QDRO’s * PENSIONS * DIVORCE
A Qualified Domestic Relations Order (QDRO) is the end of the process pursuant to which a Domestic Relations Order is reviewed by a Plan Administrator and determined to be in compliance with the Retirement Equity Act. As a result of the compliance determination by the subject Plan’s Administrator the Domestic Relations Order is thereafter treated as a Qualified Domestic Relations Order. A QDRO is the instrument required to transfer pension assets from a Titled Spouse to the Non-Titled Spouse who pursuant to the Retirement Equity Act is termed “Alternate Payee”. A QDRO is the culmination of a process allocating the marital/community property portion of the pension.
Defined Benefit Pension Plans
The statutory definition is found at 26 USC 414(j): the term "defined benefit plan" means any plan which is not a defined contribution plan. Reference to the statutory definition of defined contribution plan is not illuminating, see 26 USC 414(i):
the term "defined contribution plan" means a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account.
In a basic sense a Defined Benefit Plan is:
A Retirement Plan that provides the Participant with a definitely determinable periodic (generally monthly) annuity that is payable over the lifetime of the Participant. A participant who is married at the time of his or her retirement must elect to receive his or her annuity in the form of a Joint & 50% Survivor Annuity.
These monthly annuities are designed to begin at the participant’s “normal retirement age”, however, many employers permit (some even encourage) early retirement. The monthly retirement benefit paid to a participant is based on a combination of factors found in that portion of the Plan Document describing “Plan Benefits”. The three most significant factors in the determination of a participant’s monthly accrued benefit (this term is defined below @ “Foundation Terms to Define) are: years of service, average compensation (generally a three or five year average) and an annual rate of accrual (generally between 1% and 2.6%). Note that in the determination of retirement benefits of Law Enforcement & Firefighters, averaging of salary is not typical. Plans for these individuals, generally provide for a benefit based on the Member’s final year of compensation. Moreover, Defined Benefit Plans Plans do not offer a Lump Sum Option to retiring participants. In virtually all Defined Benefit Plans the retiring employee must elect some form of monthly annuity.
In the great majority of ERISA plans the entire cost of the plan is assumed by the employer. This is not true of Federal and State/Municipal plans which invariably require employee contributions. The attorney is alerted to the fact that there is no actuarial correlation between employee contributions and the cost of the retirement benefits ultimately paid to the retired employee. Be alert to those who equate employee contributions with the retirement benefit of the employee. The employee’s contribution to a plan represents a small part of the total cost of his or her monthly benefit.
Forms of Settlement regarding pension assets: “Immediate Offset” & “Deferred Distribution”
The following two terms relate to settlement options regarding the division of a defined benefit pension plan’s assets upon divorce.
Immediate Offset requires a calculation of the Titled-Spouse’s monthly accrued benefit (as of your jurisdiction’s end of marriage date) and a subsequent calculation to compute the present cash value of this monthly accrued benefit. The present cash value so established is then used as an “offset” against other assets; for example the Husband waives all rights to the Wife’s pension in exchange for the Husband being given full title to a piece of property. Pursuant to this settlement mode, a Domestic Relations Order is not required. Naturally, the experienced attorney will structure this “offset” of assets to comply with 26 USC 1041(a) [Transfers of property between spouses or incident to divorce].
Deferred Distribution does not require any calculation of present cash value since any actual distributions to an Alternate Payee (Non-Titled Spouse) from the pension plan take place in the future. Pursuant to this settlement mode an Alternate Payee is awarded all or a portion of the pension benefits of the Titled-Spouse. Observe,
ERISA does not bar an assignment to an Alternate Payee of 100% of the current or future pension of the Titled-Spouse. The formula to determine that portion of the pension benefit awarded to the Non-titled Spouse is a function of each jurisdiction’s case and or statute law. In Florida (Boyett v. Boyett, 703 So. 2d 451), Pennsylvania (Berrington v. Berrington, 633 A.2d 589) and Texas (Berry v. Berry, ) this allocation of benefits formula does not advantage the Non-titled Spouse. In virtually all other jurisdictions an alternative allocation of benefits formula is used. This alternative formula advantages the Alternate Payee in virtually all scenarios. It is emphasized that although the above three decisions call for an allocation of pension benefits format that is adverse to the interests of an Alternate Payee, there is no mandate that such formula be applied. There is ample opportunity for the creative practitioner to negotiate and draft adroitly in order to bring about outcomes supportive of his or her client.
RELATIONSHIPS: PROPERTY SETTLEMENT AGREEMENT AND A FINAL JUDGMENT OF DISSOLUTION OF MARRIAGE
The terms and conditions of a Domestic Relations Order are subject to the language of the underlying instrument, i.e. the Property Settlement Agreement or the Final Judgment of Divorce. The award to the Alternate Payee provided for in a Domestic Relations Order is delineated and becomes immutable as a result of the provisions of such underlying instrument. Attorneys crafting Domestic Relations Orders are limited in scope and content by the text of the Agreement or Decree. Absent a judicially imposed settlement, the Property Settlement Agreement is the controlling instrument and the sole document to be relied upon in the preparation of the Domestic Relations Order. Upon completion of the Agreement it must be established beyond any doubt that the Agreement represents the conclusion of negotiations regarding the pension asset. No post Agreement modification is possible without written agreement between the parties. Troyan, Inc. urges the practitioner to be clear:
A Domestic Relations Order is an instrument of communication to a Plan Administrator. It is not an opportunity to renegotiate the settlement.
