matrimonial matters, a party’s pension assets
are often the second and in many cases the largest asset for equitable
distribution. Yet, these assets are not frequently given much attention
within the Property Settlement Agreement (PSA). Proper care needs to
be paid to your client’s and/or their former spouse’s pension
benefits from the early stages of discovery and not at the time that
a Property Settlement Agreement is being negotiated at the Courthouse.
review of the following information may assist in avoiding common pitfalls
to the negotiation of a party’s pension benefits
and the preparation of the Property Settlement Agreement in anticipation
of a QDRO.
I. OBTAIN DOCUMENTS.
A. Determine in the early stages of discovery if any pension benefits exist. If so, obtain:
1. Most recent benefit statements.
2. A copy of the Summary Plan Description (SPD).
3. Available QDRO Guidelines.
These documents are critical to determine what benefits are available
to your client through the Plan. For example, a Plan may not have survivorship
benefits, or may only have limited survivorship benefits, in which case
you may need to negotiate differently for your client. You do not want
to find this out after the Property Settlement Agreement has been entered
into and it is too late to negotiate. Further, securing QDRO Guidelines
early in the process ensures prompt preparation later on.
THE TYPE OF PLAN.
A. Is the Plan a Defined Contribution Plan? Some examples of this type
of plan are:
1. 401(k) or 403(b) Plans.
2. Profit-Sharing Plan.
3. Employee Savings Plan.
4. Employee Stock Ownership Plan.
the Plan a Defined Benefit Plan? Some examples of this type of Plan
1. Traditional Pension Plan.
2. Annuity Plan. (Note, some Plans call their Savings Plan an “Annuity”).
3. Cash Balance Plan.
III. DEFINED CONTRIBUTION PLANS.
Defined Contribution Plans are somewhat less complicated than Benefit Plans
in that there is an identifiable amount of money within an account specifically
allocated to the Plan Participant. The value of the account can generally
be determined at various dates. The Alternate Payee in most cases has immediate
access to the funds without paying early withdrawal penalties, but will pay
A. Division of Defined Contribution Plan
1. Percentage. Distribution of
these accounts by way of a percentage is
the most common method. The PSA should state “50% (or 40%) of the
account balance from date of marriage (include date) to date of filing
of Complaint (include date).”
Advantages: Most equitable method of distribution;
most accurate way to account
for pre and post-marital assets.
Disadvantages: The distribution amount is not specifically defined in the Order.
2. Straight dollar amount . A
straight dollar amount is often utilized when the fund is being used to offset
other assets. The PSA should state the specific
dollar amount to be distributed.
Advantages: Provides for an exact distribution amount to a party.
Disadvantages: Depending upon the value of the fund at the time of distribution,
can result in an uneven distribution. Some plans may not accept due to fund
B. Other Provisions
1. Gains and losses. A provision allocating gains and losses to either a percentage
or straight dollar amount distribution should be included in the PSA if it
is so intended by the parties. The PSA should include language similar to “the
Alternate Payee’s allocated amount shall be adjusted for earnings or
losses, dividends and interest from date of Complaint (include date) through
the date of distribution”. NOTE: If you do not want gains and losses
to be included in the distribution you must affirmatively state so in the
PSA. New Jersey case law presumes gains and losses are included if they are
Survivorship. While not as critical a provision as for Defined Benefit
is a good idea to include a provision in the PSA that “should
the Participant die prior to the establishment of separate accounts,
the Alternate Payee shall be treated as the surviving spouse with respect
to any death benefits or account balances to the extent of the full amount
of the amount herein allocated”.
3. Loan Balances. If there is
a loan against the account, or even if you are not sure whether or not there
is a loan, the PSA should address whether
or not the loan will be a marital expense or born by the Participant only.
C. Pitfalls to Avoid - Case Studies
Although these plans do not often present with difficulties, there are some
re-occurring problems which can be avoided. Plans involving stock ownership
can cause difficulty due to fluctuating market values. You cannot rely upon
the value of these funds to offset other assets. Also, do not let your client
try to predict market values by eliminating gains and losses.
Case: PSA stated that Wife was to receive Husband’s entire 401(k) valued
at the time of the marriage at $250,000 plus an additional $178,000 from the
Husband’s Savings and Stock Investment Plan (SSIP) as a buy out from
the marital home.
By the time the QDRO was prepared, the company stock had taken a precipitous
drop. Unbeknownst to the attorneys, the Husband’s 401(k) was 60% funded
with company stock and the SSIP Plan was funded with 100% stock. The Wife’s
distribution turned out to be nearly one half ( ½ ) of what she should
Case: Husbands 403(b) Plan had four years of record gains immediately prior
of Complaint. At the time of filing of the Complaint,
the fund was valued at $120,000. Property Settlement Agreement was drafted
to exclude gains and losses from Wife’s 50% portion of the distribution.
