1 QDRO’s – From The ABC’s to the PPA – General Overview, Current Developments, Special Situations and Other Misconceptions Gary Nagler Gary A. Nagler & Associates, PLLC July 5, 2007

2 WHAT IS A DOMESTIC RELATIONS ORDER (DRO)? A judgment, decree or order, made pursuant to a state’s domestic relations or community property law, which relates to the provision of child support, alimony, or marital property rights to a spouse, former spouse, child or other dependent of a plan participant Established as a result of the Retirement Equity Act of 1984, for the protection of spouses from the loss of pension benefits to which they may be entitled Pursuant to Code §414(p) and ERISA §206(d)

3 WHAT IS A QUALIFIED DOMESTIC RELATIONS ORDER (QDRO)? A DRO that meets certain requirements specified under the law, is order by the appropriate court, and is approved by the Plan Administrator

4 WHAT PLANS REQUIRE A QDRO? Defined Benefit Plans Defined Contribution Plans 403(b) Tax Sheltered Annuity Plans 457 State/Local Government Deferred Compensation Plans

5 WHAT PLANS DO NOT REQUIRE A QDRO? IRA’s SEP’s SIMPLE’s Non-Qualified Plans Governmental (Federal, state, local or political subdivision) Plans

6 QDRO STATUTORY REQUIREMENTS Name and address of participant and alternate payee Name of plan to which order applies Amount of alternate payee account/benefit Manner of determination of alternate payee account/benefit Duration of payment.

7 QDRO ADMINISTRATIVE REQUIREMENTS Investment return Loans Vesting Commencement Death Benefits

8 WHAT ELSE IS NEEDED IN A QDRO? Enforcement against plan administrator Release of plan Court retains jurisdiction Maintaining addresses

9 WHAT MAY A QDRO NOT ORDER? Cannot require plan to provide any type or form of benefit or option not otherwise provided in the plan Cannot require plan to provide increased benefits determined on the basis of actuarial value

10 WHAT ELSE MAY A QDRO NOT ORDER? Cannot require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another QDRO Cannot order payment of the alternate payee’s benefit in the form of a joint and survivor annuity to the alternate payee and a subsequent spouse

11 WHEN MAY BENEFITS COMMENCE? Primarily dependent on plan provisions Secondarily dependent on the provisions of the QDRO Can always require payment on or after the date on which the participant attains the earliest retirement age Earliest retirement age is the earlier of the date of entitlement to a distribution, or the earlier of attainment of age 50 or the earliest date the participant could begin receiving benefits if he/she terminated

12 FORM OF QDRO Custom drafted Risk of required changes Benefit of pre-certification Use of model language or order Hierarchy of focus – plan administration, then participant, then alternate payee

13 NEW DEVELOPMENTS – PPA 2006 DOL directed to issue regulations addressing subsequently issued QDRO’s Regulations issued 5/7/07: Subsequent DRO may change division of benefits before payments commence Subsequent DRO is a QDRO notwithstanding existence of prior QDRO to another alternate payee as long as benefit to be assigned is available

14 NEW DEVELOPMENTS – PPA 2006 Regulations issued 5/7/07: Subsequent DRO after 18 month segregation period starts new 18 month period If DRO has defects, corrective order can be qualified as QDRO even after death DRO’s issued after divorce can still treat the ex-spouse as the surviving spouse for death benefits

15 WHAT ARE THE “NORMAL” TYPES OF QDROS? Defined Contribution Plans (P/S, 401(k), MP, ESOP) Otherwise known as account balance plan Divide account balance either by percentage or amount Primarily dependent on plan provisions

16 WHAT ARE THE “NORMAL” TYPES OF QDROS? Defined Benefit Plans Contribution unknown Monthly or annual benefit derived by formula at retirement age Independent or separate interest approach Shared interest approach

17 DEFINED BENEFIT QDRO’s – SEPARATE INTEREST Adjusts the amount of award to be paid over the lifetime of the alternate payee, not the participant Amount of the benefit is converted to a payment based on the age of the alternate payee Actuarial equivalence issues Alternate payee and participant may choose different commencement dates If alternate payee predeceases, benefit may revert Not always permitted by particular plan

18 DEFINED BENEFIT QDRO’s – SHARED INTEREST Benefits are adjusted over the lifetime of the participant Requires death benefit language both pre- and post-retirement in the event the participant predeceases If alternate payee predeceases, benefit reverts Only method permitted if the participant has already retired and is in pay status Participant must begin receiving benefits for the alternate payee to receive benefits

19 SPECIAL DEFINED BENEFIT ISSUES Subsidized benefits Cost of living adjustments Post-retirement increases Lump sum payments Death benefits Plan investment return

20 GENERAL PROBLEMS/ ISSUES Correct name of plan Correct type of plan Division date Loan issues Subsequent contributions in DC plan Benefit formula changes in DB plan

21 SPECIAL ISSUES Same Sex QDRO’s – Not qualifiable as a QDRO, even if sponsor extends benefits

22 SPECIAL SITUATIONS & MISCONCEPTIONS Defined Benefit vs. Defined Contribution Plans – Understanding the Difference Language used for various issues Methodology of split Forms of payment Timing of payment Death Benefits

23 SPECIAL SITUATIONS & MISCONCEPTIONS Cash Balance Defined Benefit Plans Account balance notwithstanding defined benefit nature Difficulty in ascertaining nature of plan, and need to know!

24 SPECIAL SITUATIONS & MISCONCEPTIONS 403(b) and 457 Plans ERISA 403(b) v. non-ERISA 403(b) 457(b) Eligible v. 457(f) Ineligible

25 SPECIAL SITUATIONS & MISCONCEPTIONS Defined Benefit Plans Specifying alternate payee account in the form of a lump sum Special considerations Plan rules