If an attorney has permitted language adverse to his or her client’s interest to be inserted into the Property Settlement Agreement, that attorney is bound by his or her “bad deal”. Troyan, Inc.’s experience as a result of preparing more than 12,000 Orders is that too few practitioners appreciate the binding nature of a Property Settlement Agreement. The shock of inadequate preparation of the Property Settlement Agreement does not become apparent until the practitioner begins crafting the Domestic Relations Order. At this point it is too late to remedy flawed writing., Understandably, Property Settlement Agreements are often entered into after days of protracted and exhausting negotiations. Alternatively, settlement is the outcome of multiple exchanges between counsel, each under great pressure from their clients to complete the negotiations. Absent full knowledge of the plan(s) subject to negotiation and much preparation, acrimonious or tense negotiations tend to produce drafting flaws not fully anticipated by either attorney at the time the Property Settlement Agreement is prepared. Attorneys are encouraged to negotiate and craft settlements on the basis of comprehensive preparation and full knowledge of the subject plans. Because few family lawyers are also specialists in pensions, mathematics and Domestic Relations Orders you are encouraged to retain the services of an attorney who is experienced in these arcane areas. Again, it is suggested that the non-lawyer “expert” be avoided. A Domestic Relations Order, which is legal instrument should be prepared by an attorney.
Troyan, Inc. CAN HELP
Consult with us prior to finalizing negotiations and execution of the Property Settlement Agreement. As is repeated throughout the text, we provide Pre-Settlement Drafting language. Attorneys utilizing these services are provided with the precise language they require to attain their goals. Our support services are predicated on extensive discussions with retaining counsel and analysis of relevant underlying documents, e.g. the Pension Plan and Trust of the subject pension. We believe the family practitioner is disadvantaged by retaining a non-lawyer drafting service to prepare a legal instrument a “Domestic Relations Order.”
Difficult, stressful negotiations are commonplace, nevertheless, the experienced practitioner must be prepared to effectively delineate his or her clients positions in such manner that minimizes client exposures. The inexperienced practitioner fails to focus on the immediate task of a properly crafted Agreement. A well crafted Agreement is the basis for a well crafted Domestic Relations Order! The time to negotiate and implement a strategy that is supportive of your client is prior to completion of the Property Settlement Agreement. In the discussion that follows key components of the Property Settlement Agreement are developed. The provisions of the Property Settlement Agreement are then incorporated or merged into the Final Judgment of Dissolution of Marriage. The Plan Administrator is then informed of the pension components of the settlement by receipt of a Domestic Relations Order. Upon the Plan Administrator’s determination that the Domestic Relations Order is in compliance with the Retirement Equity Act , the Order becomes a Qualified Domestic Relations Order.
Drafting Formats: Deferred Distribution
ONCE AN ATTORNEY HAS DETERMINED THAT DEFERRED DISTRIBUTION IS THE PREFERRED SETTLEMENT MODE, HOW DOES HE OR SHE STRUCTURE THE PROPERTY SETTLEMENT AGREEMENT TO ADVANTAGE HIS OR HER CLIENT. MOREOVER, THE ATTORNEY MUST BE CERTAIN THAT THE TEXT OF THE ALLOCATION OF BENEFITS PROVISION OF THE PROPERTY SETTLEMENT AGREEMENT ACCURATELY REPRESENTS THE INTENT OF THE PARTIES?
Regarding a Deferred Distribution Settlement, there are two unique and very different formats available to an attorney. It is to be noted that the “Allocation of Benefits” section and the “Survivor/Death Benefits” must be covered separately in the Property Settlement Agreement. Do not try to award both of these components to an Alternate Payee in the same section of the Property Settlement Agreement. Each component must be clearly and separately enumerated, leaving no doubt as to the precise nature of each award to an Alternate Payee.
Qualified Defined Benefit Plan
Allocation of Pension Benefits
Here we discuss negotiating options and drafting strategies when the settlement mode is Deferred Distribution and a Qualified Domestic Relations Order or equivalent instrument (for Federal, Military, Rail Road, State plans) is required in order to implement an award to an Alternate Payee. Clearly statute and or case law are factors in determining the format of the Coverture Fraction to be inserted into the Property Settlement Agreement. However, eighteen years of QDRO experience reveals that inadequate preparation, flawed drafting or carelessness results in an allocation of benefits provision that is inconsistent with the prevailing law of your jurisdiction. Such uniformed or careless drafting of the Property Settlement Agreement will result in an allocation of benefits formula that surprises and operates to the detriment of at least one of the parties. At best this carelessness generates embarrassment; at worst it will lead to new costs to the client and protracted negotiations or litigation. Such unpleasantries can be avoided if the attorney considers the suggestions made herein.
