DIVORCE AND THE DIVISION OF PENSIONS

The intended audience for this article are individuals going through a divorce that involves the division of pension and or other retirement benefits . This is a difficult time for you. Apart from the general stress, there are elements of expense and doubt. Nevertheless, it is our view that an informed party to a divorce action is better prepared to face the ongoing problems that he or she must confront.

To the extent possible we will avoid use of technical terms, however, some terms should be understood by you. To help we have included a Glossary. Found at the first page of our website Troyaninc.com. The first time a complex term is used it will be in bold type. If you find an unclear word or term go the Glossary for help. The Glossary is a separate file on our Website.

Suggestion:
This article covers may topics of interest to both parties to a divorce. You may wish to skim the article first to find those topics of greater interest to you and your divorce.

To obtain a basic understanding of Pension Issues we suggest starting here.

A knowledgeable party is better able to understand the pension division process. The following are basic steps necessary to gain a fuller understanding of what benefits are involved in your particular matter and how to equitably divide these pension assets.

First, Troyan Inc. will clarify the two general types of Retirement Plans.

Types of Plans
Defined Benefit Plans and Defined Contribution Plans

All military, Federal Employees and the vast majority of State and Municipal employees participate in Defined Benefit Plans. Additionally, many individuals employed by corporations of varying sizes (1 to many thousands) are also in such plans. Government employers require the employee to make annual contributions toward the cost of his or her pension benefit. Employee contributions are not generally true for corporate plans. Plans that require an employee contribution are termed "Contributory Plans".

Defined Benefit Plans.
These plans generally provide the Employee with a monthly annuity that is payable over the lifetime of the Employee. An Employee who is not married at the time of retirement may elect an alternate form of periodic annuity which is the actuarial equivalent of a single life annuity. However, if the Employee is married at the time of retirement, he or she must elect a Joint & Survivor Annuity, unless his or her spouse consents in writing to the election of an actuarially equivalent form of retirement benefit. The great majority of Defined Benefit Plans do not provide a lump sum retirement option (nevertheless, it is safer to check with the specific plan to confirm that only an annuity option and not a single lump sum option is available). The traditional form of benefit (payout option) in Qualified Defined Benefit Plans is a Single Life Annuity.
Defined Benefit Plans are considered "longevity" plans because they are intended to provide enhanced retirement benefits to individuals with the most years of credited service. Defined Benefit Plans reward individuals for long service.
Non-Titled Spouse Alert: Do not let the Employee try to convince you that the present cash value of his or her pension is the amount of the employee's contributions. Unless, the employee is new to the job, it is most likely that the present cash value of the benefit will be significantly greater than the sum of an employee's contributions.

Defined Contribution Plans:
These plans are often called individual account balance plans. The employer contributes a stated sum each year. In some plans employees may also make voluntary contributions. At the time of retirement the employee generally has the option to elect to take the full value of his or her account as a Single Lump Sum or as a periodic annuity. Most employees elect a lump sum option as the form of payment. Many recipients of a "lump sum" then "rollover" the amount of this pension distribution into an Individual Retirement Account (IRA). These Defined Contribution Plan have many names:
for example: Savings Plan, Investment Plan, 401(k), Section 457 Plan (government employees only), etc. Do not assume that all Defined Contribution Plans operate in the same manner. To better understand the plan that is the subject of your divorce please examine the Plan's Summary Plan Description (SPD). If you find this SPD does not provide sufficient information, obtain the actual Plan Document.

To determine the present cash value of this type of plan, request a copy of the employee's account balance statement (issued either monthly, quarterly or annually). In many cases an employer will (if requested) provide a statement for a specific date. If for purposes of your divorce you are making the valuation of the account as of July 10, 2006, request the employees total account balance as of that date (of any other date you may require). Do not be upset if the employer only provides account balance statements on set dates and thus refuses a specific date request. Try to obtain the quarterly statement closest to the date you require.

Non-Titled Spouse Alert: When you receive this account balance statement, confirm that it clearly indicates any loans taken by the Employee. Do not be misled by a statement that you assume to be the full value of the account, when in fact it is the balance LESS employee loans.

Once you are clear on the difference between the two types of plans go to the next step.

What You Need to Know:
Know each of the specific pension benefits that are available (Defined Benefit Plans and Defined Contribution Plans) for your divorce. This is especially important to a non-titled spouse. Before negotiations begin you should have full knowledge of all of the Retirement Type Plans that the titled-spouse is involved with. Generally, this will be one Qualified Defined Benefit Plan and one or more Savings or Investment Plans. The most popular Savings plan being termed "401(k)". However, there is an increasing trend to only provide Defined Contribution Plans. If this is the case be sure to confirm that no "Frozen Plan" (Defined Benefit Plan that is not currently active) exists. Generally if you do not specifically ask for information on a "Frozen Plan" data on such plan will not be provided.

Next:
Compute the present cash value of each retirement plan. If this is beyond your skill base contact Troyaninc.com. This is a useful early step in developing a settlement strategy. Later you may decide on a settlement strategy that does not require this present cash value information. Nevertheless, to be properly informed, have this knowledge on hand as a possible bargaining tool.

With full knowledge of each plan that is to be divided in your divorce and their present cash values, you may now consider the two general settlement formats regarding the division of pensions in divorce.

TWO SETTLEMENT FORMATS
Immediate Offset Settlement
Deferred Distribution Settlement

Immediate Offset Settlement:
The first step in this type of settlement is to compute the present cash value of each of the employee's pension benefits. Once this has been determined and mutually agreed to, the Non-titled Spouse waives his/her right to the Employee's pension benefits in exchange for equivalent offsetting assets, e.g. the marital/community home, other real property, stock, cash, etc. In essence this is a "trade off". The employee keeps the pension and the non-titled spouse is given a settlement in cash or another asset of equivalent worth. The advantage of this settlement format is that it results in a clear and immediate economic division of the pension asset.

