Understanding QDROs

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QDRO Requirements IRC § 414 (p) ERISA § 206(d)(3)(C)

414(p)(1)(A) Qualified Domestic Relations Order The term “qualified domestic relations order” means a domestic relations order— (i) which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and (ii) with respect to which the requirements of paragraphs (2) and (3) are met.

414(p)(2) Order Must Clearly Specify Certain Facts A domestic relations order meets the requirements of this paragraph only if such order clearly specifies— (A) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order, (B) the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined, (C) the number of payments or period to which such order applies, and (D) each plan to which such order applies.

414(p)(3) Order May not Alter Amount, Form, Etc., of Benefits A domestic relations order meets the requirements of this paragraph only if such order— (A) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, (B) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and (C) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

DOL QDRO Guidelines https://www.dol.gov/agencies/ ebsa/about-ebsa/our- activities/resource- center/publications/qdros.pdf Chapter 3: Drafting QDROs included in written materials beginning on page 4

Question 1-4: Who Can Be an Alternate Payee? A domestic relations order can be a QDRO only if it creates or recognizes the existence of an alternate payee's right to receive, or assigns to an alternate payee the right to receive, all or a part of a participant's benefits. For purposes of the QDRO provisions, an alternate payee cannot be anyone other than a spouse, former spouse, child, or other dependent of a participant.

Question 1-13: Who determines whether an Order is a QDRO The Plan Administrator is responsible for determining whether a domestic relations order is a QDRO. As plan fiduciaries, they are required to discharge their duties prudently and solely in the interest of plan participants and beneficiaries. Among other things, plans must establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions pursuant to qualified orders.

Warning about Model QDRO Language Most large employers have sample QDRO language available Although it may expedite the approval process, their model language may not have your client's best interests in mind Some plan administrators effectively dictate the terms of a settlement agreement and QDRO by forcing you to use their model language

Written QDRO Procedures Plan administrators must establish reasonable, written procedures to determine the qualified status of a domestic relations order You should review the company's QDRO administration procedures before you prepare the QDRO There may be unusual requirements, for example “Magic” Dates in DC QDROs Severed Approach in DB QDROs

What Type of plan is it? Defined Contribution (DC) Defined Benefit (DB)

1. Defined Contribution Plans Individual account balances on behalf of each plan participant Accounts may contain monies derived from employee contributions, employer matching contributions, and interest and investment earnings

Types of DC plans 401(k) plan, 403(b) plan Profit-sharing plan Savings plan Thrift plan Employee Stock Ownership Plan (ESOP) Savings Investment Plan (SIP)

Marital Portion of DC Plans If there was no pre-marital balance then the balance on the date of divorce is the marital portion of the account. If the account contains pre-marital contributions, then the marital portion must be calculated. Subtraction Method vs. Passive Growth Analysis

Passive Growth Analysis Obtain the Balance on Date of Marriage and All Quarterly Statements to Current Date Grow the Pre-marital Balance Based on Investment Performance Subtract the Adjusted Pre-marital Balance from the Current Account Balance

DC Plan Issues Immediate Lump Sum Distribution Adjustment of the Award for Market Value Gains/Losses Valuation Dates Administrative Fees Outstanding Loans

Immediate Lump Sum Distribution Under most defined contribution plans, the plan administrator will permit the alternate payee to receive benefits immediately upon approval of the QDRO Before promising your client immediate funds, you should ask the plan administrator whether such a distribution will be permitted

Investment Gains/Losses If the intent of the parties is to provide the Alternate Payee with interest and investment income or losses attributable to his/her assigned share of the benefits from the date of assignment to the date of distribution, the QDRO should include specific language to this effect.

Valuation Dates “The Alternate Payee is assigned $20,000." "This Order assigns to Alternate Payee a portion of Participant's Total Account Balance under the Plan in an amount equal to Twenty Thousand Dollars ($20,000), effective as of September 15, 2016 (Assignment Date), or the closest Plan valuation date thereto, plus any investment gains or losses attributable thereon for periods subsequent to the Assignment Date, until the date of total distribution.”

Administrative Fees (DC Plans Only) Plan administrator of a defined contribution plan, such as a 401(k) plan, may deduct a QDRO processing fee from a plan participant's account Usually deducted upon receipt of QDRO but can be apportioned between the parties at segregation. Written Procedures should detail any administrative fee, including default if it is not referenced in QDRO

Outstanding Loans QDRO should indicate how outstanding loans should be treated Without Regard = Include = Before Loan Subtracted With Regard = Exclude = After Loan Subtracted

2. Defined Benefit (DB) Plans No individual account balances Promised monthly benefits, paid from a single trust comprised of all plan assets Based on a specific determinable formula An “accrued benefit” generally commences on an unreduced basis at normal retirement age

DB QDRO Issues Determination of Marital Portion Subsidies & Supplements Survivorship Separate Interest vs. Shared Payment

“One Pot Theory” Any assets and debts brought into the marriage, or acquired during the marriage, are all included in the marital estate. Assets include but are not limited to real and personal property, bank accounts, investment and retirement accounts. The presumption is that the marital estate is divided equally (50/50). Courts can deviate from this presumption if it is shown that such a equal division is not “just and reasonable”.

