General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 5
DIVIDING FEDERAL EMPLOYEE RETIREMENT BENEFITS FOR DIVORCING SPOUSES
BY Mary Ann R. Baker-Randall
Mary Ann R. Baker-Randall practices primarily family law in Albuquerque, NM. She also drafts QDROs for other attorneys on a contract basis. She can be reached via e-mail at email@example.com.
Mention QDROs to a group of family law attorneys and watch how many shiver in fear. A Qualified Domestic Relations Order (QDRO) is a domestic relations order (DRO) that assigns to the ex-spouse the right to receive part or all of the benefits payable to the employee spouse in the retirement benefit under a qualified retirement plan, subject to certain requirements.
Regulations governing QDROs can be found in the Internal Revenue Code (26 U.S.C. § 414(p)(1)) and ERISA (29 U.S.C. § 1056(d)). Typically, this assignment of rights is part of the property allocation in a divorce or legal separation. If the DRO does not meet the criteria for a "qualification" as a QDRO, then the antiassignment rule prohibits the employee spouse's qualified retirement plan benefits from being assigned to the ex-spouse, unless another exception is found. Proper drafting of QDROs requires knowledge of a variety of laws and procedures, independent of marital property distribution laws. You'll need to understand basic QDRO concepts and terminology and the steps to drafting a QDRO.Key Concepts and Terminology
The antiassignment rule. Retirement plans are generally sacrosanct and immune from being used to satisfy judgments. The antiassignment rule under ERISA bars the assignment of a participant's retirement benefits to anyone, unless a specific exception exists. QDROs are one such exception (see ERISA §§ 206(d)(1), 206(d)(2); IRC § 401(a)(13)).
A participant is the person who participates in the retirement plan, whether or not that person still works for the employer or has retired. The employed versus retired status of the participant determines the type of QDRO to be prepared.
An alternate payee is the person designated in the QDRO to receive part or all of the participant's benefits under the retirement plan. Most frequently, the alternate payee is the ex-spouse, but sometimes a child or other dependent of the participant can be designated as the alternate payee.
A defined contribution retirement plan is like a bank account in that the employee can put money into the account and can either withdraw it or borrow against it prior to retirement. The value of the plan is what it is worth on a given day (like a bank balance), or what the stock market says the stocks are worth (for money invested in stocks, such as in a 401(k) plan).
A defined benefit plan is the traditional pension whereby the employee does not receive the money until he or she actually retires or is otherwise eligible to access the funds, such as taking early retirement, going on disability, or cashing in the retirement benefit on termination of employment, if allowed. The retiree is guaranteed to receive a fixed monthly payment, sometimes with a cost of living adjustment component. The amount is often based on the average of the highest three years of salary. The value of a defined benefit plan is not how much the employer and employee have contributed as of today; the value is calculated by actuarial methods to determine how much money would have to be invested today to generate a monthly payment years down the road.Dividing Government Retirement Benefits
The pleading that divides government employee retirement benefits is not called a QDRO even though the acronym is often borrowed to shorten the correct name; for example, an "Order Regarding Thrift Savings Plan Account." ERISA explicitly exempts the Federal Employee Retirement System (FERS) and the Civil Service Retirement System (CSRS) benefits from its application (see ERISA § 4,206(d)(3)(b)). Governmental retirement plans at the state and federal level are not subject to the Internal Revenue Code, or ERISA antiassignment rule, or the QDRO rules.
Another distinction from normal QDROs is that the government will not review and pre-approve a draft order. Many private pension administrators willingly cooperate with counsel and allow counsel to submit a draft QDRO for review before the judge signs the QDRO. This pre-approval step often helps iron out any glitches, saves the client money by knowing that the DRO will be "qualified," and saves the lawyer the embarrassment of having to tell the client a First Amended or Second Amended QDRO needs to be prepared because of minor wording corrections requested by the plan administrator. Review and pre-approval is not an option with orders dividing federal government retirement benefits, so you'll want to get it right the first time.Checklist of Steps
Start early. As soon as you open the new divorce client file, obtain your client's most recent retirement benefit statements and be sure to ask for the opposing party's statements as early as possible. Waiting until the settlement agreement is drafted-or worse, until the final decree is entered-to start drafting the retirement division order is a prescription for malpractice. Suppose the participant retires without having designated your client as the survivor beneficiary? Suppose the participant dies before the benefits are divided? Suppose the participant is representing himself, skips town the minute the final decree is signed, and you cannot locate him to sign the retirement order?
