QDRO CREATION IN WISCONSIN - Divorce Financial Solutions, LLC · stockholders with greater than 10% of stock. Transactions pursuant to divorce decrees under domestic relations orders

QDRO CREATION IN WISCONSIN

Building a Future After a Split

Attorney Diane S. Diel 5601 South 108th Street

Hales Corners, WI 53130 414-427-5355

E-mail [email protected]

Financial Advisor Garrick G. Zielinski, CFP, CDFA, CDS WFA Asset Management Corporation

5129 South Franklin Drive Franklin, WI 53132

414-421-8282 E-mail [email protected]



I. QDROS – TAKING A CLOSER LOOK

By Garrick G. Zielinski, CFP, CDFA, CDS

President, WFA Asset Management Corporation

I. QDROS – TAKING A CLOSER LOOK

By Garrick G. Zielinski, CFP, CDFA, CDS


A. Definition of a QDRO

A QDRO is defined as any judgement, decree, or order (including approval of a

property settlement agreement) which (i) relates to the provisions of child support,

alimony payments or marital property rights to a spouse, former spouse, child, or

other dependant of a participant, and (ii) is made pursuant to a State domestic

relations law, including a community property law.

Although it is referred to as “qualified domestic relations order” in fact it is a

“domestic relations order” (DRO) until the Plan Administrator determines the

order is a QDRO.

Growing in importance is the division of retirement benefits by way of a qualified

domestic relation’s order (QDRO). A QDRO1 is a court order that typically

directs a retirement plan to divide the income payments or account balances

accrued to a participant between the parties in a divorce or legal separation.

Alternatively retirement plans can be valued as to their present day value after tax

consequences and offset against other marital property. However, quite often the

appearance of an equitable division using present value is misleading and can

result in inequities. More often, division by a QDRO is considered to be the most

equitable way to divide retirement assets.

It is important to first to determine what type of Plan it is. Most private sector

retirement vehicles are either Individual Retirement Arrangements (IRAs),

defined contribution (DC) plans, or defined benefit (DB) plans. The Employee

Retirement Income Security Act (ERISA) of 1974 governs DC and DB Plans.

The Retirement Equity Act (REA) of 1984 was enacted to resolve the growing

conflict between ERISA and state law allowing for distribution of retirement

rights in DC and DB plans upon dissolution of marriage. REA added I.R.C. §

414(p) which permits the creation, assignment and recognition of any right within

DC and DB plans of a participant only through a Qualified Domestic Relations

Order (QDRO). IRA’s are not qualified plans as defined by ERISA. Instead,

IRA’s come under the provisions of I.R.C. § 408. Thus to transfer funds tax free2

from an IRA to a spouse or former spouse, a QDRO is not required nor are the

QDRO rules applicable.

An IRA is the most basic sort of retirement arrangement. Most people tend to

think of an IRA as something that individuals establish on their own. However,

there are three plans that businesses can sponsor and help their employees to fund

their IRA’s. With an IRA the amount that an individual receives at retirement

depends on the funding of the IRA and the earnings or losses on those funds.

I.R.C. § 1041 is not applicable to transfers of funds from IRA’s as it was never

intended that I.R.C. § 1041 would override the provisions of I.R.C. § 408(d)

applicable to IRA’s which predated the adoption of the provisions of I.R.C. §

1041. Company sponsored IRA’s are typically referred to as SAR-SEP, SIMPLE

IRA and SEP-IRA Plans.

A plan that is expected to pay a monthly benefit at a certain retirement age, in

most cases, based on a formula using the participant's length of service and/or

salary is a defined benefit plan. While a participant is employed, sufficient

actuarial calculated contributions are made by the employer to generate the

defined monthly retirement benefit payable to the participant in the future. In

essence, the retirees “benefit” in a defined benefit plan is “defined” or known in

advance, and the contributions needed to provide the benefit are not defined.

Usually there are no individual account balances within a defined benefit plan. 1 See IRS Notice 97-11. Assistance for attorneys, judges, plan participants, spouses, former spouses in reviewing and drafting QDRO’s

Defined benefit plans are typically referred to as pension plans, retirement plans

or benefit plans.