ALLOCATION FORMATS - COVERTURE FRACTIONS
Coverture Fraction: A procedure to compute the marital/community property portion of the Titled-Spouse’s pension benefit
Regarding Defined Benefit Plans, there are two formats to compute the marital/community property component of the pension. Since we are using a fraction, we will have a numerator and a denominator. What is essential to recognize is:
- the denominator of each fraction is different.
- to apply the Coverture Fraction the attorney must be clear on the term “Referencing Benefit”.
Referencing Benefit Defined:
As the expression “fraction” indicated it is derived from a larger sum. The sum against which the Coverture Fraction is multiplied is the referencing benefit. In the Traditional Coverture Fraction (“Time Rule”) the referencing benefit is the Titled Spouse’s monthly accrued benefit computed as of the jurisdiction’s end of marriage date (e.g. Date of Separation, Date of Filing of Summons or Complaint, etc).
Regarding the Fixed Dollar Coverture Fraction, the “referencing benefit” is the actual monthly accrued benefit of the Titled Spouse as of the date his or her pension payments actually begin.
- Traditional Coverture Fraction (“Time Rule”)
- Fixed Dollar Coverture Fraction
Traditional Coverture Fraction “Time Rule” (Qualified Defined Benefit Plan)
Total period of time the parties were married and the Titled-Spouse was accruing a benefit up to the End of Marriage Date.
Total Period of time the parties were married and the Titled-Spouse was accruing a benefit under this Plan.
Fixed Dollar Coverture Fraction (Qualified Defined Benefit Plan)
Total period of time the parties were married and the Titled-Spouse was accruing a benefit up to the End of Marriage Date.
Total period of time the Titled-Spouse was accruing a benefit up to the End of Marriage Date.
Most states with the notable exceptions of Florida (Boyett v. Boyett, 703 So. 2d 451), Pennsylvania (Berrington v. Berrington, 633 A.2d 589) and Texas (Berry v. Berry, 647 S.W.2d 945) use some form of the Traditional Coverture Fraction, however New Jersey as a result of Faulkner v. Faulkner, 824 A.2d 283, may have effected a retreat from the Traditional Coverture Fraction (“Time Rule”).
- Since most jurisdictions endorse some form of the Traditional Coverture Fraction, language providing clear and convincing documentation, establishing beyond doubt that the parties intended to use the Traditional Coverture Fraction (“Time Rule”) MUST be inserted into the Property Settlement Agreement. Absent such language in the Property Settlement Agreement it is likely that at the time for preparation of the Domestic Relations Order controversy will emerge regarding the nature of the size and form of the award to the Alternate Payee. If the language of the Property Settlement Agreement is ambiguous or worse, it is likely costly and time consuming disputes will arise. The intent of the scribe is not to be divined, what will be dispositive, will be the “plain language of the Property Settlement Agreement. When the operative document is unable to clearly speak for itself problems ensue. Troyan, Inc., cannot overemphasize the importance of crafting and inserting proper language into the Property Settlement Agreement to clearly and conclusively establish the size and form of the award to an Alternate Payee. It is a poorly crafted Property Settlement Agreement not a Domestic Relations Order that causes complications and expense. LOOK TO Troyan, Inc.’s PROPERTY SETTLEMENT AGREEMENT LANGUAGE SERVICES TO AVOID THIS TYPE OF PROBLEM.
ALLOCATION FORMATS - ILLUSTRATED
To illustrate: consider the following provisions of a Property Settlement Agreement:
The Wife is be entitled to 50% of the benefit earned from the date of marriage up to the date of the filing in this action
(June 22, 2002)
The Alternate Payee is entitled to 50% of the marital/community property portion of the pension benefit determined as of June 22, 2002.
In states clearly endorsing the Traditional Coverture Fraction (“Time Rule”) attorneys often and unwisely consider either of the above provisions an assignment to the Alternate Payee of 50% of the marital/community property portion of the ACTUAL pension paid to the Titled-Spouse. The term “actual” is emphasized as that term is the key to a Traditional Coverture Fraction award to an Alternate Payee. The inexperienced attorney representing the non-titled spouse incorrectly assumes that either of the above provisions will be interpreted as follows:
The Plan Administrator shall determine the actual monthly benefit of the Titled-Spouse at the time of his retirement.
The benefit determined at Step I, shall be multiplied by a Coverture Fraction. The numerator of this fraction is the time between the date of hire (December 28, 2002 and the end of marriage date (21.48 years). The denominator shall be the Titled-Spouse’s total years of service. The product of this calculation represents the marital/community property portion of the pension.
The Alternate Payee shall be given 50% of the product of the Step II, calculation.
Let us analyze the above provisions so that the flaws inherent therein may be exposed.
- In each jurisdiction endorsing some form of Traditional Coverture Fraction there is a leading decision affirming such Coverture Fraction. In the above provisions there is no saving reference to such decision. It is our view that ambiguous or otherwise flawed language can be cured by a case reference and language providing that the format herein described is to be consistent with such decision. In New York a reference to Majauskas (463 N.E.2d 15) or in California a reference to Judd (137 Cal. Rptr. 318) would be critical. The case reference alone has in many instances been sufficient.
- The literal language of the Agreement, absent a referencing decision to the contrary requires the calculation of a finite benefit. There is no basis for a calculation of a Traditional Coverture Fraction benefit.
