When should you anticipate a DRO?
There are times when the value of a pension exceeds the value of all other tradable marital assets. When this is the case, it is possible to direct a Plan to pay the former spouse’s marital portion of the retirement assets directly to the former spouse. Any such direction to a private plan must be made in compliance with the Employees Retirement Income Security Act (ERISA). Any such direction to a public plan must be made in compliance with the state or federal code which governs the particular public plan with whom you are dealing.
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What is a private pension plan versus a public pension plan?
When a pension is issued through a private company such as General Motors, IBM, various unions, AT&T, etc. it is a private pension plan.
When a pension is issued through the government, whether it be local or federal government (i.e. State of New York, U.S. Military, City of Miami, etc.) it is a public plan.
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How would a private pension be handled as opposed to a public pension?
One of the functions of ERISA is to insure that the corporations providing pension benefits are providing a fair benefit to their employees and not exploiting the designated pension funds. There are provisions within ERISA specifically relating to the distribution of pension funds to a non participant spouse. When the term Qualified Domestic Relations Order (QDRO) is used it implies that the Order is qualified under the terms of ERISA. When drafting a QDRO, we want to pay close attention to the language of the Order not only meeting the terms of the agreement and the terms of the Plan, but also the terms of ERISA.
Public pensions are not subject to the terms of ERISA. Obviously, a governmental plan does not have the same tax issues that a private plan would have. This does not mean that there are no laws governing public pensions, but rather each public pension is governed by it's own laws. One important thing to keep in mind when drafting a Domestic Relations Order (DRO) in the interest of a public plan is that the word "Qualified" and/or any reference to ERISA codes would imply that the Order is subject to the terms of ERISA. This implication would cause 99% of all public plans to reject an Order on that basis alone.
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What preparations are necessary when you are anticipating the need for a DRO?
Of primary importance to an Attorney in insuring his/her own protection is a thorough investigation into the Participant's employment history. Often a Participant has more than one pension. This is especially true in cases where the Participant is a union member. Also, in many larger corporations, commonly two or more plans exist and the Participant may be a member of one, two or several. It is very important that there is settlement language drafted which clearly states how each pension is to be distributed.
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At what point in the case should a DRO be drafted?
It would be in the best interest of all parties involved for the Attorneys to pursue the drafting of any DRO's needed immediately following the finalization of a settlement agreement. In most circumstances, the pension plan administrators will request a copy of the final decree of divorce at the time the DRO is submitted. It would be prudent to have all DRO's drafted and ready to be submitted to the pension plan(s) immediately following the signing of the final decree. This protects the intent of the parties in the event of death, termination of employment (and the possible availability of a return of any contributions made to the plan at the time of separation of service), or retirement.
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How do pensions work?
There are two basic types of pension plans: a DEFINED CONTRIBUTION PLAN and a DEFINED BENEFIT PLAN.
A DEFINED CONTRIBUTION PLAN works very much like a bank account. It has a specific value on any given date.
A DEFINED BENEFIT PLAN works very much like a promise. In most cases a plan will allow that once a participant is vested, he/she will receive an annuity based on credited service and final average compensation.
Here is an example taken from the Pennsylvania State Employees Retirement System:
.02 X YEARS OF SERVICE X FINAL AVERAGE SALARY = ANNUAL STANDARD SINGLE LIFE ANNUITY
The participant is eligible for this particular monthly benefit only if, upon leaving his/her job he/she has 3 or more years of credited service at normal retirement age or has 35 years of service prior to normal retirement age. If the Participant stops accruing benefits under the plan prior to either of these two stipulations being met, he/she will receive an annuity reduced accordingly for early retirement.
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How do I best express the division of defined contribution plan benefits through the settlement agreement?
Expressing the division of defined contribution plan benefits in settlement language should be relatively simple, keeping in mind that the plan works very much like a bank account.
Here is an example of settlement language appropriate in the case of distribution of funds from a defined contribution account:
The husband has an interest in the Jones Ltd. 401(k) Plan. The wife is entitled to (choose either _______% or $________ ) from the account balance credited to the husband on the marital property cut-off date of July 3, 1996. The wife shall be awarded her interest in the Plan plus any accretions or losses on that portion of the Plan from July 3, 1996 through the date of distribution to the wife. This intent shall be accomplished through a Qualified Domestic Relations Order.
Although a dollar amount is almost always acceptable to a Plan, and is sometimes favorable if a portion of the defined contribution plan is being used for offset purposes, when applicable the use of a specific percentage is most protective to all parties involved.
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How do I best express the division of defined benefit plan benefits through the settlement agreement?
