By Patricia Barrett, CFP CDFA Mediator

 

Immediate Steps

As soon as you are notified of the plans involved in the property settlement, it is advisable to contact the Plan Administrator immediately to give notice of the impending divorce and division of assets. Ask them to avoid making distributions prior to receipt of the DRO, if possible, and to be aware of any sudden shift in asset allocation that would be detrimental to the Alternate Payee.Follow up with a letter explaining the coming proceedings. While this letter and phone call are not legally binding, they will serve to notify the Plan of the divorce and of their fiduciary duty.

 

Additionally, ask the State court to issue an emergency DRO assigning some estimate of the Alternate Payee’s share. Any receipt by the plan of a DRO, no matter how flawed, serves to start the 18-month escrow provision to prevent the Participant from withdrawing funds. Also consider requesting authority to make investment decisions for one half of the balance. This actually applies to the Defined Contribution plan, since withdrawals can be made at any time.

 

Non-Marital Portion of Benefit Plan:

If the divorcing couple has been married for less time than the period of participant employment, a fractional benefit will be awarded to the Alternate Payee based on a proportionate share. However, the greater percentage held by the Participant can still be an important factor in establishing the division of other assets. The non-marital portion may also be utilized to satisfy child support or spousal maintenance.

 

Post-divorce Allocation of Earnings, Appreciation and Contributions:

The QDRO should include detailed instructions for the allocation of future earnings, appreciation and contributions to the Participant’s plan. If the fractional share going to the Alternate Payee is established through the QDRO, her share should also experience appreciation, although future contributions will not be included.

 

Non-vested Portion of Benefit:

State law, not ERISA, determines how much is available for division through a divorce. ERISA even allows an entire plan to be paid to an Alternate Payee. If the Participant is agreeable, it is possible to include future vesting in the Alternate Payee’s portion awarded through the QDRO. This is not allowed for Public Retirement Plans in the State of Texas, only for private retirement plans.

 

Valuation Dates:

Various dates are possible for valuation, with the QDRO governing the choice. Either the date of the divorce or the hearing may be used. Since the valuation of a Defined Benefit Plan requires the services of an actuary and varies with the age of the participant and the prevailing interest rates, the valuation date should be determined early in the divorce process. If benefits are to be paid to each spouse in the future through an annuity, it is not necessary to value the Defined Benefit Plan.

 

If the offset method is used to divide the plan benefits, valuation is necessary and sufficient assets must exist outside of the plan to pay the Alternate Payee. Many courts favor this method, since it represents a “clean break”.

 

Death of the Participant

Payments to the Alternate Payee are not affected by the remarriage of the payee and are not affected by the death of the Participant if the QDRO provides for a Joint and Survivor Annuity. If a Single Life Annuity is chosen by the Participant (requires a waiver to be signed by the Alternate Payee), the Alternate Payee receives no payments after the death of the Participant.

 

Hybrid Plan: An ERISA plan that has characteristics of both the defined benefit plan and defined contribution plan. The plan document will require careful perusal in order to sort out features and deal with them separately. Examples of Hybrid Plans are:

 

Target benefit plan

Cash Balance pension plan

Age-weighted profit-sharing plan

Comparability profit-sharing plan

 

Shared Interest Division:

This method of dividing a qualified plan gives the Alternate Payee a portion of a Participant’s benefit when he retires, leaving the date of commencement totally out of their control. Additionally, if a joint and survivor annuity is not chosen, the payments will cease upon the death of the Participant.