Regarding the above scenarios an impartial party called upon to compute the monthly benefit to be paid to the Alternate Payee can reach but one conclusion; the above language can only be interpreted to provide the Alternate Payee with a finite and not a formula benefit. The impartial person making the calculations will proceed as follows:
Compute the monthly accrued benefit of the Titled-Spouse as of June 22, 2002.
Based on the specific and finite monthly benefit computed at Step A, above the Alternate Payee is to receive 50% of this benefit.
THE ECONOMIC IMPACT OF FLAWED DRAFTING - ALTERNATE PAYEE
To infuse reality into this analysis let us assume that the Titled-Spouse is a Postal employee whose salary for pension calculation purposes on June 22, 2002 was $48,693.30. Further assume that based on the U.S. Postal Service (Civil Service Retirement System) benefit formula the Titled-Spouse’s monthly accrued benefit at the end of marriage date was $1,591.05. The Alternate Payee was to be given 50% her monthly benefit is: $795.53. Based on service to the end of marriage date the Titled-Spouse will retire at age 60 on January 4, 2018. On that date (6/4/2018) the Non-titled Spouse will begin to receive her monthly benefit of $795.53. The valuation date in this matter was October 25, 2002. As of this valuation date the present cash value of the Non-titled Spouse’s monthly accrued benefit was $78,578.46.
Shortly after the Domestic Relations Order in this matter was accepted by the Civil Service Retirement System, the Alternate Payee was advised by a friend that the Domestic Relations Order in her matter did not conform to the generally accepted format in her state. Rather, the Alternate Payee’s jurisdiction followed the Traditional Coverture Fraction (“Time Rule”) format.
Needless to say the situation deteriorated from that point and the Non-titled Spouse instituted an action against her attorney for the loss due to the attorneys failure to use the proper form of Coverture Fraction. In support of her position the Non-titled Spouse presented the following analysis.
Wife’s Analysis in support of her malpractice claim against her former attorney.
- Based on the Titled-Spouse’s salary history his average annual rate of salary increase was 2.5%.
- Based on an assumed retirement age of 60, reasonable rate of interest and mortality the Titled-Spouse’s monthly accrued benefit at age 60 would be: $4,234.12
- Based on a Traditional Coverture Fraction of 58.02% the marital part of this monthly benefit is $2,456.75.
- Assuming an award to the Non-titled Spouse of 50% of the marital part of the ACTUAL monthly benefit of the Titled-Spouse the award to the Alternate Payee beginning at the Titled-Spouse’s age 60 is: $1,228.38.
- The present cash value of the Alternate Payee’s monthly benefit as of the valuation date was: $175,757.85.
- The loss to the Alternate Payee due to her attorney’s careless drafting is: $96,539.79.
Providing for a Fixed Dollar Coverture Fraction is generally to the advantage of the Titled Spouse. There is, however, a difficult to anticipate contingency that operates to the detriment of the Titled Spouse:
Absent saving language the early retirement of the Titled Spouse in a case using a Fixed Dollar Coverture Fraction results in a disproportionate reduction to the benefit otherwise payable to the Titled Spouse.
When your Property Settlement Agreement uses a Fixed Dollar Coverture Fraction it becomes the duty of the attorney representing the Titled-Spouse to be certain that there is language in the Property Settlement Agreement protecting the Titled-Spouse from an unanticipated and substantial reduction in benefit. Consider the following.
Foundation, Terms to Define
- Monthly Accrued Benefit
- Early Retirement Reduction Factors
- Subsidized Early Retirement
Monthly Accrued Benefit;
The ERISA definition of “accrued benefit” is found at 26 USCS 411(a)(7)(A)(i), and provides as follows:
the term "accrued benefit" means--
(i) in the case of a defined benefit plan, the employee's
accrued benefit determined under the plan and, except as
provided in subsection (c)(3), expressed in the form of an
annual benefit commencing at normal retirement age,
The statutory definition of normal retirement age is found at 26 USCS 411(a)(8), which reads:
the term "normal retirement age" means
the earlier of--
(A) the time a plan participant attains normal retirement age
under the plan, or
(B) the later of--
(i) the time a plan participant attains age 65, or
(ii) the 5th anniversary of the time a plan participant
commenced participation in the plan.
For ERISA plans the stand alone term “monthly accrued benefit” would be interpreted by pension and tax law practitioners as defined above . We suggest that the statutory definition of “monthly accrued benefit” as stated above be assumed for Family Law purposes.
Earliest Retirement Age;
This term is defined at 29 USC 1056(d)(3)(E)(ii)
the term "earliest retirement age" means the earlier of--
(I) the date on which the participant is entitled to a distribution under the plan, or
(II) the later of the date the participant attains age 50 or the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.
Early Retirement Reduction Factors;
Actuarially Reduced Early Retirement Benefits.