Before embarking on the task of correctly setting forth the distribution method to be applied to a plan participant's defined benefit plan, it is prudent to be fully knowledgeable as to the relevant case law in your state. Not all states have specific case law. But in the states where there are specific case laws, it would be prudent for you to use that as your guide in drafting your agreement. Basically there are two distribution methods to be applied to defined benefit plans.
The first distribution method (referred to by LawDATA as the "Matured Full Benefit" method) allows for the pension benefit to mature and carves out a portion of the matured benefit by dividing the Participant's number of months of credited service earned during the marriage by the total number of months of service credited to the Participant as determined at the time that payments to the alternate payee commence. That fraction is then multiplied by 50 % to reflect the Alternate Payee's marital portion of the pension benefit earned during the marriage. Here is an example of a matured full benefit language for distribution of defined benefit plan benefits:
The wife has an interest in the Zachary Pension Plan. The husband shall be entitled to 50% of a fraction of the pension to be paid to him from the Zachary Pension Plan at the time that benefits become payable under the Plan. The fraction to be used shall be determined by the Plan at that time using the following formula: The number of months the Parties were married while the Participant was employed divided by the total number of months of service credited to the wife at the time that benefits to the husband are to commence. This intent shall be effectuated through a Domestic Relations Order to be drafted as soon as possible following the signing of this agreement.
The second distribution method (referred to by LawDATA as the "Deferred Vested Method") assumes that the Participant stops working on the marital cut-off date and awards the Alternate Payee a portion of the Plan Participant's pension on an "as of" basis. Here is an example of a deferred vested language for distribution of defined benefit plan benefits:
The wife has an interest in the Zachary Pension Plan. The husband shall be entitled to 50% of the pension benefits earned by the wife during the marriage up until July 1, 1997. That benefit shall be paid to the husband by the Zachary Pension Plan at the time that benefits become payable under the Plan. This intent shall be effectuated through a Domestic Relations Order to be drafted as soon as possible following the signing of this agreement.
Please note that in both examples provided we used neither dollar amounts nor references to lump sum distributions. Occasionally, defined benefit plans allow for dollar amount and/or lump sum distributions, but it is so infrequent that we strongly recommend avoiding all references to either. A common scenario is that the intent of the agreement simply cannot be met under the terms of the plan and time and money are wasted in renegotiating a new agreement regarding the pension. We strongly urge you to avoid that situation by using language that states a formula that is to be implemented using the pension plan's guidelines.
Another extremely important factor to note is that, although the discrepancy in language may appear to be only a subtle nuance, the result is often a tremendous difference in value. With rare exception, allowing the pension to mature and subsequently carving out the marital portion allows for a significantly larger benefit than cutting off the accrual of benefits.
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What are survivor benefits?
Survivor benefits are the benefits paid to an alternate payee under the pension plan in lieu of pension benefits in the event of the participant's death. When preparing an agreement in anticipation of a DRO, survivorship provisions should always be considered. There are two kinds of survivorship provisions. There are pre-retirement survivorship provisions and post-retirement survivorship provisions.
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How do pre-retirement survivor benefits work as opposed to post-retirement survivor benefits?
Pre-retirement survivor benefits, generally speaking, are provided by an ERISA covered plan at little or no cost to the participant. Pre-retirement survivor benefits provide for a benefit payment to a participant's designated survivor in the event of the participant's death prior to his/her election to commence receiving pension benefits under the plan. When dealing with a private pension plan, pre-retirement survivorship benefits should always be provided to an alternate payee in a DRO whether or not they were negotiated. Provisions for the alternate payee to be named as beneficiary of her marital portion of the participant's pre-retirement survivor benefits are the only way to insure that she receive the pension benefits awarded to her. An absence of these provisions in the event of the participant's pre-retirement death would cause the alternate payee to receive absolutely nothing from the plan.
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How do post-retirement survivor benefits work as opposed to pre-retirement survivor benefits?
Post-retirement survivor benefits work similarly to an insurance policy that is purchased through the pension. Normally the gross benefit is reduced by 7% to 10% in order to subsidize the post-retirement survivor benefit provisions. Post-retirement survivor benefits provide benefits to a designated beneficiary of a plan participant in the event of the participant's death after retirement. These provisions are applicable to an alternate payee only if he/she is specifically named as a designated beneficiary through a DRO. It is particularly important to address this issue with a public plan as public plans do not normally calculate a separate benefit based on an alternate payee's actuarial lifetime. In most cases involving a public plan, the only way to provide an alternate payee with benefits over his/her lifetime is to direct (through a DRO) the participant to retire under the post-retirement provisions of the plan, naming the alternate payee as beneficiary. In most cases the portion of the survivor benefits awarded to the alternate payee can be limited to his/her marital portion.