Deferred Distribution Settlement:
The present cash value of the pension is not a factor in this type of settlement. Rather the parties agree that the pension will be divided pursuant to a marital/community property fraction. This fraction is known as: Coverture Fraction or Time Rule Fraction. There is a full explanation of the Coverture Fraction, Time Rule below.

Since the Deferred Distribution Settlement is complex, we focus on this form of settlement.

Three Key Terms:
At this point we introduce the reader to the terms "Domestic Relations Order" and "Qualified Domestic Relations Order".

Domestic Relations Order:
This is an order of a state court of competent jurisdiction regarding the division of marital/community property rights incident to divorce or separation.

Qualified Domestic Relations Order (QDRO):
This is a Domestic Relations Order that has been deemed "Qualified" by the Plan Administrator of the Employee's plan. Increasingly a court is called upon to make this determination. The Plan Administrator's determination that a Domestic Relations Order is "Qualified" or "Not Qualified" must be in writing and will be sent to either the parties to the action or their legal representatives.

ERISA: This is an acronym for Employee Retirement Income Security Act. It is the federal law that made Qualified Domestic Relations Orders possible. The parts of ERISA that relate to divorce are found in a federal law called "Retirement Equity Act".

You Need To Know:
Not all Domestic Relations Orders upon acceptance become Qualified Domestic Relations Orders. Strictly speaking a QDRO relates to a private plan (ERISA plan). Thus it can be anything from a one man candy store up to the largest corporations.

A QDRO will not be involved for the following Employers. For each employer we also provide the name given to the form of Order against that employer.

State Retirement Systems: Some use the term Approved Domestic Relations
Order (ADRO). Many states have no formal name. However, you must receive a
letter from the Retirement System stating that the Domestic Relations Order will
be implemented as submitted.

Municipal and Local Retirement Systems. Some use the term Approved
Domestic Relations Order (ADRO). Many of these jurisdictions have no formal
name for the accepted Domestic Relations Order. However, you must receive a
letter from the Retirement System stating that your Domestic Relations Order will
be implemented as submitted.

Railroad Retirement System: This is relevant to this System's Tier II benefit.
There is no specific name, however, you may refer to it as a Railroad Order. The
Tier I benefit is equivalent to Social Security and not subject to Domestic
Relations Orders.

You should have an understanding of the rules relating to each of the above types of plans at the earliest stage of your matter as is possible (only as they relate to your divorce). In the course of this article and others soon to appear on the "Non-Lawyer Information Center" section of our Website we try to provide you with additional useful information. Please note that if you represent an organization that sponsors lectures, Troyan Inc. presents seminars designed to meet the specific interests of your group.

Let us now move to the basics of a Qualified Domestic Relations Order.

CHARACTERISTICS OF A DOMESTIC RELATIONS ORDER
For greater detail please refer to Internal Revenue Code at 414(p), Sections; 1-12).

A Qualified Domestic Relations Order is:

a judgment, decree, or order (including the approval of a property settlement)

that is made pursuant to state domestic relations law (including community property law) and

that relates to the provision of child support, alimony payments, or marital/community property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.

A state authority, generally a court of competent jurisdiction, must issue a judgment, order, or decree or otherwise formally approve a property settlement agreement so that those parts which are relevant to the pension can be drafted into a "domestic relations order". A Domestic Relations Order is the essential initial step in the development of a Qualified Domestic Relations Order. There is no federal requirement that both parties to a marriage dissolution proceeding sign or otherwise endorse or approve the form of Order (this is not the case with an order against a member of the armed forces).

Good To Know:
Pension plans are not permitted to follow the terms of domestic relations orders attempting to assign pension benefits UNLESS such Domestic Relations Order has been determined to be a Qualified Domestic Relations Order by the Plan Administrator. Be clear the divorce assigns rights and an interest in a pension to an Alternate Payee. The Qualified Domestic Relations Order is the required instrument to implement and give effect to the rights and interests of an Alternate Payee in pension plans.

Good To Know:
It is not necessary that the pension plan be made a party to a domestic relations proceeding for an order issued in that proceeding to be a "domestic relations order" or a "qualified domestic relations order." (If you are a California resident, special rules apply). Pursuant to ERISA, state law is generally preempted to the extent that it relates to the division of pension plans as a result of a divorce or Property Settlement Agreement. The Department of Labor has taken the position that pension plans cannot be joined as a party in a domestic relations proceeding pursuant to state law. Although the above criteria indicated that the Domestic Relations Order is to be made pursuant to state domestic relations law, there is no federal qualification requirement that the Domestic Relations Order be issued by a state court. A domestic relations order may be issued by any state agency or instrumentality with the authority to issue judgments, decrees, or orders, or to approve property settlement agreements, pursuant to state domestic relations law.

Essential Components of the Qualified Domestic Relations Order (as indicated by the Department of Labor).

A Qualified Domestic Relations Order must contain the following information:

Must Contain # 1.
the name and last known mailing address of the participant and each Alternate Payee;

Must Contain # 2.
the name of each plan to which the order applies;

Must Contain # 3.
the dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee; and

Must Contain # 4.
the number of payments or time period to which the order applies (duration of payments to an Alternate Payee).

The above constitutes the essential components according to the Department of Labor. However, do not confuse bare essentials with a comprehensive delineation of the assigned rights. Remember your goal is to get it right in all respects. Be careful! Be comprehensive!