Defined Benefit Plans are actuarially funded. This means that the cost to provide each employee’s benefit is funded by annual employer contributions. This cost is based on the assumption that all employees will remain with the firm until their Normal Retirement Age. Clearly, if an employee retires prior to his or her Normal Retirement Age the plan has not had the time to build up the funds necessary to pay for the employees retirement. Hence, when an employee retires prior to Normal Retirement Age the smaller amount accumulated will provide that employee a smaller monthly benefit. The amount of reduction in benefit to an employee who retires prior to his or her Normal Retirement Age is termed the “Early Retirement Reduction Factor”. If the Early Retirement Reduction Factor is determined actuarially it is generally between 6% and 8% for each year of retirement prior to Normal Retirement Age. Assuming an annual actuarial reduction of 7% and Normal Retirement Age of 65, the Early Retirement Reduction Factor for an individual retiring at age 55 would be 7% multiplied by 10 years or 70%. Based on this reduction the employee retiring at age 55 would receive 30% of his total accrued benefit. Due to the massive reductions caused by actuarial reductions employees rarely when the reduction to the benefit is actuarially determined.
Subsidized Early Retirement.
No Actuarially Reduced Early Retirement Benefits.
Although Defined Benefit Plans are actuarially funded, there is a method to offset the large reduction to the benefit payable to an employee who retires prior to his or her Normal Retirement Age. The method used by employers to encourage the early retirement of its mature employees is to apply an early retirement reduction percentage that is less that the actuarial reduction. In effect the plan is “subsidizing” the employees retirement. For example if the actuarial reduction percentage was 7%, then a subsidized early retirement reduction rate would be any percentage less than 7%. Clearly, if the percentage of “subsidy” is too small there will be little incentive to retire early. Typical “subsidized” reduction percentages are in the range of 2% - 4%. If the Subsidized Early Retirement Reduction Factor for an individual retiring at age 55 was 3%, the total reduction for an individual retiring at age 55 (whose Normal Retirement Age was 65) would be 3% multiplied by 10 years or 30%. Based on this reduction the employee retiring at age 55 would receive 30% of his total accrued benefit. Lowering the percentage of reduction to the monthly accrued benefit is only one form of subsidy. Some plans encourage early retirement by adding years of service and or years of age. The number of years added generally is 5. For example an employee at age 55 with 25 years of service would be treated as age 60 with 30 years of service. This “increase” in age and years of service produces abundant motivation for the early exit of the mature employee population.
Drafting Alert Repeated
Providing for a fixed dollar Coverture fraction is generally to the advantage of the Titled Spouse, however, one contingency should be recognized by attorney representing the Titled Spouse: the possible early retirement of the Titled Spouse.
This alert is directed to cases in which the Fixed Dollar Coverture Fraction is used. When using a Fixed Dollar Coverture Fraction the attorney representing the Titled-Spouse must be alert to the possibility that the Titled-Spouse could retire prior to his or her Normal Retirement Age. The timing of the Titled Spouse’s retirement is generally unknown at the time of divorce. The following discussion explains the need for special drafting to bar loss of entitlement by the Titled-Spouse.
Generally, use of the Fixed Dollar Coverture Fraction is supportive of the Titled-Spouse’s interests. Nevertheless, failure to insert into the Property Settlement Agreement language treating the trap discussed in this illustration will result in a significant reduction to the retirement benefit that would otherwise have been paid to the Titled Spouse.
John and Mary Smith divorce at John’s age 42. At John’s age of 42, his monthly accrued benefit payable at his age 65 is $900.00. Mary is awarded 50% of this monthly benefit or $450.00 monthly. Mary’s benefit becomes payable when John retires. Thus, Mary must wait till John retires. Note her monthly accrued benefit is fixed at the time of divorce does not increase (this is advantages of the Fixed Dollar Coverture Fraction to the Titled Spouse).
The danger to the Titled Spouse.
However, when John attained age 55 the plan offered him an incentive to retire early (clearly this was not ascertainable at the time of divorce). The incentive was a subsidized early retirement reduction percentage of 3%. At age 55, as a result of continued years of employment, John’s monthly accrued benefit payable at age 65 had increased to $1,600.00. If John elects to retire at age 55 his subsidized early monthly retirement benefit will be $1,120.00 ($1,600.00 less 3% for the ten years between 55 and 65). The total percent of reduction is 30% or $480.00. John elects to retire at age 55 with a monthly accrued benefit of $1,600.00 less 30% or $1600-$480 = $1,210.00.
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Based on the above scenario, how will John’s monthly accrued benefit be divided? Recall, the Property Settlement Agreement called for Mary to receive a monthly benefit of $450.00. Thus, when John retires at age 55 and begins to collect his benefit John receives $670.00 monthly. Mary as mandated by the Property Settlement Agreement and Qualified Domestic Relations Order will receive each month the fixed amount of $450.00. Had John’s attorney properly crafted the Property Settlement Agreement the Qualified Domestic Relations Order would have provided for Mary’s monthly accrued benefit to be proportionately reduced if John elected to retire prior to his Normal Retirement Age. Had John’s attorney inserted the appropriate language the division of benefits would have been: John’s monthly pension benefit: $805.00. Mary’s monthly pension benefit: $315.00. Troyan, Inc.’s language service offers the necessary language to avoid this unpleasantry.
