For Attorneys and Mediators:
Quick Overview of Defined Contribution Plans (DC Plans):
· Most plans, but not all, allow an immediate lump sum distribution. (Some union plans will not distribute until participant reaches earliest retirement age, and some portions of the TIAA CREF plan will make payments over time, not in a single lump sum )
· Even if there’s not an immediate distribution, each party gets a separate interest in the plan. The division is done, and neither has to deal with the other again.
· The 10% early distribution penalty does not apply to distributions from a qualified plan by QDRO. (IRAs are not qualified plans – penalty will apply, even if you use a QDRO)
· If parties are trying to divide the marital portion, please make the parties stipulate to the premarital value. Many plans’ records only go back a few years.
· IRAs – should not need a QDRO to divide as long as the judgment clearly identifies the account (Fidelity IRA f/b/o John Doe, account number xxxxx1234). The transfer must be from IRA trustee to IRA trustee or the bank will generate a 1099, subjecting the account holder to taxes and penalties, and making the recipient’s share ineligible for rollover into an IRA.
· Annuity IRAs – These are IRAs too, but be aware there is often a steep fee for transferring or dividing the annuity (deferred sales charges)
Considerations when dividing a defined contribution plan:
· Specify a Percentage or Dollar amount to be assigned
· Specify a Valuation Date
· State whether earnings/ losses apply – (Kremenitzer .v Kremenitzer, 81 Conn. App. 135 (2004) Judgment must specify that the assigned benefit includes investment experience, otherwise the assignment will be based on the valuation date set forth in the judgment, regardless of what happens in the market between the date of divorce and the date of transfer.
· Specify whether division applies to gross or net account balance
· Address whether the plan participant is 100% vested, and, if he isn’t, specify whether assignment (if a percentage) applies to the vested balance or the total balance
· Specify who pays for the QDRO
· Sample Language:
- Plaintiff is assigned $xx from the Defendant’s 401(k) savings plan, valued as of the date of divorce, along with investment gains and losses thereon. The transfer will be by QDRO and the parties shall share the cost equally.
- Plaintiff is assigned xx% of the Defendant’s 401(k) savings plan, valued as of the date of divorce, along with investment gains and losses thereon. Plaintiff’s share shall be based on the gross account balance as if there were no loans outstanding. (or on the net account balance after reduction for any loans outstanding). If the Defendant is not 100% vested, the Plaintiff’s share shall be based on the total balance. The transfer will be by QDRO and the parties shall share the cost equally.
Child Support QDROs
- Typically applies to defined contribution plans.
- Child support is not taxable income, so plan will withhold federal income tax and report distribution under the Participant’s social security number.
- Helpful to both parties, since it keeps the obligor out of jail, and provides ready cash for the custodial parent. Make sure the plan will allow an immediate lump sum distribution.
Quick Overview of Traditional Defined Benefit Pension Plans
- You are assigning a right to a future stream of payment rather than a present lump sum. You cannot assign a lump sum from a traditional pension.
- Know whether plan will allow a separate interest approach . As long as the plan participant is not in pay status, ERISA –qualified plans will allow the assignment of a separate interest..
- Know when benefits can commence. Under separate interest, the former spouse usually can commence benefits when the plan participant reaches earliest retirement age, typically age 55.
Considerations when dividing a defined contribution plan:
- Specify a Percentage to be assigned. Be extremely cautious if you are assigning a monthly dollar amount. This will only work if benefits are to be paid under the shared payment approach. If you are using the separate interest approach, the plan administrator will have to actuarially adjust the benefit to be paid for the life of the former spouse.
- Specify a Valuation Date – are you assigning pension benefits earned up to the date of divorce or through the date of retirement?
- Address Cost of Living Adjustment: Not all plans have COLAs, but the possibility should be addressed. COLAs are generally considered to be part and parcel of the pension.
- Address Early Retirement Subsidies: An Early Retirement Subsidy is the amount by which the early retirement reduction in the participant’s benefits using the Plan’s early retirement factors is more generous than the reduction using the Plan’s regular actuarial assumptions.
Considerations for dividing Cash Balance Plans
- This is a defined benefit plan. Do not mistake it for a 401(k).
- Most cash balance plans will not make a distribution to an Alternate Payee until the Participant has reached earliest retirement age (typically age 55). There may be a reduction for early distribution .
- Many plans have both a cash balance component and a final average pay component. You can’t assume the CB statement covers everything. Some plans are converting into Cash Balance, some freeze the defined benefit plan and start a cash balance plan, and some pay the higher of the two but not both.
Two Approaches for Dividing Defined Benefit Plans:
- You can divide a traditional pension plan under the separate interest (carve out) method or under the shared payment
- In Connecticut, the typical assignment is a percentage of the benefits earned by the participant as of the date of dissolution. This approach is acceptable for all qualified plans, as well as the state teachers, but does not work for state or federal employees, military pensions or for the MTA pension (see chart). If you want to limit the assignment to the date of divorce for those plans, you must be able to determine the monthly benefit earned as of the valuation date used in the divorce..
- Separate Interest: All qualified defined benefit plans allow the separate interest approach, as long as the plan participant is not yet in pay status. That’s just about everyone but public servants (municipal, state and federal government, church, railroad employees, among others).
- The plan administrator carves out the assigned benefit and adjusts that benefit to be payable over the life of the alternate payee.
- The alternate payee can start benefits any time on or after the Participant’s earliest retirement age, even if the Participant is still working. (Earliest retirement age is the earliest age the participant could commence benefits if he terminated employment. It’s usually age 55 or 62.)
- Separate interest is the most popular way to divide a DB plan. The alternate payee is not affected by anything the participant does after the divorce and vice versa.
- You should not assign survivor benefits if you’re assigning a separate interest. The alternate payee will receive benefits regardless of the participant’s life or death, so it’s not necessary and could result in a double dip.
- Shared Payment (also known as stream of payment): Payments are made to the alternate payee if, as and when payments are made to the participant. If the alternate payee dies first, future monthly payments revert to the participant.
- Most public servant pensions only allow shared payments. For example, the State Employees Retirement System (SERS), State Teachers, Federal Employees Retirement System (FERS), Civil Service Retirement System (CSRS), Metro North (MTA) Pension, and many town plans will only allow payments to be made for the life of the participant. Survivor benefit provisions for each of these plans should be addressed.
- Payments to the alternate payee will not start until the participant retires.
- Payments will be made for the life of the participant. Survivor benefits are considered a separate benefit and must be specifically assigned. You must deal with pre-retirement and post-retirement survivor benefits.
- If you assign pre- retirement survivor benefits, you should understand what, if any benefits might be payable on the plan participant’s pre-retirement death
- If you assign post- retirement survivor benefits, you should understand that the survivor benefit will probably be a percentage of the pension valued at retirement, whereas the assigned portion may be based on the benefit accrued as of the date of divorce. If the marriage is brief, or if retirement is many years off, survivor benefits may not be appropriate.
- There are some plans (municipal plans) that will not, under any circumstance, pay survivor benefits to a former spouse.