid by the plan. This type of distribution is usually accomplished using a court order or Qualified Domestic Relations Order (QDRO).
What is the Immediate Offset Method?
The Immediate Offset Method of dividing a pension compares the value of the pension to the value of the other marital property. The employee will end up keeping his/her pension, and the spouse receives another asset of equal value in lieu of his/her interest in the pension. If the value of the pension is unknown, it is impossible to use the Immediate Offset Method to come up with an accurate property division.
Helpful Tips and Facts
How to split a retirement plan with a QDRO.
QDRO stands for Qualified Domestic Relations Order. It’s a court order either to your retirement plan administrator or your soon to be ex-spouse’s. It basically lays out how the retirement plan assets will be divided up. QDRO’s are used for 401k’s, TSA’s and defined benefit (pension) plans. They are not used to divide IRA’s, SEP IRA’s, deferred annuities or non-qualified deferred compensation plans. This is not something to take lightly. A qualified attorney should draft this document for you. It’s also a good idea to get a sample QDRO if possible from the plan administrator prior to drafting. Also, get the QDRO finalized prior to the divorce decree being issued.
QDRO
It is very important that the QDRO drafting process be initiated and completed as soon as possible in the divorce process, since a delay in getting the QDRO filed and accepted by the plan administrator could result in a loss of benefits by the non-participant spouse if the participant spouse dies, retires, quits, is terminated, etc. prior to the implementation of the QDRO
QDRO
QDROs are complicated, highly technical legal documents. A minor error in the language used in the QDRO or other applicable division order could result in the loss of thousands of dollars in lost benefit payments. It is very important that the QDRO drafting process be initiated and completed as soon as possible in the divorce process, since a delay in getting the QDRO filed and accepted by the plan administrator could result in a loss of benefits by the non-participant spouse if the participant spouse dies, retires, quits, is terminated, etc. prior to the implementation of the QDRO.
Retirement Accounts -- complete QDRO’s and Letters of Instruction
As somewhat of an inverse of the point on real estate above, until a Qualified Domestic Relations Order (QDRO) or Letter of Instruction pertaining to a retirement account is complete, the recipient spouse has no real claims on the money. It is important to complete these items in a timely manner to avoid payout of the funds at the ex-spouse’s death, disability, employment termination or retirement. If the employer pays out the funds and the recipient spouse’s claim isn’t yet on file, the only way to get back the recipient’s share is to go back to court. Since one never knows when one of these life events like termination or death might occur, it is important to complete them as quickly as possible.
Change the Beneficiary
After a divorce, a party should formerly change the beneficiary on any retirement instrument (such as an IRA), and not rely on state law, a divorce decree or a separation agreement to revoke the beneficiary status of a former spouse. Courts have held that despite the agreement of the parties, ambiguous language in waivers in separation agreements regarding survivor’s benefits can be insufficient to divest the designated beneficiary of his or her rights.
Don’t Forget the Pensions
It’s wise idea to get pensions appraised. Appraising a pension costs a few dollars, but pensions can be worth a great deal of money, particularly to a stay-at-home mother whose economic contribution to the marriage was child rearing. After the family home, the breadwinner’s pension may be the largest asset many couples divide when they divorce.
Pensions and Divorce With Stay At Home Moms
Many women who have been stay-at-home mothers -- women who contributions to the marriage have been noneconomic -- find themselves on the verge of the so-called "golden years" without any pension benefits other than their husband’s. Women in this situation will need a Qualified Domestic Relations Order to receive a share of the husband’s pension.
Purpose of a Domestic Relations Order
DROs and QDROs both protect nonworking spouses. A Qualified Domestic Order (QDRO) is the legal way to distribute benefits from a qualified plan such as a 401(k). It is the only legal way for a former spouse to get money from a qualified plan.
The Value of Benefit Plans in Divorce
Defined benefit plans, such as the popular 401(k)s, have cash value today, and they can be distributed by using a Qualified Domestic Relations Order (QDRO). A portion of the defined contribution plan can be transferred to a former spouse without tax consequences, and some companies allow a plan to be divided so the former spouse has an account with the company.
A Pension is a Marital Asset
In a divorce many women, particularly women who have been homemakers and out of the work force to raise children, re-enter single life without any pensions of their own. A husband’s pension is marital property and subject to distribution.
Are You Getting Part of Your Spouse’s Pension?
If so, once the divorce is final, you must draft a domestic relations order that will be signed by the judge. This document instructs the plan administrator to distribute the pension account as it is stated in your final judgment or decree for divorce. Many Alternate Payees forget to do this step, so years down the road they end up not receiving the funds they are entitled to.