DOMESTIC RELATIONS ORDERS
UNANTICIPATED POST DIVORCE RETIREMENT
OF THE TITLED SPOUSE FOR DISABILITY*
* The reader is alerted to the fact that discussion of the post-divorce disablement of a member of the armed forces is treated separately. The following discussion does not treat military disability.
At the time of the marriage dissolution action little if any thought is given to the possibility of the post-divorce disablement of the Titled-Spouse. As a result of this oversight, the drafting attorney may fail to provide language to cover: form, timing and rights to the payment of benefits to the Alternate Payee as a result of the post-divorce disablement and retirement of the Titled-Spouse pursuant to the plan’s disability retirement provisions. Troyan, Inc. suggests that the attorney representing the Titled-Spouse insert provisions into the Property Settlement Agreement to protect the Titled Spouse from the adverse results described below. The following discussion illustrates and quantifies the cost to the Titled Spouse of not inserting such language into the Property Settlement Agreement.
In this discussion we have deliberately used as the Titled-Spouse a Police Officer. Reasoning: the greater probability of disablement among this occupational group and the significant increase in his or her retirement benefits as a result of retirement for “service connected” disability.
Police Officer Bill Smith, age 36, and his wife Jane Smith divorce. At the time of the divorce the Property Settlement Agreement used a Traditional Coverture Fraction (“Time Rule”), awarding Jane 50% of the marital part of the actual pension being paid to Bill. Jane was to begin collecting her portion of the pension when Bill began to collect his benefit. The Property Settlement Agreement and the ensuing Domestic Relations Order were silent on the issue of the Titled-Spouse’s post-divorce retirement for disability. At the time of the divorce Bill was in excellent health. Three years later at age 38 Bill is disabled as a result of being wounded while attempting to prevent a crime. Shortly thereafter he is retired for “service connected” disability. At the time of retirement his monthly accrued benefit was $1,547.00. However, under the disability retirement statutes a Law Enforcement Officer or Firefighter disabled in the line of duty is entitled to a pension that is equal to 75% of the Member’s actual pensionable pay at the time of his disablement. At the time of disablement Bill’s annual pensionable pay was $51,000.00. Thus, his monthly retirement benefit was: $51,000.00 multiplied by 75%, for a monthly disability pension of $3,187.50.
At the time of divorce the parties had been married the entire period of Bill’s Law Enforcement service. When Bill retired for disability he had a total of 14 years of service. The Retirement System calculated and allocated Bill’s pension as follows.
The plan’s benefit formula was:
Service Retirement Benefit: 2.6% per year multiplied by years of service multiplied by final pay.
Disability Retirement Benefit:
(This 75% of final pay is not atypical for Service Disabled, Police officers. The Chicago rate is between 65%-70%. The NYPD the pension is close to 90% of Final Pay. In OK, the benefit range is 50% -100% of Final Pay.) 75% of Final Pay.
Final Monthly Pay at Disablement $51,000.00
Total Monthly Pension @ Retirement $3,187.50
Coverture Fraction: 12 years ÷ 14 years = 85.71%
Marital Part of Monthly Pension $2,732.14
To Jane $1,366.07
To Bill $1,821.43
Total Monthly Pension $3,187.50
Shortly thereafter, Bill instituted a malpractice suit against his attorney. In his suit Bill claimed the following:
- The earliest age a non-disabled police officer could retire and begin collecting his pension was after attaining twenty years of Law Enforcement Service. Therefore, Jane should receive no pension payments for six years as it would be at that point that Bill would have reached his Normal Retirement Age (20 years of Law Enforcement Service). It was noted in the Complaint that had Bill left the Police Force (for reasons other than disability) after 14 years of service he would have had to wait until six additional years elapsed in order to begin collecting his pension. Based on an interest rate of 5% and monthly payments to Jane in the amount of $$1,366.07, for the six years prior to what would have been Bill’s twentieth year of service, he claimed that the present cash value of these 72 improper payments was $84,823.17.
- Bill then argued that based on the law of his jurisdiction Jane was not entitled to share in the non-disability portion of Bill’s pension. Bill’s expert computed the non-disability portion of the monthly pension as of the date of Bill’s disablement to be $1,547.00. Based on a Coverture Fraction of 85.71% the marital part of the monthly non-disability pension was $1,326.00 Had Jane’s monthly pension benefit been based on the non-disability part of the monthly pension she would have received each month (after the twentieth year of service) $663.00. Thus, Jane is being overpaid each month by $703.07. Bill’s expert computed the present cash value of these monthly overpayments beginning in what would have been Bill’s 20th year of service to be $146,482.00.
- Bill claimed that as a result of his attorney’s failure to properly craft the Property Settlement Agreement and Domestic Relations Order in this matter the present cash value of his loss was: $231,305.17.
When preparing a Property Settlement Agreement involving a Law Enforcement Officer or Firefighter, it is Troyan, Inc.’s view that the burdened attorney is the attorney representing the Titled-Spouse.
The Titled-Spouse’s attorney is the burdened attorney because he or she has a duty to recognize and draft in a manner that is mindful of the possible future disablement of any client in a risk intense occupation. This attorney has the further duty to insert appropriate language regarding the hazard of post-divorce disability retirement into the Property Settlement Agreement in order to bar or at the least minimize economic loss to this client.
