HOW QDROS DI VI DE RE T I RE ME NT PL ANS ON DI VORCE OR - PowerPoint PPT Presentation

HOW QDROS DI VI DE RE T I RE ME NT PL ANS ON DI VORCE OR SE PARAT I ON & WHAT DI VORCE F I NANCI AL ANAL YST S NE E D T O K NOW I DF A Na tio na l Co nfe re nc e – Chic a g o – Ma y 5, 2016 Pre se nte d b y Ro b e rt T re a t, JD, APA

BASI C “MUST K NOWS” • Wha t is a Qua lifie d Do me stic Re la tio ns Orde r (QDRO) • Whe the r the pla n b e ne fits a re divisib le b y QDRO o r simila r Orde r • T ype o f re tire me nt pla n • Whe n b e ne fits a re pa ya b le – de fine d c o ntrib utio n pla n – de fine d b e ne fit pla n • T a xa tio n – shifts b urde n e xc e pt fo r CS; I RC (t)(2)(C) e xc e ptio n to 10% pe na lty • Va lua tio n & o ffse t vs. dividing pla ns se pa ra te ly – g a ins a nd lo sse s; size o f pla n • Ho w the QDRO pro c e ss wo rks – time line • Ma in b e ne fits a wa rde d – de fine d c o ntrib utio n pla n – de fine d b e ne fit pla n • K no w the pa rtic ula r pla n • Ha s the pa rtic ipa nt re tire d; if so , the fo rm o f b e ne fit e le c te d a nd b e ne fic ia ry

WHAT A QDRO I S • E RI SA a nd the Co de do no t pe rmit a pa rtic ipa nt to a ssig n his o r he r inte re st in a pe nsio n pla n. T he Re tire me nt E q uity Ac t o f 1984 (RE A), ho we ve r, a me nde d E RI SA to a llo w fo r a ssig nme nt o f b e ne fits pursua nt to do me stic re la tio ns ma tte rs witho ut vio la ting the a nti-a lie na tio n pro visio ns o f E RI SA, via QDRO. • A QDRO is a Qua lifie d Do me stic Re la tio ns Orde r. I t is a c o urt o rde r tha t divide s a priva te se c to r re tire me nt pla n pursua nt to sta te do me stic re la tio ns la w tha t re la te s to c hild suppo rt, spo usa l suppo rt o r ma rita l pro pe rty rig hts fo r the b e ne fit o f a spo use , fo rme r spo use , c hild o r o the r de pe nde nt o f a pla n pa rtic ipa nt. T he fo rma l de finitio n o f "QDRO" c a n b e fo und in the I nte rna l Re ve nue Co de (the Co de ) a t 26 U.S.C. 414(p ) a nd in the E mplo ye e Re tire me nt I nc o me Se c urity Ac t (ERI SA) Se c . 206(d )(3) (no w c o difie d in the U.S. Co de a t 29 U.S.C. 1056(d )(3). T he re a re pa ra lle l sta tute s a llo wing divisio n o f fe de ra l, sta te a nd munic ipa l re tire me nt pla ns. T he re g ula tio ns fo r dividing fe d e ra l pe nsio ns b y c o urt o rde r c a n b e fo und in the Co de o f F e de ra l Re g ula tio ns a t 5 C.F .R. 838. T he sta tute g o ve rning the divisio n o f milita ry pe nsio ns is the Unifo rme d Se rvic e s F o rme r Spo use Pro te c tio n Ac t (USF SPA), 10 U.S.C. §1408.

WHE T HE R PL AN BE NE F I T S ARE DI VI SI BL E BY QDRO OR SI MI L AR ORDE R • E RI SA q ua lifie d e mplo ye r spo nso re d pla ns a re divisib le b y QDRO • F e de ra l g o ve rnme nt re tire me nt b e ne fits suc h a s the Civil Se rvic e Re tire me nt Syste m (CSRS) a nd F e de ra l E mplo ye e s Re tire me nt Syste m (F E RS) a re divisib le b y Co urt Orde r Ac c e pta b le fo r Pro c e ssing (COAP). T he F e de ra l T hrift Sa ving s Pla n is divisib le b y a Re tire me nt Be ne fits Co urt Orde r (RBCO). • Milita ry re tire d pa y is divisib le b y a Milita ry Pe nsio n Divisio n Orde r (MPDO). • Sta te spo nso re d a nd munic ipa l spo nso re d re tire me nt pla ns ma y b y divide d unde r sta te sta tute s a nd lo c a l o rdina nc e s. Sta te o r munic ipa l de fine d c o ntrib utio n pla ns a re usua lly 401(a ), 403(b ) o r 457 pla ns sub je c t to QDROs. • No n-q ua lifie d pla ns mig ht pe rmit divisio n b y DRO. I f no t, a “wo rka ro und” mig ht b e re q uire d, suc h a s a g re e d to te rms fo r the e mplo ye e spo use to pa y the fo rme r spo use upo n re c e ipt whe n the b e ne fit is e ve ntua lly pa id. • I RAs – a re divisib le unde r I RC 408(d )(6); no t b y QDRO.