Determine all benefits and what type of benefits are involved. Government employees are covered by either the CSRS or the FERS. Typically, a federal employee will have both the pension and the Thrift Savings Plan, each of which requires its own order.
Ascertain whether loans or withdrawals have been taken. Loans can be taken against the Thrift Savings Plan, but not against the pension. Whether the retirement benefit should be divided based on the postloan or preloan balance needs to be negotiated.
Survivor benefits designation. Find out if the participant has already named a survivor beneficiary, and that beneficiary's identity. Determine whether the election is irrevocable. Find out what the survivor benefit annuity premium will cost and negotiate which party will have the premium deducted from his or her share of the pension payments, or whether the premium will be shared in some fashion.
Request a copy of the plan summary. The plan summary contains an excellent overview of such things as how monies are put into the plan, conditions under which loans or withdrawals can be made, designation of beneficiaries, and the spouse's rights. Do not advise a client-whether the participant or alternate payee-on allocating retirement benefits in a divorce settlement if you don't know and understand the actual benefits involved.
Check the websites. Current information, forms, publications, and a calculator to project future account balances can all be obtained at the Thrift Savings Plan website at www.tsp.gov. Other useful websites for pension information include:
The Retirement and Insurance Publications web page (www.opm.gov /asd/htm/pub.htm), which contains Publications RI 84-1 (Court Ordered Benefits for Former Spouses) and RI 83-116 (Handbook for Attorneys on Court Ordered Retirement Benefits).
The Office of Personnel Manage-ment Federal Benefits homepage (www.opm.gov), which includes the "Guidance and Policy in Federal Benefits" (www.opm.gov/benefits). This site offers the CSRS and FERS Handbook for Personnel and Payroll Offices, which provides comprehensive guidance to agencies on all matters affecting retirement benefits and processing. Chapter 5 specifically addresses court-ordered benefits.
Draft the order yourself. If you represent the alternate payee spouse, then your client should not have to depend on opposing counsel to prepare an order that divests the opposing party of a valuable property interest. Also, you need to be able to advise your client on various matters including the options for payment, such as lump-sum cash-out or roll-over to an IRA for the Thrift Savings Plan. You also need to be able to advise about how much money your client can expect to receive from the pension payments, when payments will begin, and the cost of the survivor benefit premium deduction. The participant's lawyer has less incentive to draft the order promptly, and any procrastination could cause your client to lose the entire benefit if something happens to the participant before the government accepts the order.
Similarly, if you represent the participant, it's still a good idea to draft the order to ensure timeliness. Once parties are divorced, they rarely want to deal with their lawyers six or 12 months down the road, and they are less likely to pay attorney fees for drafting post-divorce pleadings.
Finally, drafting the order yourself is one way to protect yourself from potential malpractice claims. If the order is not entered in a timely manner, or if it improperly allocates the benefits, then both your own client and the opposing party are potential plaintiffs in a suit against you.
Double-check for consistency in the settlement agreement and order language. Make sure the language in your marital settlement agreement is consistent with the language in the retirement division order, and that both pleadings achieve the same goal. Spell out the key points in both documents. The settlement agreement should not merely provide: "Each spouse shall receive one-half of respondent's government retirement benefits." This sentence fails to identify the individual retirement plans, the survivor beneficiary, who pays for the survivor benefits, whether loans against the plan are also allocated equally between the parties, and so on.Obtaining Information from the Government
Before I knew that the Thrift Savings Plan will not review or preapprove a draft order, I sent my standard letter enclosing the draft order and requesting review, comments, and proposed changes to effect the parties' intent. In response, I received a letter from an assistant general counsel, who gave me the value of my client's Thrift Savings Plan account in the month immediately preceding the divorce, the loan balance against the account as of the month preceding the divorce, and the current account and loan balances. The letter also enclosed copies of two free booklets entitled "Summary of the Thrift Savings Plan for Federal Employees" and "Information About Court Orders." Consider these booklets your bible in preparing orders affecting Thrift Savings Plan accounts. They can be obtained through the website or by writing to the Federal Retirement Thrift Investment Board at 1250 H Street NW, Washington, DC 20005.
After reading these booklets several times, I took a deep breath, drafted the Order Regarding Thrift Savings Plan, obtained opposing counsel's signature, and submitted the order to the judge for execution and filing. I then sent a certified copy back to the Federal Retirement Thrift Investment Board (see sample order on page 16). Several months later, I received a copy of a letter mailed directly to my client, from a completely different address (Thrift Savings Plan, National Finance Center, P.O. Box 61500, New Orleans, LA 70161-1500) (see "Letter to Client from Thrift Savings Plan" on page 16).