Good To Know:
Please note that not found among the QDRO requirements is any language mandating the assignment to an Alternate Payee of death or survivor benefits. It would be ill advised to conclude that item # 3 above:

constitutes a sound basis for the assignment to an Alternate Payee of either death and or survivor benefits. The assignment of survivor and death benefits is a function of the "plain language of the Order". In this regard you are alerted to the need to be clear and specific on all of the terms of the settlement. Did the parties intend for the Alternate Payee to have death/survivor benefits? The specific language required to assign death or survivor benefits to an Alternate Payee is discussed herein. A recent decision; Files v. EXXON, 428 F.3d 478, United States Court of Appeals for the Third Circuit (New Jersey, Pennsylvania & Delaware) has given an expansive interpretation of Alternate Payee rights to survivor benefits based on language found in Property Settlement Agreements. The complexities of this case are beyond the scope of this basic article.)

A Qualified Domestic Relations Order must NOT contain the following provisions:

Must NOT Contain # 1.

The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan (this is a major flaw in may Orders that fail to obtain qualification);

Must NOT Contain # 2.
The order must not require a plan to provide for increased benefits
(determined on the basis of actuarial value);

Must NOT Contain # 3.
The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO; and

Must NOT Contain # 4.
The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.

Now that you have some basic knowledge of what should and should not be in a QDRO let us begin the process of enhancing your skills regarding the content of a QDRO. Understand that the QDRO is the end of the process. First you must be in possession of a Domestic Relations Order. The key difference between a DRO and a QDRO is:

A Domestic Relations Order is a court order that has not yet been Qualified by a Plan Administrator

A Qualified Domestic Relations Order is a court order that has been "Qualified"
by a Plan Administrator. Thus the "Q" on the "DRO" then equals a "QDRO".

How does one determine the content of a Domestic Relations Order? This
brings us to our next topic.

THE ROLE OF THE PROPERTY SETTLEMENT AGREEMENT

The content of a Domestic Relations Order is determined by the content of the underlying operative instrument, i.e. the Property Settlement Agreement or the Final Judgment of Divorce. THE TERMS OF THE DOMESTIC RELATIONS ORDER CANNOT VARY FROM THE PROVISIONS OF THE UNDERLYING INSTRUMENT.

The Property Settlement Agreement or Final Judgment of Divorce is the controlling document. We cannot overemphasize the importance of the Property Settlement Agreement! Our experience after preparing more than 15,000 Domestic Relations Orders is that too few recognize the significance of preparation prior to crafting the division of pension benefits provisions of the Property Settlement Agreement. Often, this Agreement is entered into after days of exhausting negotiations. Alternatively, settlement is the outcome of multiple exchanges between the parties, each under great pressure to complete the negotiations. Such negotiations tend to produce results not fully anticipated by either party at the outset of the negotiations or at the time of completion of a hurried Property Settlement Agreement. At the culmination of this exhausting process, it is then necessary to put the settlement on the record or race to draft a formal Property Settlement Agreement. Such circumstances are commonplace. Nevertheless, in spite of these pressures and need for haste, each party must be prepared to effectively delineate his or her retirement benefits in such manner that neither party is subject to unanticipated or unfavorable outcomes. The inexperienced or unwise party fails to devote sufficient time and care to the preparation of the pension sections of the Property Settlement Agreement. The time to negotiate and implement an equitable arrangement is before completion of the Property Settlement Agreement. In the discussion that follows the key benefit components that should be negotiated and inserted into the Property Settlement Agreement are developed. These are the provisions that will become the terms of the Domestic Relations Order, which upon Qualification by the Plan Administrator becomes the Qualified Domestic Relations Order.

PROCEDURES: NEGOTIATION AND ALLOCATION OF BENEFITS.

Benefits to be negotiated and inserted into a Property Settlement Agreement.

There are not less than two separate and distinct components to the assignment of Retirement Benefits that must be specifically and dispositively addressed in the Property Settlement Agreement or Final Judgment of Divorce.

A. Retirement Benefits: These are benefits that are Payable Over the Lifetime of the Participant Spouse (living benefits).

B. Death and Survivor Benefits

Regarding Death and Survivor Benefits, it is generally the case that Death Benefits are relevant to a Defined Contribution Plan and Survivor Benefits are relevant to a Defined Benefit Plan.

The immediately above comments are a general statement that must be confirmed for your particular matter because government plans (state and federal) may have different definitions and forms of guarantees to a Former Spouse. From items "A" and "B" above it is to be noted that there are two separate and distinct elements to the term "Retirement Benefit." For ease of discussion and identification "A" above will be termed "Living Benefits" and "B", will be limited to distributions resulting from the death of the Titled Spouse (Note: death may occur either before or after the retirement of the Titled Spouse).

Good To Know:
It is essential to function on the basis that the term "Retirement Benefits" as interpreted by a Plan Administrator will not be deemed to include an assignment of Death or Survivor Benefits. The focus on these two separate and distinct components necessary for a well crafted Property Settlement Agreement is not to imply that these are the only areas of concern to the parties. However, it will be noted that virtually all other elements of the Underlying Instrument and Qualified Domestic Relations Order are derivatives of one or the other of these fundamental components. An exception to this point is "Disability Retirement Benefits", which due to complexity are not covered in this article.

Defined Benefit Plans and the Assignment of Living Benefits to an Alternate Payee.
There are two widely used methods for the division of Living Benefits from a Defined Benefit Pension Plan pursuant to a dissolution of marriage. This discussion is focused on negotiating options and drafting strategies when the settlement mode is Deferred Distribution and a Qualified Domestic Relations Order or equivalent instrument (for Federal, Military, RR, State plans) is required in order to assign a portion of the Titled Spouse's pension benefits to an Alternate Payee (for military divorces use the term "Former Spouse"). Each jurisdiction has some case law on point, however, it has been our experience that the case law format is not always followed for a variety of reasons one being the relative knowledge and sophistication of the parties.

