CHARLA H. BRADSHAW KOONSFULLER, P.C. FAMILY LAW Navigating a Minefield: Dividing Retirement Funds and Benefit Plans in Divorce

First things to occur when retirement or benefit plans are divided Freeze request Identification of the PA Request for all plan information (e.g. SPD's, contracts) Request for model orders and procedures Providing plan information to AP: severe fines possible The more information = less work for PA The more information = less stress on P

Retirement Plan Division Defined Benefit and Contribution Plans Texas is a community property state: presumption of community property What is separate property? "All property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise or descent, shall be the separate property of that spouse;…" TEX. CONST. art. XVI, § 15

Defined Benefit Plan Division Berry v. Berry, 647 S.W.2d 945 (Tex. 1983): referred to as the “Berry formula.” Defined benefit plans are to be divided and valued at the time of divorce The benefit is apportioned between the employee’s separate estate and the community estate

Defined Benefit Plan Division The Berry formula: Number of months married and in the plan as of the date of divorce divided by Number of months in the plan as of the date of divorce This fraction = community estate’s share of the benefit and is applied as if retired at divorce

Defined Benefit Plan Division Community property does not have to be divided 50/50 Value of the plan important if disproportionate division Cash Balance Plans Shared vs. Separate Interest

Defined Benefit Plan Division Shared Interest: AP must wait for P to retire P's lifetime is measuring life QPSA and QJSA Reversion A must if P in pay status

Defined Benefit Plan Division Separate Interest/Payment AP can begin early = early reduction AP's lifetime is measuring life QPSA and QJSA No reversion Cannot use if P in pay status

Other DBP Issues Early Retirement Subsidy: part and parcel of the benefit and a community asset subject to division and consideration upon divorce Cost of Living Adjustments Survivor Annuities: QPSA and QJSA

Perils and Pitfalls of DBP Division Form of division does not meet plan rules (e.g. formula vs. percentage) Time application of the Berry formula Denominator of the Berry formula Use of Berry formula when there is no separate property Decree of Divorce ambiguous

Defined Contribution Plans Division by subtraction vs. tracing Information is vital to prove SP Loans and interpreting statements Dollar amount vs. percentage Date of division Gains / Losses

Perils and Pitfalls of DCP Division Attorney uses the Berry formula Attorney cannot prove SP of employee

Other Components of QDROs for DBPs & DCP's What is a QDRO? A QDRO is a state-issued order that relates to the provisions of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a plan participant, and that has qualified with the plan. A QDRO begins as a DRO and becomes a QDRO once the PA deems it qualified. Plan name Social security numbers/separate document Pursuant to domestic relations law statement

Other Components of QDROs for DBPs & DCP's Tax treatment Constructive receipt Actions by Participant Plan requirements Continued jurisdiction Only judge's signature is required

Other Important Factors Use of QDROs for child support & alimony Attorney's fees in seeking QDRO Business Records Affidavits

Other Types of Deferred Compensation Plans Employer makes their own rules Arise from agreements b/w employer and employee Plan documents vital to ascertain transferability / plan rules Constructive Trust if no transferability DRO not QDRO DRO must follow the plans rules per the agreements

Common Types of DC plans & division Nonqualified DC Plans: there are no statutory rules for division in divorce

Common Types of DC plans & division Restricted stock plans / Stock options (ISO or NSO): Statutory Division Rules If granted before marriage but required continued employment during marriage before the grant could be exercised or the restriction removed, the employee's separate property is equal to the fraction in which the numerator is the sum of the period from the date the option or stock was granted until the date of marriage and if the option or stock also required continued employment following the date of divorce before the grant could be exercised or the restriction removed, the period from the date of divorce until the date the grant could be exercised or the restriction removed; and, the denominator is the period from the date the option or stock was granted until the date the grant could be exercised or the restriction removed

Common Types of DC plans & division If the granted during the marriage but required continued employment following the date of divorce before the grant could be exercised or the restriction removed, the employee's separate property is equal to the fraction in which the numerator is the period from the date of divorce until the date the grant could be exercised or the restriction removed; and, the denominator is the period from the date the option or stock was granted until the date the grant could be exercised or the restriction removed.

Common Types of DC plans & division These computations apply to each component of the benefit requiring varying periods of employment before the grant could be exercised or the restriction removed