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
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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
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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

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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

• 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

• 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

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RI SA q ua lifie d e mplo ye r spo nso re d pla ns a re divisib le b y QDRO

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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.

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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

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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.

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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.

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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.

HOW T HE QDRO PROCE SS WORK S

• Ag re e me nt is re a c he d a b o ut divisio n o f the Pla n
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nfo . is o b ta ine d fro m the Pla n: mo de l QDRO a nd g uide line s a nd pro c e dure s, a nd the Summa ry Pla n De sc riptio n o r fo rma l pla n do c ume nt itse lf

• T

he QDRO is dra fte d a nd se nt to the a tto rne ys, a nd the pla n a dministra to r fo r c o nditio na l pre a ppro va l, if a llo we d.

• Onc e pre a ppro va l is o b ta ine d a nd a ll a g re e to its pro visio ns, the QDRO is

e nte re d in c o urt with the Divo rc e Judg me nt/ De c re e , the n the QDRO is se nt to the pla n a dministra to r fo r fo rma l q ua lific a tio n.

• T

he pla n the n se nds no tic e o f re c e ipt to the pa rtie s, the n se nds a no the r no tic e upo n fo rma l q ua lific a tio n o r no n-q ua lific a tio n de te rmina tio n. I f q ua lifie d the pla n info rms the a lte rna te pa ye e o f the a lte rna te pa ye e ’ s rig hts a nd pro vide s pla n c o nta c t info rma tio n, a s we ll a s a ta x no tic e . T he a lte rna te pa ye e fre q ue ntly ha s the o ptio n o f a ro llo ve r o r c a sho ut.

MAI N BE NE F I T S AWARDE D

• De fine d c o ntrib utio n Pla ns
• All o r pa rt o f the a c c umula te d b e ne fit
• Ga ins a nd lo sse s o n the spe c ifie d a mo unt
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nc lude lo a ns (tre a t a s if ne ve r ta ke n) o r e xc lude lo a ns (divide o nly no n-lo a n a sse ts

• Co ntrib utio ns a ttrib uta b le to the pe rio d o f the ma rria g e ma de a fte r the va lua tio n

da te (e .g . fo rfe ite d pro fit sha ring c o ntrib utio ns, o r pro fit sha ring c o ntrib utio ns ma de in the sub se q ue nt c a le nda r ye a r.

• De fine d b e ne fit pla ns
• A po rtio n o f the a c c rue d b e ne fit (“b a sic ” b e ne fit pe r the b e ne fit fo rmula )
• A pro po rtio na te sha re o f “a nc illa ry” b e ne fits suc h a s e a rly re tire me nt supple me nts,

po st-re tire me nt c o st-o f-living a djustme nts, e a rly re tire me nt “windo ws,” e tc .

• Sur

vivor be ne fits – q ua lifie d pre re tire me nt survivo r a nnuity (QPSA) a ttrib uta b le to the

pe rio d o f the ma rria g e . Also , if the sha re d pa yme nt me tho d o f divisio n is use d, the q ua lifie d jo int survivo r a nnuity (QJSA) a ttrib uta b le to the pe rio d o f the ma rria g e .

K NOW T HE PART I CUL AR PL AN

• So o fte n the c o rre c tne ss o f the divisio n c o me s do wn to ho w we ll the b e ne fits

a nd fe a ture s o f the pla n a re unde rsto o d.

• T

he re a re inhe re nt diffe re nc e s in type s o f pla ns. E ve n whe n pla ns a re o f the sa me type , diffe re nt pla ns ma y ha ve diffe re nt fo rmula s, b e ne fits a nd fe a ture s.

• De fine d b e ne fit g o ve rnme nt (pub lic se c to r) spo nso re d pla ns a re inva ria b ly

ve ry diffe re nt fro m de fine d b e ne fit E RI SA (priva te se c to r) pla ns.

• Churc h pla ns a re no t sub je c t to a ny rule s, e ve n if the y vo lunta rily a llo w DROs
• No n-q ua lifie d pla ns ra re ly a llo w DROs, so c re a tive so lutio ns a re ne e de d.

I S T HE PE NSI ON I N PAY ST AT US

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f the de fine d b e ne fit pe nsio n is in pa y sta tus, we re the pa rtie s ma rrie d a t the time o f re tire me nt? I f so , the n the de fa ult fo rm o f pa yme nt fo r E RI SA pla ns is a jo int survivo r o ptio n, whic h if no t e le c te d wo uld ha ve to b e wa ive d in writing b y the pla n pa rtic ipa nt, with the writte n c o nse nt o f the fo rme r spo use .

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f the pe nsio n is in pa y sta tus a nd the fo rme r spo use c a n o nly re c e ive a b e ne fit fo r the pa rtic ipa nt’ s life time a nd is no t e lig ib le fo r a survivo r a nnuity, c o nside r va luing the lo st survivo r b e ne fit a nd re pla c ing it with life insura nc e .

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f the pe nsio n is in pa y sta tus, c o nside r ho w to ha ndle the fo rme r spo use ’ s sha re o f the b e ne fit until the QDRO is sub mitte d to the pla n a nd the pla n b e g ins to a c c o unt fo r future b e ne fits to the fo rme r spo use .

…MORE … DE F I NI NG MARI T AL PORT I ON

• De fining the ma rita l po rtio n
• De fine d c o ntrib utio n pla ns – will yo u b e simply dividing the diffe re nc e b e twe e n

the da te o f ma rria g e va lue a nd the da te o f divo rc e va lue , o r will yo u b e e xc luding fro m divisio n the g a ins o n the pre ma rita l b a la nc e

• De fine d b e ne fit pla ns
• Pro spe c tive c o ve rture = b e ne fit a c c rue d a s o f re tire me nt X ma rita l se rvic e / to ta l

se rvic e

• Ac c rue d c o ve rture = b e ne fit a c c rue d a s o f divo rc e (o r o the r a g re e d-to da te suc h a s

the da te o f filing o f the c o mpla int) X ma rita l se rvic e / to ta l se rvic e a s o f da te o f divo rc e

• T

ra c king me tho d = inc re a se in a c c rue d b e ne fit e a rne d a s o f da te o f ma rria g e to da te o f divo rc e

…MORE … DRAF T I NG QDROS

• Sho uld yo u dra ft QDROs? Ma yb e …
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a sy to ma ke mista ke s

• Do yo u like wo rd pro b le ms a nd puzzle s? Ho w we ll to yo u write te c hnic a l wo rks?

Ca n yo u write a n a irtig ht, una mb ig uo usly c le a r se t o f instruc tio ns using te rms o f a rt fo r the industry? Do yo u e ve n wa nt to , o r do yo u just wa nt to ma ke sure yo u unde rsta nd the issue s so yo u c a n unde rsta nd the a wa rd a nd a pply it to yo ur c lie nts’ divo rc e pla nning a nd fina nc ia l pla nning ?

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e c hnic a l le g a l do c ume nt – b e a n a tto rne y o r pre pa re fo r a n a tto rne y – ho me wo rk – se rvic e inte nsive

• Che c k with una utho rize d pra c tic e o f la w c o mmitte e o f the sta te b a r in the sta te
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& O c o ve ra g e – do n’ t le a ve ho me witho ut it, a nd ma ke sure pre pa ra tio n o f QDROs is c o ve re d!

Q & A

• Survivo r b e ne fits?
• Ma rita l po rtio n?
• Ga ins a nd lo sse s?
• L

ia b ility?

• Othe r?

PL E ASE F I L L OUT YOUR E VAL UAT I ON F ORMS

T HANK YOU !!!