The two methods are:
     1. Traditional Coverture Fraction, also called "Time Rule"

     2. Fixed Amount Coverture Fraction

Discussion of the Coverture Fraction.
For both the Traditional Coverture Fraction (Time Rule) and the Fixed Amount Coverture Fraction, the fraction is expressed as years over years (not for the military where a point system is used). The quotient of this fraction is multiplied by a specific monthly benefit. The distinction between the two formats is the denominator of the Coverture Fraction.

For the Fixed Amount Coverture Fraction the "referencing benefit" is the monthly accrued benefit of the Titled Spouse as of the End of Marriage Date. The full meaning of the term "monthly accrued benefit" is monthly accrued benefit accrued to the End of Marriage Date and payable at the Participant Spouse's normal retirement age. Hence, a Fixed Amount Coverture Fraction is then multiplied by the referencing benefit (for this method the End of Marriage Date accrued benefit). Illustration of how to compute a Fixed Amount Coverture Fraction
:
Assume the monthly accrued benefit of the Participant Spouse as of the End of Marriage Date is: $800.00

Assume a Numerator of 8 years (total years married and accruing a benefit up to end of marriage date)

Assume a Denominator of 10 years (total years of accrual up to end of marriage date

EXPLANATION: The reason the numerator is eight years in the above illustration.

The eight years represents only the time the parties were married and the titled-spouse was accruing benefits under the pension plan up to your jurisdiction's end of marriage date. This means that the Participant Spouse was hired two years before the marriage. That is why the denominator has two more years. Thus, when the marriage began the Participant Spouse had already accrued two years of credited service.

Based on the above the Fixed Amount Coverture Fraction is 80% (8 ÷ 10). The referencing monthly benefit is $800.00. The marital/community portion is: $640.00 (80% multiplied by $800.00). Assuming a 50% of the marital/community part is awarded to the Alternate Payee, his or her award is $320.00. The award to the Alternate Payee is a finite amount and not a percentage amount (naturally any known ratio can be expressed as a percentage). It is fixed at the time of divorce and will not increase in the time between the divorce and the actual retirement of the titled-spouse! If stated as a formula it is a percentage of a known amount as of a date certain, result a finite amount. All computational factors are known at the time of preparation of the Property Settlement Agreement! Based on this illustration the amount inserted into the Property Settlement Agreement will be the finite sum of $320.00. A Fixed Amount Coverture Fraction generally favors a titled-spouse.

Alternatively when the Traditional Coverture Fraction is used the "Referencing Benefit" is unknown. Reason it is unknown: it is the actual benefit of the Titled Spouse at the time of his or her retirement (thus it is unknown at the time of divorce). For this reason the Traditional Coverture Fraction (Time Rule) is also termed a "formula" allocation. For this Traditional Coverture Fraction, two of the three factors are unknown at the time of the drafting of the Domestic Relations Order (but are known at the time of the Titled Spouse's retirement). These unknowns are: the denominator of the Coverture Fraction and the actual retirement benefit of the titled-spouse. The formula, when the unknowns are inserted (at the time of the titled-spouse's retirement) produces a specific monthly benefit. The formula is created at the time of drafting your Property Settlement Agreement. However, and most significantly the benefit is determined at the time the titled-spouse's benefit moves to pay status. This format generally favors an Alternate Payee.

An illustration of the Traditional Coverture Fraction follows:

Assume the monthly accrued benefit of the Participant Spouse as of the date benefits begin to the Alternate Payee (titled-spouse retires) is: $2,500.00 (this will not be known at the time of the divorce, this is known when the Participant Spouse retires)

Assume a Numerator of 16 years
Assume a Denominator of 27 years (this will not be known at the time of divorce, it is computed when the Participant Spouse retires).

Based on the above the Coverture Fraction is 59.26% (16 ÷ 27).

The marital/community property portion of the monthly benefit is: $1,481.48 (59.26% multiplied by $2,500.00).

Assuming an equal division of the marital/community property share the Alternate Payee receives: $740.74 ($1,481.48 ÷ 2). The Alternate Payee receives 29.63% of the actual benefit at retirement. The Alternate Payee receives half of the marital/community property share (pursuant to the Coverture Fraction) which is 29.63% of the actual benefit payable to the Titled Spouse. The 29.63% was computed as follows:
(59.26% ÷ 2 = 29.63%)

Be clear on this math or contact Troyaninc.com.

SUMMARY OF MARITAL/COMMUNITY PROPERTY FRACTIONS
Fixed Amount Coverture Fraction (Qualified Defined Benefit Plan)
Numerator: Total period of time the parties were married and the Titled Spouse was accruing a benefit up to the End of Marriage Date.
Denominator: Total period of time the Titled Spouse was accruing a benefit up to the End of Marriage Date.

It will be recognized that under the Fixed Amount Coverture Fraction Method the total monthly benefit accrued up to the end of marriage date and payable to the Alternate Payee is a known sum. This is a known sum since all of the factors used in the determination of the numerator and denominator are known at the time the marriage ends. With certain caveats this is the sum (a specific monthly benefit) that will be inserted into the Property Settlement Agreement and or Final Judgment of Divorce.

Traditional Coverture Fraction (Qualified Defined Benefit Plan)
Numerator: Total period of time the parties were married and the Titled Spouse was accruing a benefit up to the End of Marriage Date.