When the QDRO was drafted two years later, the fund had experienced a
decrease to $90,000. Wife received 50% of value of fund at the time of
filing of the Complaint with no adjustment for gains or losses equaling
$60,000. Husband was left with $30,000.
Case: Participant was no longer employed with the Plan Sponsor (this
is known as a separated employee) and thus, was capable of withdrawing
funds. Participant withdraws all funds prior to the QDRO being put in
place. Be cautious when dealing with the separated employee situation.
You may want to include language in the PSA for curative action including
attorney fees should the Participant wrongfully withdraw funds prior
to the QDRO distribution.
IV. DEFINED BENEFIT PLANS.
Defined Benefit Plan are more complicated to divide. The benefit is to be provided
to the Participant at some future date upon his or her retirement. The amount
of the benefit is based upon a benefit formula set by the plan which usually
includes length of service and earnings. The plan funds are held jointly
for all Participants and there is no actual account set up for a Participant
until retirement. These accounts require pension evaluations to determine
their present day value.
A. Shared Interest QDRO v. Separate Interest QDRO.
1. Shared Interest QDRO. A shared interest QDRO is basically a division of
the Participant’s annuity payment in a specified amount or percentage
between the Participant and the Alternate Payee. Payments begin when the Participant
retires, in the form chosen by the Participant, and end at the Participant’s
death. If the Alternate Payee predeceases the Participant, the Alternate Payee’s
share automatically reverts back to the Participant. In order to ensure continued
benefits to the Alternate Payee, the Participant should be required to choose
a Qualified Pre-retirement Survivorship Annuity (QPSA) option and a Qualified
Joint and Survivorship Annuity (QJSA) option under the Plan. This form of QDRO
must be utilized if the Participant is already in pay status prior to a QDRO
being put in place. The state and local government Plans (i.e., PERS, TPAF,
PFRS) are all shared interest DROs. This form of QDRO favors the Participant.
For private plans it should be considered if the Alternate Payee is in poor
health or significantly older than the Participant and thus, less likely to
live long into retirement. If you intend to use a shared interest QDRO you
must use very specific language in the PSA such as “parties agree to
a Shared Interest QDRO, based upon the lifetime of the Participant, with a
reversionary interest to the Participant”.
2. Separate Interest QDRO. A separate interest QDRO creates two distinct separate
accounts for the Participant and the Alternate Payee. Each account is actuarially
adjusted for the lifetime of each party. The Alternate Payee may select a commencement
date to receive benefits different from the Participant and may chose the form
of payment. Once benefit payments begin, they will continue for the lifetime
of the Alternate Payee, but will not revert to the Participant upon the death
of the Alternate Payee. Cost of living and other increases will not automatically
be applied to the Alternate Payee’s share, but must be specifically stated
in the QDRO. Also, a QPSA needs to be in place to secure this benefit even
with a separate interest QDRO in case of the pre-retirement death of the Participant.
B. Division of Defined Benefit Plan.
1. Coverture Approach - Marx Formula.
This is the standard formula used in New Jersey to divide marital assets in
a pension. The Alternate Payee is entitled to 50% (or whatever fractional share
agreed upon) of the Marital Portion. The Marital Portion is determined by the
Plan multiplying the Participant’s final pension benefit by a fraction:
the numerator, which is the period of the parties' marriage during plan participation
in months and the denominator, which is the Participant's total plan participation
in months as of the commencement date.
Advantage - Generally this formula favors the Alternate Payee because
the fractional share is decreasing over time, it is a smaller share of
a larger pension benefit. The Alternate Payee shares in the future growth
of the pension benefit.
Disadvantage - the Alternate Payee does not know the value of the benefit
until his or her actual retirement. Participant will argue that the Alternate
Payee is unjustly enriched by receiving a share of benefits that were
not accumulated during the marriage.
CAUTION: If a Plan’s benefits have been frozen and the Participant remains
employed with the Plan Sponsor this formula should not be used. The effect
will be to reduce the Alternate Payee’s fractional share without any
increase in benefits.
2. Immediate Offset Approach.
This formula is still in use by some Plans. The Alternate Payee is entitled
to a fractional share of the Marital Portion. To determine the Marital Portion,
the Plan multiplies the Participant’s pension benefit as of the marriage
termination date by a fraction: the numerator which is the period of the parties'
marriage during plan participation in months and the denominator which is the
Participant's period of employment and plan participation in months as of the
marriage termination date.
Advantage - the formula benefits the Participant as the Alternate Payee does
not share in any future increases of the pension benefit. The pension benefit
is known at the time that the QDRO is put in place. This formula can be used
with a pension that has been frozen.