T YPE S OF RE T I RE ME NT PL ANS • E RI SA pla ns a re divide d into “pe nsio n” pla ns, a nd we lfa re pla ns. We a re c o nc e rne d with pe nsio n pla ns. Pe nsio n pla ns a re divide d into two type s: de fine d c o ntrib utio n pla ns a nd de fine d b e ne fit pla ns. • T he te rmino lo g y g e ts c o nfusing he re , b e c a use o utside the E RI SA la ng ua g e c o nte xt, de fine d c o ntrib utio n pla ns c a n b e e ithe r pe nsio n (T a rg e t Be ne fit o r Mo ne y Purc ha se ) pla ns, o r pro fit sha ring pla ns. Pro fit sha ring pla ns c a n b e a type o f pla n unto itse lf whe re in the e mplo ye r c a n ma ke pro fit sha ring c o ntrib utio ns, o r a pro fit sha ring pla n c a n b e a g e ne ra l b ro a d c a te g o ry e nc o mpa ssing mo st o f the de fine d c o ntrib utio n pla ns with whic h we ’ re fa milia r, suc h a s 401(k)s, sto c k b o nus pla ns, e mplo ye e sto c k o wne rship pla ns (E SOPs), 403(b )s a nd 457 pla ns. • De fine d b e ne fit pla ns c a n b e e ithe r a tra ditio na l de fine d b e ne fit pla n, o r a c a sh b a la nc e pla n. T he re a re no de fine d b e ne fit pro fit sha ring pla ns. E ve rything tha t is no t a tra ditio na l de fine d b e ne fit pla n o r a c a sh b a la nc e pla n is a de fine d c o ntrib utio n pla n. • I RAs a re no t in the a b o ve c a te g o rie s a nd a re no t E RI SA q ua lifie d pla ns, b ut the e mplo ye r o r c usto dia n mig ht re q uire a DRO to divide it.

WHE N BE NE F I T S ARE PAYABL E • De fine d c o ntrib utio n pla ns – fo r a lte rna te pa ye e ’ s unde r QDROs b e ne fits a re usua lly pa ya b le a s so o n a s a dministra tive ly fe a sib le a fte r the DRO is a ppro ve d b y the Pla n a s a QDRO. T he unusua l e xc e ptio n is fo r c e rta in de fine d c o ntrib utio n pla ns spo nso re d thro ug h a munic ipa lity o r c e rta in o f the skille d tra de s a nd the unde rlying inve stme nt is a n a nnuity. • De fine d b e ne fit pla ns – no rma lly the a lte rna te pa ye e c a n dra w b e ne fits e ithe r: a ny time a fte r the pa rtic ipa nt’ s e a rlie st e lig ib ility fo r re tire me nt (if the se pa ra te • inte re st me tho d o f divisio n is use d – the a lte rna te pa ye e ’ s b e ne fit is se pa ra te ly c a rve d o ut fro m the pa rtic ipa nt’ s b e ne fit a nd b a se d o n the a lte rna te pa ye e ’ s life time ), o r • whe n the pa rtic ipa nt c o mme nc e s (if the sha re d pa yme nt me tho d is use d – the a lte rna te pa ye e ’ s b e ne fit re ma ins b a se d o n the pa rtic ipa nt’ s life time a nd)

T AXAT I ON • A QDRO shifts the ta x b urde n to the a lte rna te pa ye e , who will g e t the I RS fo rm 1099 if the y a re the fo rme r spo use o r spo use . I f the a lte rna te pa ye e is a c hild o r o the r de pe nde nt, the n the pa rtic ipa nt still pa ys the ta xe s. • An a lte rna te pa ye e who re c e ive s a distrib utio n dire c tly fro m the pla n tha t is the sub je c t o f the QDRO is NOT sub je c t to the 10% pe na lty fo r e a rly withdra wa l. T his e xc e ptio n is lo st if the funds a re ro lle d o r tra nsfe rre d o ut o f the pla n tha t is the sub je c t o f the QDRO into a n I RA o r o the r q ua lifie d pla n tha t a c c e pts the funds, a nd the n the distrib utio n is re q ue ste d.

VAL UAT I ON AND OF F SE T VS. DI VI DI NG T HE PL ANS SE PARAT E L Y • Ga ins a nd lo sse s – the o nly wa y to a b so lute ly ma ke c e rta in the g a ins a nd lo sse s fro m a ll the de fine d c o ntrib utio n pla ns a re sha re d e q ua lly is to divide the m e a c h se pa ra te ly via QDRO fo r e a c h pla n. So me time s, ho we ve r, the re is a sma ll a c c o unt whe re the g a in/ lo ss wo uld b e ne g lig ib le . T he re ma y a lso b e c a se s whe re the pla ns ha ve ide ntic a l inve stme nts a nd a llo c a tio ns. T he re ma y a lso b e c a se s whe re the pa rtie s a re a wa re o f the po te ntia l une q ua l sha ring o f g a ins a nd lo sse s, b ut to a vo id the c o st o f pre pa ring ma ny QDROs, the y de c ide to va lue a nd o ffse t the de fine d c o ntrib utio n pla ns to minimize the numb e r o f QDROs ne c e ssa ry. • Pe nsio n va lua tio ns – usua lly the se a re re q ue ste d b e c a use the pa rtie s a nd the ir a tto rne ys wa nt a n ide a o f the va lue o f the de fine d b e ne fit pla n. I t is no t g e ne ra lly re c o mme nde d tha t de fine d b e ne fit pla ns b e o ffse t a g a inst de fine d b e ne fit pla ns b e c a use pe nsio n va lua tio ns a re b a se d o n a ssumptio ns, whic h a re b a se d o n e stima te s o f future b e ne fits. Ho we ve r, it ma y ma ke se nse to o ffse t sma ll pe nsio ns, o r to o ffse t pe nsio ns if the pa rtie s unde rsta nd the inhe re nt po te ntia l inc o nsiste nc ie s.