Denominator: Total Period of time the Titled Spouse was accumulating credited
service under this Plan.

Be clear: The traditional Coverture Fraction is based on the titled-spouse's total
monthly accrued benefit as of the date of retirement.

Please go back and review the two forms of the Coverture Fraction to be certain
you are clear on this calculation.

THE NEXT AREA OF CONCERN WHEN DISCUSSING LANGUAGE FOR THE PROPERTY SETTLEMENT AGREEMENT IS:

SURVIVOR BENEFITS/DEATH BENEFITS

This portion of the article discusses Qualified Defined Benefit Plans and Survivor Benefits. These are difficult concepts to grasp. Moreover Survivor Benefits are the most litigated area regarding Domestic Relations Orders. These malpractice suits result from flawed or assumed flaws regarding Survivor Annuity Benefits of an Alternate Payee. Make an effort to draft with knowledge and caution and the results will be a better outcome at a lesser cost.

Survivor Benefit rights for an Alternate Payee, were created by the Retirement Equity Act which added §417 to Title 26 of the United States Code (USC).

Prior to a discussion of the Survivor Benefit issue it is necessary to provide the reader with a basic understanding of this topic and key terms. This foundation requires the reader to understand the differences between the two widely accepted concepts regarding Qualified Domestic Relations Orders. These concepts are:

1. Shared Payment Qualified Domestic Relations Order*
2. Separate Interest Qualified Domestic Relations Order

* This form of payment to an Alternate Payee is also termed "Stream of Payments". According to the Department of Labor this term is applicable if the benefit payments to an Alternate Payee begin after the commencement of annuity payments to the titled-spouse. This annuity is based on the actuarial life expectancy of the titled-spouse.

Next the reader must be clear on the two types of Survivor Annuity payable to an Alternate Payee.

1. Post Retirement Joint & Survivor Annuity
2. Qualified Pre-retirement Survivor Annuity (QPSA)

Post Retirement Joint & Survivor Annuity Defined:
An annuity equal to not less than 50% of the benefit payable to the titled-spouse as of his or her retirement. In federal plans the maximum survivor annuity can be as much as 55% of the titled-spouse's "basic annuity".

Qualified Pre-retirement Survivor Annuity (QPSA)
An annuity equal to 50% of the benefit that was earned by the titled-spouse up to his or her date of death.

Thus, both pay 50% of a benefit. The Joint & Survivor is payable subsequent to the retirement of the titled-spouse. The QPSA is payable as a result of the death of the titled-spouse prior to retirement.
Caution: The above is the general rule for survivor annuities. The actual survivor benefit can be greater or less than 50%. For example for federal employees the maximum survivor annuity is 55%. In military divorces the survivor benefit can be significantly lower. Moreover, with some ERISA plans the QPSA may not become payable until the time the titled-spouse would have attained his or her earliest retirement age. This last point should be of significance to younger Alternate Payee's who may incorrectly anticipate an earlier payment of this benefit. To protect against loss of this annuity for the period up to the time the titled-spouse would have attained his or her normal retirement age, consider term insurance.

Regarding the Shared Payment Qualified Domestic Relations Order.
This form of Order does not create a separate and distinct property interest for the exclusive benefit of the Alternate Payee. Rather, the monthly benefit assigned to the Alternate Payee, pursuant to the Assignment of Benefits clause will be paid to the Alternate Payee at the time the Titled Spouse retires. Payments will continue until the earlier of the following events:

Death of the Alternate Payee
Death of the Participant.

Central to this concept is the fact that all payments to the Alternate Payee end upon the death of the Titled Spouse (unless the Alternate Payee dies earlier). To bar such loss of entitlement to an Alternate Payee it is necessary to make a specific award to the Alternate Payee of survivor annuity benefits (both QPSA and Joint & Survivor).

Regarding the Separate Interest Qualified Domestic Relations Order.
Under this doctrine it is not necessary to insert a survivor benefit provision into the Property Settlement Agreement. The format for this assignment to an Alternate Payee awards his or her interest as "sole and separate" property, not subject to loss as a result of the death of the Titled Spouse. Because this "separate interest" exists, survivor benefits are not required, UNLESS, the plan considers the separate interest created at the time the titled-spouse retires. If this is the plan's position then a QPSA is necessary.

Good To Know:
Be cautious when trying to apply this doctrine. Some plans assume the separate interest is created upon the retirement of the Titled Spouse. When the Plan makes such assumption it is not necessary to assign the Alternate Payee a post-retirement survivor benefit, but it is necessary to assign to the Alternate Payee a QPSA. It has been Troyan Inc.'s experience that an increasing number of Plan Administrators require the QPSA in a Separate Interest Qualified Domestic Relations Order in order to protect the interest of the Alternate Payee in the pre-retirement period. Be sure to remember this at the time your Property Settlement Agreement is being prepared!

When the language of the Property Settlement Agreement does not make a clear, definitely determinable assignment to the Alternate Payee of Survivor Benefits, or the creation of a "separate interest", then no such rights may then be inserted into a Final Judgment of Divorce. Please note and remember the preceding sentence. It is critical that this message be kept in mind at all times. The Property Settlement Agreement determines the award to the respective spouses. That which is not specifically awarded to an Alternate Payee may not be unilaterally inserted into subsequent documents or a Domestic Relations Order. Again the controlling instrument is the Property Settlement Agreement! If an Alternate Payee is awarded survivor benefits, be clear on establishing and specifying the calculation procedure to determine the extent of the Survivor rights awarded to an Alternate Payee.