The statutes regarding the retirement of a Law Enforcement Officer or Firefighter are clear and unambiguous. It is not unreasonable for clients in risk intense occupations to assume that his or her attorney had sufficient knowledge of this pension plan so as to insert language into the Property Settlement Agreement and Domestic Relations Order protecting people like Bill in the event of their post-divorce disablement. We find the flawed drafting illustrated herein inexcusable. An attorney representing an individual engaged in an enhanced risk occupation has a duty to know fundamental law on point and to negotiate and draft accordingly!
When you suspect that the plan involved in your matter may have some unique or difficult to understand elements, retain Troyan, Inc., in order to avoid the above scenario. Should litigation of the type described herein occur your malpractice carrier is likely to be troubled upon discovering that you retained uninformed or minimally qualified people to assist with drafting the pension portion of your settlement. Additionally, when your malpractice carrier discovers that you have retained a non-lawyer to craft a legal document (a Domestic Relations Order) your defense may be adversely impacted.
THE MOST LITIGATED AREA
DEFINED BENEFIT PLANS ---- SURVIVOR ANNUITIES
NEGOTIATING AND DRAFTING
Kindly rivet the following into your mind. For an Alternate Payee to be awarded survivor benefits there must be a separate, distinct and easily calculated award of such survivor benefits provided for in the Property Settlement Agreement. Awards of survivor benefits are not inferred, either there is clear and definable award to the Alternate Payee or there is no such award to an Alternate Payee. At all times examine the plain language of the Agreement. Are the treatment of survivor benefits consistent with the intent of the parties? Is there any basis to dispute either a general award of survivor benefits or any of the specifics of such award to the Alternate Payee? Any award to an Alternate Payee of survivor benefits must be clearly specified, well defined and consistent with the subject plan’s provisions; thereby leaving no doubt in the Plan Administrator ‘s mind as to the procedure to implement this Order. Nothing less is acceptable!
A Property Settlement Agreement cannot provide survivor benefits by inference. Either they have been granted to an Alternate Payee or they have not.
When preparing the Property Settlement Agreement remember that there are two separate and distinct components to an award of survivor benefits to an Alternate Payee:
Qualified Pre-Retirement Survivor Annuity (QPSA)
Joint and 50% Survivor Annuity
The QPSA and the Joint & Survivor Annuity are not interchangeable terms. There are significant differences. The practitioner should be clear on these differences prior to any settlement negotiations.
To recognize the differences between the two forms of survivor annuity the practitioner must first know the definition of the term” Annuity Starting Date”.
Annuity Starting Date:
is the first day of the first period for which an amount is received as an annuity or (note this definition does not call for the retirement of the Titled Spouse):
the Annuity Starting Date denotes the time at which retirement benefits become payable to the Titled Spouse as a result of his or her retirement.
THE DIFFERENCE BETWEEN THE TWO FORMS OF ANNUITY
If death occurs prior to the Titled Spouse’s Annuity Starting Date then the form of survivor benefit payable is the QPSA.
If death occurs subsequent to the Titled Spouse’s Annuity Starting Date then the form of survivor benefit payable is the Joint & Survivor Annuity.
The statutory definition of QPSA:
(1) for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of the amount of the annuity which is payable during the joint lives of the participant and the spouse,
The statutory definition of Joint & Survivor Annuity:
(1) for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse, and
(2) which is the actuarial equivalent of a single annuity for the life of the participant.
The most widely used form of Joint & Survivor Annuity is the Joint & 50% Survivor Annuity, which is defined as follows (recall the above alert to the attorney representing the Titled Spouse; adroit drafting can significantly reduce this percentage).
(1) for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of the amount of the annuity which is payable during the joint lives of the participant and the spouse, and
(2) which is the actuarial equivalent of a single annuity for the life of the participant.
The informed practitioner recognizes that pursuant to ERISA, Joint & Survivor Annuities traditionally provide for a survivor benefit between 50% and 100% of the actual benefit paid to the participant. However, in the case of federal, military and state plans it is possible to provide a lesser percentage. Contact Troyan, Inc. to learn how reduce the percentage of an Alternate Payee’s survivor award to less than 50% (ERISA and government Plans). This procedure to reduce the survivor annuity payable to an Alternate Payee need not be a tool of advocacy, rather, it may be required to conform the survivor annuity award to the allocation of benefits part of the Agreement.
SIGNIFICANT POINT REGARDING THE ASSIGNMENT OF SURVIVOR ANNUITY BENEFITS AND AN ALTERNATE PAYEE.
Once again, Troyan, Inc. finds it necessary to provide some foundation discussion prior to further topic development:
alternate language that may be used in order to guarantee the payment of benefits to an Alternate Payee subsequent to the death of the Titled Spouse.