A plan that defines the contributions while a participant is employed, with the

future value of the benefits left uncertain, is a defined contribution plan. In

essence, the “contribution” in a defined contribution plan is “defined” or known

and the final benefits payable are not defined. The defined contribution plan may

contain individual account balances for each participant, which are valued at least

once each year. Defined contribution plans are typically referred to as 401(k)

plans, profit sharing plans, employee stock ownership plans (ESOP), money

purchase, Keogh plans and savings plans. Many defined contribution plans may

contain sub-accounts such as employer contributions, employee contributions,

employer matching contributions, and pre-tax/after-tax contributions.

PRACTICE TIP: Many defined contribution plans provide for a single lump

sum distribution to alternate payees3 while most defined benefit plans do not.

B. How a QDRO Can Be Used

The QDRO statute is silent as to when a QDRO must be drafted. Most QDRO’s

take the form of a stipulated court order that is approved by the court, either

simultaneously or shortly thereafter a divorce proceeding. In numerous

circumstances the QDRO is not drafted for many years after the divorce. The

definition clearly indicates that the QDRO can be a judgement in itself. Although

a QDRO usually occurs after the date of divorce, it is also clear that the final

divorce is not necessary in order to draft a QDRO. The language states that a

payment may be made to a “spouse” or a “former spouse” as long as it is made in

accordance with a states domestic relations law. Further, a court may order a

2 I.R.C. § 408(d)(6) 3 I.R.C. § 414(p)(8) Alternate Payee defined

QDRO signed by the court and not necessary that either the participant or

alternate payee sign and/or approve the order.

The first step may seem obvious, however, it is worth repeating; it is imperative to

determine what type of plan you are attempting to divide. Defined contribution

plans are typically much easier to divide in terms of percentage splits than defined

benefit plans. Once you have determined the type of plan it is, of equal

importance is to thoroughly understand the benefit payment options available to

the participant. An alternate payee generally may elect any option that is

available to the participant in the plan other than a joint and survivor annuity with

a subsequent spouse. Therefore, benefits payable to an alternate payee are

derived “through the eligibility” of the participant. Benefits are payable to an

alternate payee based upon the terms and conditions of the plan. You cannot

require4 the plan to provide any type or form of benefit, or any option, not

otherwise provided under the plan. Benefits are then are paid in accordance with

the plan’s options.

A QDRO may be used to provide survivorship benefits to the former spouse. It

could be drafted to provide an early retirement provision thereby allowing the

former spouse an opportunity to collect her benefits independent of the

commencement of the participant. It is usually drafted in the context of a

property settlement but it can also be used to provide child support (current and

arrears), maintenance (current and arrears) or to satisfy marital property rights. A

QDRO can be used for a myriad of purposes, such as debt reduction, a down

payment on a residence, and possibly for an estate planning concern, when

nursing costs or the general claims of creditors are an issue. In a New York

Supreme Court case5the court not only ordered distributions from a profit sharing

plan to pay child support and other arrears, the court also ordered that attorney

fees in arrears, plus attorney fees for the current proceeding, be paid from the plan

4 I.R.C. § 414(p)(3)(A) 5 See Renner v. Blatte, 650 N.Y.S.2d 943 (N.Y. Supp. Oct. 18, 1996)

in addition to $41,000 for income taxes as a result of the distributions. The

author used a QDRO once to provide a “get out jail free” card to a plan participant

that embezzled money from her former employer and was ordered to make full

restitution within 120 days or go to jail for 3 years!

C. Restrictions on QDRO’S

Since the QDRO is the document that divides the retirement benefits, it is

imperative that you understand the type of plan, the plan benefits, the available

methods of distribution options and the required procedures necessary to obtain

the benefits prior to drafting, negotiating and filing the QDRO. Throughout this

booklet we will discus in detail a number of restrictions on QDRO’s. ERISA and

IRC § 414(p) lists the following restrictions on QDRO’s:

The order cannot require the plan to provide any type or form of benefits, or any

option, not otherwise provided under the plan6

The order cannot require the plan to provide increased benefits determined on an

actuarial value7.

The order cannot require the payment of benefits to an alternate payee that are

already required to be paid to another alternate payee under a previous order8.

D. Current Developments in Case Law and Legislation

Under the Economic Growth and Tax Relief Reconciliation Act of 2001

(EGTRRA), an alternate payee can request a waiver of the 60-day rollover rule.