Fierce disagreements regarding Survivor Benefits generally occur subsequent to the completion of a Property Settlement Agreement. Because many of these disputes emerge subsequent to the divorce it is likely that the Property Settlement Agreement was not well crafted. Had the parties properly crafted and understood their Property Settlement Agreement regarding this benefit, no dispute should arise. The basis for this controversy is generally a failure to draft an award of a survivor benefit that is timely and clearly understood by all parties to the divorce.

ALERT:
The following is complex. Please read with care.

In resolving issues relating to the Survivor Rights of an Alternate Payee the Plan Administrator will rely on Internal Revenue Code §414(p)(5)(A):
(5) TREATMENT OF FORMER SPOUSE AS SURVIVING SPOUSE FOR PURPOSES OF DETERMINING SURVIVOR BENEFITS:

To the extent provided in any qualified domestic relations order -

The key is the term "to the extent provided." That which has not been provided for in the Property Settlement Agreement, may not suddenly appear in the Domestic Relations Order. You are reminded that a Domestic Relations Order is an instrument of communication. It is neither an opportunity to recast a settlement in a manner more favorable to you or to repair any perceived errors and omissions from the Property Settlement Agreement.

For a Shared Payment Qualified Domestic Relations Order to effectively assign Survivor Benefits to an Alternate Payee, the Property Settlement Agreement must provide for a clear and easily computed assignment to an Alternate Payee. Prior to discussion of the two components of a Survivor Award to an Alternate Payee it is instructive to discuss a possible trend regarding attempts to effect a post-judgment modification of a "flawed" Property Settlement Agreement. Two cases exhibit some of the issues involved; Ross v. Ross,132; 705 A.2d 784 (New Jersey) and DeSantis v. DeSantis, 714 So. 2d 637 (Florida). These two cases are supportive of the view that upon divorce and the remarriage of the Titled Spouse, the Former Spouse, absent a QDRO being in place at the time of divorce, no longer possesses an assignable interest in the Survivor Benefits of the Titled Spouse. Be clear, if a QDRO does not exist at the time of the remarriage of the titled-spouse, survivor benefits are likely to be lost! Upon remarriage of the titled-spouse, survivor rights vest in the new spouse.

At this point it is necessary to provide an additional layer of complexity to this discussion and observe that there are in fact two separate and distinct components to a Survivor benefit. Please read the following carefully and perhaps more than once. This topic was briefly discussed above.

Part I.     Qualified Pre-Retirement Survivor Annuity (QPSA)
Part II.     Joint & 50% Survivor Annuity.

The Qualified Pre-Retirement Survivor Annuity is defined at Internal Revenue Code §417(c), which provides:
(1) IN GENERAL
Except as provided in paragraph (2), the term "qualified pre-retirement
survivor annuity" means a survivor annuity for the life of the
surviving spouse of the participant if
(A) the payments to the surviving spouse under such annuity are
not less than the amounts which would be payable as a survivor
annuity under the qualified joint and survivor annuity under the
plan (or the actuarial equivalent thereof) if
(i) in the case of a participant who dies after the date on
which the participant attained the earliest retirement age,
such participant had retired with an immediate qualified
joint and survivor annuity on the day before the
participant's date of death, or
(ii) in the case of a participant who dies on or before the
date on which the participant would have attained the
earliest retirement age, such participant had
(I) separated from service on the date of death,
(II) survived to the earliest retirement age,
(III) retired with an immediate qualified joint and
survivor annuity at the earliest retirement age, and
(IV) died on the day after the day on which such
participant would have attained the earliest retirement
age, and...

The Joint & 50% Survivor Annuity is defined at Internal Revenue Code §417(b),

which provides:

...the term "qualified joint and survivor annuity" means an 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.

It is to be noted that in most cases the survivor annuity payable to the surviving spouse will be 50% of the amount that would have been payable to the Titled Spouse. From the above definitions it will be seen that the distinguishing factor to determine if the form of payment is a QPSA or a J/S, is the timing of payments to an Alternate Payee. If this annuity benefit is paid prior to the Titled Spouse's Annuity Starting Date (benefit commencement date), [pre-retirement] it is a QPSA. If the Survivor Benefit is paid subsequent to the Titled Spouse's Annuity Starting Date [post-retirement] it is a Joint & Survivor Annuity.

Good To Know:
The informed reader is aware that an assignment of survivor rights need not be a full assignment, it is possible in most ERISA, Federal Civil Service and Military plans to award less than a full survivor benefit to an Alternate Payee (Former Spouse). This will not be true for plans provided by the City and State of New York. Moreover, it is generally not the case with state and municipal retirement systems because some Plan Administrators require "all or nothing" awards of survivor annuity benefits.

Good To Know:
It is essential for a non-titled spouse to be aware of the fact that many state and municipal retirement plans do not permit an Alternate Payee to be a surviving spouse, e.g. Florida and certain systems in New Jersey. Be sure to check with your state or municipal plan prior to preparation of a Property Settlement Agreement. If a survivor annuity is not available to an Alternate Payee, try to bargain for an economically meaningful alternative. When in doubt discuss this with your QDRO Specialist.

Division of Survivor Benefits.
As indicated above in most cases the award of Survivor Benefits to an Alternate Payee need not be a transfer of the total survivor benefit payable. In the majority of cases an award, if consistent with the assignment of the marital/community property share of the living benefit, may be less than the full survivor benefit. As with other aspects of the settlement this too is likely to be an area of controversy.

Issue: Is the survivor benefit to be paid to the surviving former spouse to be equal to the benefit that would have been paid to said surviving spouse had the Titled Spouse not died?