Disadvantage - the Alternate Payee does not share in any future growth of the
C. Survivorship Provisions.
1. Qualified Pre-retirement Survivorship
Annuity (QPSA). In a Defined Benefit
Plan, the funds are held jointly in a collective account for all the Participants.
A Participant’s individual account is not created until he or she retires.
Thus, if the Participant does not survive to retirement, an account is not
created and the funds remain in the collective account. Basically, the retirement
benefit disappears. A QPSA provides that should the Participant die prior
to reaching retirement, the named survivor will still receive their share
of the pension benefit. A PSA should state that “the Alternate Payee
shall be treated as the Participant’s surviving spouse for purposes
of receiving a monthly Qualified Pre-Retirement Survivorship Annuity (QPSA)
attributable to the Marital Portion of the Participant’s accrued benefit
under the Plan”
Qualified Joint and Survivorship Annuity (QJSA). This provision allows
Participant to name a survivor to whom a benefit will
continue to be paid after the death of the Participant. A pension benefit
of a married Participant automatically has a 50% QJSA provision unless
waived in writing by the spouse. Shared interest QDROs should require
this benefit choice by the Participant. The PSA should state that “at
the time of retirement, the Participant shall elect the Alternate Payee
as the Participant’s surviving spouse for purposes of a Qualified
Joint and Survivorship Annuity (QPSA) attributable to the Marital Portion
of the Participant’s accrued benefit under the Plan.” In
a separate interest QDRO, this provision is not critical to the continuance
of the Alternate Payee’s benefit.
D. Other Provisions.
1. Early Retirement Benefits. These benefits are sometimes provided by a company
as an early retirement incentive to older, long time employees. New Jersey
case law has held that these incentives are marital property; however, they
will not be distributed to an Alternate Payee unless specifically provided
for in the QDRO. The PSA should specificially state that “the Alternate
Payee is entitled to his or her proportionate share of any employer-provided
early retirement subsidy, supplement, incentive and/or cost of living adjustment.”
of Living Adjustments. This benefit is not often found in private
Plans; however, to ensure that the Alternate Payee shares in this benefit,
it needs to be stated directly in the QDRO. PSA language provided above.
E. Pitfalls to Avoid - Case Studies. Defined Benefit Plans present with an
array of options that can cause difficulty in the drafting of the PSA and
QDRO. The best defense for avoiding difficulties with these type of plans
is to know the plan. Obtain plan documents before entering into a PSA and
be specific in your PSA as to the provisions of the QDRO.
Case: Every Plan has it’s own provisions and nuances. Know the
Plan. The United Postal Service Pension (UPS) claims that it allows for
a Separate Interest QDRO; however, the provisions allowable under the
Plan result in a Shared Interest QDRO. In this case, the Wife gave up
retention of the marital home for a future benefit in Husband’s
pension. The PSA called for “equal division of Husband’s
UPS pension with a survivorship interest to Wife”. Unfortunately,
the parties were unaware of the nuances in the UPS pension. The UPS Plan
requires that the benefit be based upon the lifetime of the Participant
and there are limited survivorship options. The only options available
are a Ten Year Guarantee or a Husband and Wife Pension where the surviving
spouse receives 50% of what they were receiving prior to the Participant’s
death. The Husband needs to live a long and healthy life in this case
for the Wife to realize a pension benefit equal to half the value of
the marital home.
Case: Wife had a significant pension, married to 20 year older Husband. In
the PSA, Husband was given 50% share of the pension with
the understanding that Husband’s share would revert to her upon
his death. Wife bargained away other assets to “retain” pension.
Unfortunately the PSA was not written clearly enough to distinguish a
Shared Interest QDRO which resulted in a separate interest QDRO being
prepared and Husband receiving separate interest of pension. Wife lost
the reversionary interest in 50% of her pension benefit.
Case: The death before QDRO cases. Three recent cases include Husband died
in a car
accident the weekend after the divorce. Husband died of
a heart attack one month after divorce. Husband died of cancer three
years after divorce but before a QDRO was prepared. In two of the three
cases, Husband’s death resulted in Wife losing pension benefit.
In one case, the benefit was saved due to the adequate drafting of the
PSA. It is always a good idea to prepare the QDRO pre-judgment and file
it at the same time as the Judgment of Divorce to ensure that the benefit
does not get lost. If that is not possible, be sure to draft the PSA
specific enough that a judge could later rule it satisfied the Plan’s
requirements for a QDRO.
The information provided in this guide is by no means exhaustive or
all inclusive as it relates to the preparation of Qualified Domestic
Relations Orders or the Property Settlement Agreement on behalf of your
client. It is intended to provide you with a starting point of reference
and a checklist to review. You can always contact our office for additional
questions or information regarding the particular pension plan you are
dealing with in your case.