A fact that should be noted is that if a participant is married at the time that he/she retires, he/she will automatically be paid under the post-retirement provisions of the plan unless his/her spouse has waived their rights to this election.
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What is your schedule of fees?
For one flat fee of $500.00, we will prepare any Order and nurse it through the plan approval process. This fee covers any rewrites as well as time spent in discussions with plan administrators in an effort to finalize wording and/or acceptance of an Order. It is not unusual to expect an Order to require one or two rewrites. We feel our inexpensive service is a worthwhile investment to any attorney seeking a helping hand with the intricacies of QDRO processing.
If a Plan provider will accept a consolidated Order, there is no additional charge for language addressing more than one plan in which an individual participates. Any additional Orders, generally incurred as the result of participation under multiple and exclusive plan providers, will incur a fee of $350.00 for each additional Order.
Pension appraisals are $200.00 for each appraisal using either method (deferred or matured). For an additional $50.00 we will provide an appraisal using both methods, or an appraisal for more than one date (i.e. separation and divorce), or provide rush service via fax or express shipment. We will also charge an additional $50.00 if a request is made to re do an appraisal because of a clerical error not of our own making.
We are also available to provide testimony, in most cases telephonic. Please feel free to write or call us to discuss your individual needs in these cases.
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Why should I trust LawDATA with the preparation of my client's QDRO?
We have been preparing Qualified Domestic Relations Orders for our attorney clients since 1985. We are not attorneys but rather provide specific retirement benefit valuation and distribution consulting services to attorneys for use in dissolution cases. Over the years I have presented many Family Law CLE programs incident to the valuation and distribution of retirement benefit assets in divorce cases. Among others, I have presented programs for Bar Associations in New Jersey, North Carolina, Florida, Delaware, New Hampshire and Indiana. Over the years we have drafted more than 4000 orders that have been accepted and approved by the presiding Courts and Plan Administrators for the proposed Domestic Relations Order.
We have had Professional Liability insurance since 1988 and fortunately have never had to file a claim. We have coverage through National Union Fire Insurance Company of Pittsburgh, PA to the extent of $500,000. This is sufficient for any possible liability we could incur either in the preparation of a Qualified Domestic Relations Order or a pension appraisal. In the areas for which we provide services, the greatest potential liability is generally the failure on the part of an attorney to obtain a Domestic Relations Order that meets the terms of the settlement and is subsequently approved by the Plan Administrator. That is our primary purpose and the specific problem that we solve for our attorney clients.
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Appropriateness of Divorce Related Pension Valuations Using GATT Guidelines
In 1994 the GATT treaty governing international trade was adopted. Included in the treaty were provisions requiring U.S. ERISA governed pension providers to increase the level of pension plan funding necessary to assure the financial soundness of the Pension Benefit Guaranty Corporation's (PBGC) payment guarantees to vested U.S. pension participants. The projected funding level for plans that were deemed "underfunded" was increased by setting new interest rates (i.e., 30 year T-Bill rates) to rates that are lower than the interest rates that plans had generally been allowed to use for funding assumptions in the past. For plans that are terminated, either voluntarily or involuntarily (bankruptcy?), the lump sum values of the benefits to be paid to participants will be based on these rates. The new interest rates are higher than those used by the PBGC in the past. This results in lower pay-outs to terminated plan participants (higher interest rate assumptions = lower lump sum payments, lower interest rate assumptions = higher lump sum assumptions) and higher funding levels of Defined Benefit pensions.
None of this applies to valuations of retirement benefits incident to marital dissolution. The purpose of a pension appraisal is to determine the "real world" cost of purchasing the non-participant spouse's share of the pension benefits that have been earned during the marriage and are being retained by the plan participant. These values are set in the annuity marketplace. They are priced according to the projected long term investment returns and overhead of a private annuity provider (i.e., insurance company). The required funding level of ERISA governed plans is based on each plan's investment history and its future projected investment returns and actuarial assumptions. These projections mean nothing to somebody who has to go into the private annuity market to purchase a single premium annuity.
These new funding provisions were inserted into GATT to utilize the "fast track" provisions of the trade bill to avoid lobbying on the part of corporate plan providers who would have vigorously fought changes in pension benefit funding levels if they were in a "stand alone" congressional bill and not part of the GATT reforms which corporate America generally favored. There were many similar GATT "provisions" which had nothing to do with International Trade that were inserted into the Bill to take advantage of "fast track". Required plan funding levels are meaningless to a divorcing non-participant spouse who will not be receiving benefits from that plan.
I hope the foregoing puts the term "GATT valuation" in perspective. Please call if you have any questions.
Paul R. Commerford
President, LawDATA, Inc.
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