Prior to this discussion of alternate language it is necessary to first define the term “actuarial equivalence” and then the two broad forms of Qualified Domestic Relations Order:
Shared Payment Qualified Domestic Relations Order
Separate Interest Qualified Domestic Relations Order
Of equal value. Two forms of annuity are actuarially equivalent if they are of equal value. For example if the present cash value of a Single Life Annuity at age 65, paying $1,000.00 per month is $156,000.00 and the present cash value of a Joint and 50% Survivor Annuity paying $900.00 per month is $156,000.00 then these two annuities are actuarially equivalent. Clearly, the monthly payments are less in the Joint and 50% Survivor Annuity (since two lives are involved), but, the costs of the annuities is the same. An understanding of this concept is useful when we discuss allocating the costs of an award of survivor benefits to an Alternate Payee.
SHARED PAYMENT QDRO
Benefit payments to an Alternate Payee are based on the life of the Titled-Spouse. Under this format there is no separate and identifiable award to an Alternate Payee apart from his or her participation in the payments made to the Titled Spouse. The expression “sole and separate property of the Alternate Payee”, does not appear in this form of QDRO. Since, the award to an Alternate Payee is not deemed his or her sole and separate property it is necessary to guarantee that benefit payments to an alternate payee will not be extinguished as a result of the death of the Titled Spouse, assuming the Agreement called for payments to the Alternate Payee to continue beyond the death of the Titled Spouse. This bar to loss of entitlement is achieved by an award to the Alternate Payee of all or a portion of the survivor benefit. BUT NOTE: In many cases the Alternate Payee is not awarded all or a portion of the Survivor Annuity, instead the Agreement may provide that the alternate payee will commence receiving benefit payments when the participant begins receiving payments or at a later stated date, and that the alternate payee will cease to share in the benefit payments at a stated date (or upon a stated event, provided that adequate notice is given to the plan. Under the Shared Payment format payments to an Alternate Payee may be for the Alternate Payee’s lifetime, but, if other language is used payments to an Alternate Payee may be for a fixed or definable period. Under this format it may be said that the “referencing life” to determine the duration of payments to an Alternate Payee is the life of the Titled Spouse.
SEPARATE INTEREST QDRO
This form of Order is often called a “carve out”, because the property interest of an Alternate Payee has been severed from that of the Titled-Spouse and upon qualification of the Domestic Relations Order will be treated as the sole and separate property of the Alternate Payee. Thereafter, payments to such Alternate Payee are not dependent on the life of the Titled-Spouse, nor are such payments to this Alternate Payee for a period other than his or her lifetime. The death of the Titled-Spouse is without impact on payments to an Alternate Payee pursuant to the Separate Interest Format. It is emphasized that with this format it is inappropriate to make provision for survivor benefits since the Alternate Payee has his or her own benefit unrelated to the payment stream to the Titled Spouse. As a separate benefit deemed his or her property, the measuring life for the duration of payments to the Alternate Payee is the Alternate Payee. Should the Agreement and Order inadvertently call for both a “separate interest” and a survivor benefit, then the Alternate Payee would enjoy a “double dip”.
Under the separate interest approach, the alternate payee may begin receiving benefits at a different time than the participant. A QDRO either may specify a time at which payments are to commence to the alternate payee or may provide that the alternate payee can elect a time when benefits will commence in accordance with the terms of the plan. In two circumstances, an alternate payee who is given a separate interest may begin receiving his or her separate benefit before the participant is eligible to begin receiving payments. First, Federal law provides that benefit payments to the alternate payee may begin as soon as the participant attains his or her earliest retirement age. Federal law defines "earliest retirement age" as the earlier of:
The date on which the participant is entitled to a distribution under the plan, or The later of the date the participant attains age 50, or the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service. Moreover, a plan may (but is not required to) allow payments to an Alternate Payee at a date prior to the Titled Spouse’s earliest retirement date. Under this format it may be said that the “referencing life” to determine the duration of payments to an Alternate Payee is the life of the Alternate Payee.
A CAUTION REGARDING USE OF THE SEPARATE INTEREST METHOD.
Query: Is it necessary to award an Alternate Payee QPSA benefits when the Domestic Relations Order provides that the Alternate Payee has been assigned a benefit that is to be treated as his/her “sole and separate” property (separate interest)?
Recall, our above observation that to award an Alternate Payee of a survivor interest when he or she has a “separate interest” in the pension constitutes a “double dip”. NOT ALWAYS! Plan Administrators do not uniformly interpret the “separate interest” form of QDRO. Pursuant to the interpretations of some Plan Administrators it is possible that an award to an Alternate Payee of payments over his or her lifetime can be extinguished by the death of the Titled Spouse prior to his or her Annuity Starting Date. Unfortunately, there is an absence of uniformity among Plan Administrators regarding their interpretation of separate interest language. Prior to providing language or a draft Order the practitioner is urged to interrogate the Plan Administrator in order to determine its treatment of the QPSA component of a “separate interest” Order. The practitioner’s exposure is the fact that a significant minority of Plan Administrator’s maintain that the separate interest award to the Alternate Payee does not take effect until the Titled Spouse’s retirement. As a result of this minority interpretation, should the Titled Spouse die prior to retirement (Annuity Starting Date) the Alternate Payee has no interest in the plan. To avoid loss of entitlement by an Alternate Payee, as a result of this minority interpretation Troyan, Inc. suggests that when called for by the subject plan’s interpretation of “separate interest” that QPSA language be inserted into your Agreement in order to protect the Alternate Payee’s award.