Also, the spouse that the participant was married to on the annuity starting date

6 IRC § 414(p)(3)(A) and ERISA § 206(d)(3)(D)(i) 7 IRC § 414(p)(3)(B) and ERISA § 206(d)(3)(D)(ii) 8 IRC § 414(p)(3)(C) and ERISA § 206(d)(3)(D)(iii)

(and one-year rule) is entitled to the survivor annuity unless a QDRO states

otherwise. A § 457(b) deferred compensation plan is subject to the QDRO rules

for purposes of recognizing and making distributions to an alternate payee.9 This

rule does not extend to City, County and state plans. However, many

municipalities have adopted, or are adopting, rules to divide deferred

compensation plans. Milwaukee County and City for example, have not adopted

a plan for division, but they have recognized some of the changes to the law and

now permit the 457(b) plan to be rolled over to an IRA upon retirement rather

than being paid as an annuity.

Effective August 29, 2002, the Sarbanes-Oxley Act of 2002 adopted new rules

under Section 16(a) of the Securities Exchange Act of 1934 accelerating the

deadlines for insiders of public companies to report changes in their ownership of

their company’s securities. Insiders are considered Directors, Officers and

stockholders with greater than 10% of stock. Transactions pursuant to divorce

decrees under domestic relations orders remain exempt from the Section 16(a)

rules. However, under the Act a Director, Officer or greater than 10%

shareholder would clearly be violating Section 16(a) of the Act if they were to

notify their former spouse of their intent to exercise certain stock option

agreements in advance of the sale and/or purchase. This might make it difficult to

draft a domestic relations order in regard to deferred stock arrangements, in

particular stock options, if your intent is that the non-participant spouse maintain

any form of control over the sale and/or purchase of any portion awarded to them.

Supreme Court of Wisconsin:

See Case No. 02-0036 Sulzer v. Diedrich: In this case Sulzer was awarded one

half of her spouses WRS pension and one half of his 457(b) Deferred

Compensation Plan in their divorce proceeding in 1989. WRS and the Copeland

Companies did not recognize QDRO’s at the time of divorce. In May of 1998 the

9 See Economic Growth and Tax Relief Reconciliation Act of 2001; IRC § 414(p)(12)

law was changed so the WRS would accept a QDRO for divorces prior to April

27, 1990. However, husband married Diedrich on May 9, 1992 and subsequently

changed all of his beneficiary designation to his subsequent spouse. Husband

died in early 1995 and Sulzer requested her portion of the retirement accounts.

WRS and Copeland however, already paid the account to Diedrich in the form of

survivor benefits. A host or problems ensued. Eventually, Sulzer recovered her

portion of the benefits.

In a recent U.S. Supreme Court10 case the husband died in auto accident two

months after he was divorced and before he changed his beneficiary on his group

life plan. Mr. Egelhoff lived in Washington, which under statute automatically

removes a spouse as beneficiary upon divorce. However, the group life plan is an

ERISA welfare benefit plan and it was not clear which law applied. The court

ruled for the former spouse and awarded the life proceeds to her. The

Washington Supreme Court reversed the decision and awarded the life proceeds

to Mr. Egelhoff’s children from a previous marriage. The former wife appealed

and the U.S. Supreme Court recently reversed the Washington Supreme Court

decision and awarded the proceeds back to the former spouse. Clearly, ERISA,

and not State law govern such benefits.

To avoid ambiguities, beneficiary designations should be addressed no later than

the completion of the divorce. Even if the MSA (Sulzer) names the intended

beneficiaries of individually owned policies or another plan not covered by

ERISA, the designated beneficiaries could still wind up in an expensive court

battle.

Court of Appeals:

See Case No. 99-3066 McNamara v. McNamara: Again, this is another WRS

matter. The divorce happened in 1985 at a time that WRS did not honor

10 See U.S. Supreme Court Egelhoff v. Egelhoff

QDRO’s. The parties retained an actuary to value the plan and it was determined

that the husband’s value of the wife’s plan was $25,000.00. However, adequate

assets did not exist to buy-out the wife’s portion. Therefore, the actuary devised a

formula that was intended to be used in the event that the plan “did not recognize

QDRO’s at the time of distribution.” Wife retired in 1998 and a QDRO was

presented to WRS and based upon their interpretation of the QDRO and based

upon a divorce in 1985, the plan determined that the husband was due $965 per

month out of $2,642 per month payable to the wife. The wife appealed that the

plan should have used the actuary formula in the MSA, and that calculation

determined a benefit of $391 payable to husband. The court concurred and the

husband appealed. The Appellate court reversed the decision but they based their

reversal on the fact that the original agreement that the actuary formula would be

used only if WRS “did not accept” a QDRO, which they subsequently did. The

wife had additional arguments that the agreement clearly meant to “freeze” the

value at the date of divorce and those arguments were also rejected. The author

feels that the very same arguments being made in regard to WRS and the lack of

QDRO legislation may apply to City and County Plans that have those some

characteristics today. In other words, if you are fashioning a settlement

agreement on City or County plans not governed under ERISA, it is imperative

that your language is clear in regard to the manner and effect of the formula used

to calculate the end result.