For example.
Titled Spouse: Bill Jones
Surviving Former Spouse (Alternate Payee): Jane Jones
Based on the terms of the Underlying Instrument Jane is to receive a monthly benefit of $800.00 per month. If this is the agreed monthly benefit payable to Jane over Bill's lifetime what sum, if any will Jane receive upon Bill's death?

Foundation Discussion:
To better deal with a Qualified Pre-Retirement Survivor Annuity, the reader should have some understanding of the characteristics of this form of survivor benefit. Absent a Qualified Domestic Relations Order the size of the survivor benefit payable to a Surviving Spouse is determined by the Plan Document.

Regarding a Qualified Pre-Retirement Survivor Annuity the amount of the Survivor Annuity Benefit of an Alternate Payee would be determined as follows.

Step 1. The Plan Administrator determines the monthly accrued benefit of the participant as of his or her date of death assuming retirement at normal retirement age under a Joint & Survivor Annuity. For purposes of our illustration assume normal retirement age is 65 and that Bill died at age 58 with a monthly accrued benefit (payable at his age 65 under a Joint & Survivor Annuity) of $2,800.00.

Step II. Reference the Plan Document to determine when payments to the surviving Alternate Payee may commence. This may not begin upon the death of the Titled Spouse. The plan may delay this survivor annuity payment to an Alternate Payee for many, many years. This is an issue that must be understood prior to divorce in order to avoid problems should the titled-spouse die and only then does an Alternate Payee discover the long wait to collect.

Recognize two points regarding the QPSA.
First, the QPSA may not be immediately payable.
Secondly if the QPSA is payable prior to the date the Titled Spouse would have attained normal retirement age, the monthly survivor payment may be a reduced amount. This reduction may be an actuarial reduction (full reduction) or a subsidized reduction (less than a full actuarial reduction). In some cases the commencement of survivor benefits may not begin before the date the deceased titled-spouse would have his or her Earliest Retirement Age. In rare instances the Survivor Annuity will not begin until the date the Titled Spouse would have attained age 65. Both parties must know, be clear and agree not only the procedure to compute the monthly survivor benefit, but, the date the Alternate Payee's survivor annuity begins. The only source of this information is the Plan Document or interrogation of the Plan Administrator who will advise as to what the Plan provides (this must be in writing). It is suggested that when the source is the Plan Administrator that this person be required to provide the section of the plan relied upon in making this decision. A wise party to divorce assumes nothing!

Step III. Determination of the percentage of the benefit to be paid to the surviving Alternate Payee.
In many post-divorce conflicts no language was provided in the Property Settlement Agreement which clearly limited or defined the interest of the Alternate Payee in the Survivor Annuity. Absent clear language to the contrary, a Plan Administrator will award an Alternate Payee the full Survivor Annuity. It is to be recognized that in many cases this award of the full Survivor Annuity benefit was not contemplated by the parties. Using Bill and Jane, assume that Jane was awarded a monthly benefit of $800.00. Assume that in addition, Jane was awarded Bill's survivor benefit. Notice no term of limitation. When Bill dies at 58, Jane will begin to receive not $800.00 each month, but one-half of the actual accrued benefit payable to Bill at the time of his death, i.e. $1,400.00. (one-half of the $2,800.00 mentioned above).

SUMMARY OF THIS POINT.
The informed reader must view living and survivor benefits as separate and
distinct issues. They are to be treated separately. By approaching living
and survivor benefits as two separate and distinct awards it is easier to focus on
the size of each distinct assignment to an Alternate Payee. Failure to separate
these two entitlements is an open invitation to an unpleasant money experience.

THE FOLLOWING SERIES OF QUESTIONS ARE BASED ON ISSUES OF CONCERN TO BOTH PARTIES REGARDING DOMESTIC RELATIONS ORDERS.

Prior to the Questions & Answers (Q&A) on Qualified Domestic Relations Orders, permit me a comment on a heavily litigated issue in the QDRO area. In addition to generating litigation on this content issue it is also a major source of malpractice complaints against the family practitioner. The heart of this issue is:

WHAT IS THE PROPER TIME TO FILE YOUR DOMESTIC RELATIONS ORDER WITH THE PLAN ADMINISTRATOR?

Is it well advised to file your Domestic Relations Order prior to the parties divorcing? If you do not file your Order prior to divorce what exposures exist in particular for an Alternate Payee? Hint: "Untimely Death", "Untimely Death", "Untimely Death", "Untimely Death"!!!!!

If you do not file your Domestic Relations Order prior to divorce is there any other precautionary action that should be taken by an Alternate Payee?

Question # 1.
As part of a comprehensive settlement involving a Defined Benefit pension, the Property Settlement Agreement provided that the pension is to be divided equally between the spouses. An Order to this effect is submitted to and Qualified by the Plan Administrator. Shortly after the divorce the titled-spouse dies. Is the Former Spouse entitled to her equitable share of the pension subsequent to the death of the titled spouse?

Answer: NO. The ERISA rules are clear, see 29 USC 1056(d)(3)(F). The Former Spouse is entitled to survivor benefits to the extent provided… Absent a clear and indisputable assignment of survivor benefits in a Qualified Domestic Relations Order the Former Spouse is without entitlement to a survivor benefit. It is necessary to recognize the need to have separate and distinct sections of the Domestic Relations Order dealing with pension benefits and survivor benefits.

Question # 2.
A Property Settlement Agreement and Final Judgment of Divorce awarded a Former Spouse a full "Joint & Survivor Annuity". A Domestic Relations Order with such language is Qualified by the Plan Administrator. Shortly thereafter while still employed the Titled Spouse dies. Is the Alternate Payee entitled to a survivor annuity?