Indiana CODE Section: 31-15-7-5 The court shall presume that an equal division of the marital property between the parties is just and reasonable.  However, this presumption may be rebutted by a party who presents relevant evidence, including evidence concerning the following factors, that an equal division would not be just and reasonable:

Indiana CODE Section: 31-15-7-5 (1) The contribution of each spouse to the acquisition of the property, regardless of whether the contribution was income producing. (2) The extent to which the property was acquired by each spouse: (A) before the marriage;  or (B) through inheritance or gift. (3) The economic circumstances of each spouse at the time the disposition of the property is to become effective, including the desirability of awarding the family residence or the right to dwell in the family residence for such periods as the court considers just to the spouse having custody of any children. (4) The conduct of the parties during the marriage as related to the disposition or dissipation of their property. (5) The earnings or earning ability of the parties as related to: (A) a final division of property;  and (B) a final determination of the property rights of the parties.

What’s Do you Say? Kendrick v. Kendrick, 44 N.E. 3d 721 (2015) Total Present Value: $172,285.30 Marital Present Value: $116,233.64 By itself that report was not enough to rebut the presumption. It seems that counsel would have needed to present an argument based on the report indicating, “that an equal division would not be just and reasonable”.

dissenting opinion in Kendrick Even without the magic words indicating that the trial court technically considered all of Husband's pension as a marital asset before setting aside to him the coverture portion earned outside the marriage, it is very clear that this is precisely the method employed in dividing Husband's pension between him and Wife. Although I understand the point the Majority is making in remanding on the stated rationale, it needlessly prolongs this litigation and ultimately serves no purpose. The trial court obviously employed a well-established and well-accepted method in distributing Husband's pension, and I would let that be the end of the matter.

Well Established Method: Coverture Credited Service While Married 50% X X Retirement Pension Credited Service at Retirement

Coverture Language Amount of Plaintiff's Benefits: Plaintiff shall be assigned a portion of Defendant's retirement benefits in an amount equal to the actuarial equivalent of Fifty Percent (50%) of the Marital Portion of the Defendant's Accrued Benefit under the plan as of Defendant's benefit commencement date, or Plaintiff's benefit commencement date, if earlier. The Marital Portion shall be determined by multiplying Defendant's Accrued Benefit by a fraction (less than or equal to 1.0), the numerator of which is the number of months of Defendant's participation in the Plan earned during the marriage (from ___________ to ___________), and the denominator of which is the total number of months of the Defendant's participation in the Plan as of the earliest of his/her date of cessation of benefit accruals or the date that Plaintiff commences his/her share of the benefits hereunder.

Early Retirement Subsidy Incentive for employee to retire early Allows employee to start pension early without full actuarial reduction APs can take advantage of ER Subsidy but only when employee actually retires early If AP elects to start pension before employee retires, her share will be fully actuarially reduced. Can include language to “recalculate” AP’s portion should employee subsequently retire early

Early Retirement Supplement Temporary benefit paid to qualifying participants who chose to retire early Often the supplement is payable until the participant becomes eligible for Social Security Example: UAW 30-and-out QDRO can provide the Alternate Payee with a pro-rata share Assigning fixed dollar amount to the Alternate Payee may cause problems when the supplement ends

Qualified Preretirement Survivor Annuity (QPSA) This secures the AP’s benefits in the event of the death of the participant before the AP’s benefit commencement date. Normally the plan does not charge for this coverage.

Qualified Joint and Survivor Annuity (QJSA) The total monthly benefit is reduced to “buy” a survivorship annuity for a beneficiary. When the Participant dies, the designated beneficiary begins to receive a separate survivor annuity in the percentage elected. A married participant at retirement must elect benefits in the form of a 50% qualified joint and survivor annuity. The participant could elect an alternative form of benefit with the written, notarized consent of the spouse QJSA is not necessary with a Separate Interest QDRO

Types of QDROs for DB Plans Separate Interest Shared Payment

Simple difference between Separate and Shared Sole distinction: Duration over which payments are to be made. Alternate Payee's life expectancy or Participant's life expectancy? QDRO must address this duration of benefits issue as required under Code Section 414(p)(1)(C)

Separate Interest QDRO Alternate Payee's share of the benefits is actuarially adjusted to her own life expectancy. Alternate Payee can commence benefits when the Participant become eligible to retire, even if he doesn’t actually retire.

Separate Interest Advantages The Alternate Payee is free to choose among the available benefit options offered under the plan. The Participant is not forced to elect a reduced qualified (postretirement) joint and survivor annuity for the benefit of the Alternate Payee, but may choose any form of benefit under the plan.

Shared Payment QDRO The Alternate Payee’s benefit is payable over the life of the Participant. The Alternate Payee's benefits cease at the death of the Participant, unless the QDRO includes appropriate preretirement and postretirement survivorship protection. The Alternate Payee typically has to wait until the Participant retires and commences benefits before receiving her share of the benefits.

If the Participant is Already Retired If you are drafting a QDRO for a participant who is already retired and in pay-status, the only acceptable approach is the shared payment QDRO. Once the participant retires, it is too late to use a separate interest QDRO. It is too late to actuarially adjust the alternate payee's benefits to her own life expectancy. Drafting a QDRO on a timely basis can help prevent a tragedy.

Dilemma of Delay If you delay in preparing the QDRO, and the Participant retires and elects a single life annuity, the Alternate Payee will lose her lifetime income. On the one hand, it is too late to draft a separate interest QDRO, because the participant is already retired; on the other hand, it is too late to provide the alternate payee with postretirement survivorship coverage, because the participant had elected a single-life annuity at retirement.

Follow Through with the plan administrator If you do not receive an Approval Letter, you should follow-up with plan. If the QDRO Approval Letter does not give interpretations of the provisions, you should request this. If you receive a QDRO Rejection Notice, you should submit an Amended QDRO.