Answer:
Not likely! Remember when using the shared payment format, it is necessary to award a Former Spouse both the Joint & Survivor Annuity (this is limited to the death of the Titled Spouse subsequent to retirement) and a QPSA (this is limited to the death of the Titled Spouse prior to retirement. Recognize that the shared payment format mandates insertion of two survivor awards to the Former Spouse. To a considerable extent the Separate Interest format is essentially an automatic resolution of the survivor issue (provided both parties agree to such award to an Alternate Payee).

Question # 3.
May a Plan Administrator fail to qualify a Domestic Relations Order based on the fact that the language of the Order is not found to be consistent with the underlying Final Judgment of Divorce or Property Settlement Agreement?
Answer:
An emphatic NO, provided the Plan is an ERISA plan. However, this is not true if the Orders relate to federal and military retirement benefits.

Question # 4.
If the Titled Spouse is divorced, remarries and then dies and no Qualified Domestic Relations Order is in place, can a Former Spouse be deemed the surviving spouse?
Answer: NO! See Ross v. Chiloro; (308 N.J. Super. 132). DeSantis v. DeSantis (714 So. 2d 637).

Question # 5.
Can you prepare an Order against a New Jersey State Employee that assigns an Alternate Payee a portion of the participant's benefit at any date other than the participant's actual retirement date?

Answer: NO! And there are no exceptions to this firm rule. If either party wants to insert other than a percentage of the titled-spouse's benefit (determined as of his or her actual retirement), then you must insert a specific dollar amount.

WHAT HAPPENS WHEN A PLAN FAILS?

Pension Benefit Guaranty Corporation (PBGC). A special class of Plans that are subject to the Retirement Equity Act. Trusteed Plans.

The PBGC is a federal agency that insures the retirement benefits of more than 44 million working men and women in about 34,000 private sector defined benefit pension plans. If a Qualified Defined Benefit Plan does not have sufficient assets to meet its obligation to pay benefits to Plan Participants, this Plan may be terminated. Such Plan terminations can arise if the employer faces severe financial difficulty, such as bankruptcy, or is simply unable to maintain the plan. In such an event, the Pension Benefit Guaranty Corporation (PBGC), becomes trustee (hence, the term "Trusteed Plan") of the plan and pays benefits, subject to legal limits, to plan participants and beneficiaries. Since the PBGC covers more than 34,000 Plans, it is possible that the plan involved in your matter could fail and become a trusteed Plan. It is thus necessary to have knowledge of the PBGC as it relates to Qualified Plan Terminations. Generally, the PBGC will become involved when the type of Plan is a Qualified Defined Benefit Plan. The PBGC will not be involved when the Plan type is Qualified Defined Contribution Plan, e.g. 401(k) Plan. Moreover, a few Terminated Plans have sufficient assets to meet their obligations to pay benefits. The reasons for the PBGC assuming control of such Plans is beyond the scope of this seminar.

There are three general scenarios that can involve the PBGC with Qualified Domestic Relations Orders:

Scenario # 1.
PBGC becomes trustee of a plan that is already paying benefits pursuant to a QDRO.

Scenario # 2.
PBGC becomes trustee of a plan that has a QDRO already approved by the plan administrator but payments under the QDRO will not begin until sometime in the future.

Scenario # 3.
QDROs issued after PBGC becomes trustee of a plan.

Recognize that the assumption of a Plan by PBGC can impact on the terms of the QDRO. The monthly benefits payable may be reduced. Such reductions in the amounts payable pursuant to a Qualified Domestic Relations Order, can apply to an Alternate Payee, Participant Spouse or both.
The following chart indicates maximum PBGC insured benefits:

The PBGC's maximum guarantee is shown in the table below.

Good To Know:
The PBGC will not fail to administer a Qualified Domestic Relations Order solely because PBGC maximums require reduction of the participant's and/or the alternate payee's benefit. PBGC will apply the reduction rules for an existing QDRO, in the same manner as it applies the reduction rules to QDROs that are issued after PBGC becomes trustee. For example, if a QDRO awarded a fixed percentage of the participant's benefit to the Alternate Payee, the benefits payable to both the Participant and the Alternate Payee would be reduced to reflect PBGC's guarantee limitations. A Titled Spouse must be mindful of the fact that when a QDRO awards a fixed dollar amount of his or her benefit to the Alternate Payee, and the Plan becomes trusteed, the format to reduce if necessary the parties respective benefits will be determined by the language of the Qualified Domestic Relations Order. If you award a fixed amount with no recognition of a PBGC takeover, you may find the Alternate Payee actually gets a larger share of the titled-spouse's pension. Please be mindful of the potential for a Plan to become a trusteed Plan. An informed individual will provide in the Domestic Relations Order, the allocation amount or percentages if the Plan becomes "trusteed".
PBGC and SURVIVOR BENEFITS.
Of great significance is the fact that the PBGC will follow the format of the Qualified Domestic Relations Order, regarding the form of survivor benefit to be paid to an Alternate Payee. If the benefit to the Alternate Payee is in pay status then the option mandated in the Qualified Domestic Relations Order will not be changed by PBGC.

When PBGC becomes trustee of a plan that has QDROs already approved by the plan administrator, PBGC reviews the QDROs to see if there is anything in the QDROs that would make them no longer qualified under its rules. If any issues arise, PBGC advises the parties to the QDRO. There is no option, the conflicting QDRO language will be disregarded, to the detriment of one of the parties.

Good To Know:
Please note that the appropriate vehicle for the assignment of an IRA benefit is not a QDRO, because the Department of Labor does not define an IRA as "an employee plan". The proper procedure is found at Internal Revenue Code §408(d)(6). The procedure to make an IRA transfer "incident" to divorce is very different from a QDRO assignment.