See Case No. 00-0525 Jeffords v. Jeffords: This case involves a bankruptcy

petition where the husband was ordered to have a QDRO drafted to facilitate an

award to his former spouse in the amount of $100,000. In the interim, the parties

agreed in the MSA that the husband would “lend” the former spouse $50,000 until

the QDRO was effective and the wife would pay the loan back. She received the

loan and subsequently filed for bankruptcy and the $50,000 loan was discharged

in bankruptcy court. The husband was successful in getting the court to modify

the MSA and reduce the QDRO amount to $50,000 because wife didn’t repay the

loan. Wife appealed and the court affirmed the lower court decision. However,

the wife also requested that she receive “interest” on her portion since it took 3

years before she was able to receive her portion of the QDRO. In response to

wife’s request for interest the court explained that “because she had not

cooperated in 1997 when husband offered to provide the QDRO required in the

MSA, she was not entitled to do so. While interest may be required where there

has been a delay in fulfilling obligations in a property division,11a family court

can deny interest if it offers a reasonable explanation. The explanation in this

case is that wife “cannot expect to profit from her refusal to complete the

transactions required in the final property division.” What’s interesting about this

case is that many times participants and non-participants alike delay the draft of a

QDRO for a variety of reasons, and arguments arise about equity. In particular,

we have seen instances where flat dollar amounts were used for the division of a

401(k) plan in year 1999, for example, and the amount was not remotely the same

as a division of the same account in year 2002. Also, most 401(k) accounts will

fluctuate in value and even fewer, actually earn “interest.” The terms, interest and

earnings, are often intertwined, yet have substantially different meanings to plan

administrators.

See Appeal No. 02-0118 Taylor v Taylor: This case has the above mentioned

factors involved and the Court of Appeals District IV affirmed that absent

language to the contrary, the value of a retirement plan is subject to market

valuation increases and/or decreases until such time as the account is distributed.

Therefore if you intend not to have an account balance subject to fluctuation in

value from the date of divorce to the date of distribution the QDRO and MSA

should clearly state that. Another consideration is having the plan participant

redirect all or a portion of their investment allocation to a stable value investment,

a required component of the employee elective plan, as of the date of divorce, or

possibly sooner. If it is know in advance, or in a collaborative manner, that there

would likely be an equal division of the account, a reallocation of 50% of the

11 See Corliss v. Corliss, 107 Wis. 2d 338, 346, 320 N.W.2d 219 (Ct. App. 1982)

value could be stipulated. Upon the draft of the QDRO, the awarded share could

consist of 100% of the reallocated value in the account.

QDRO CREATION IN WISCONSIN Building a Future After a Split

II. SATISFYING ERISA CRITERION

Garrick G. Zielinski, CFP, CDFA, CDS

II. SATISFYING ERISA CRITERION



A. Required Standards for the QDRO

QUALIFICATION REQUIREMENTS: (I.R.C. and ERISA)

The Order must designate each alternate payee. An alternate payee is any spouse,

former spouse, child or other dependent of the participant who is recognized by a

domestic relations order as having a right to receive all or a portion of the benefits

payable under the plan with respect to the participant. (I.R.C. §414(p)(8) and

ERISA §206(d)(3)(K))

The Order must clearly specify the amount or percentage of the participant's

benefits to be paid to alternate payee, or the manner in which the amount is to be

determined. (I.R.C. §414(p)(2)(B) and ERISA §206(d)(3)(C)(ii))

The Order must specify the number of payments or the period to which the order

applies. (I.R.C. §414(p)(2)(C) and ERISA §206(d)(3)(C)(iii))

The Order must specify each plan to which the order applies. (I.R.C.

§414(p)(2)(D) and ERISA §206(d)(3)(C)(iv))

The Order must specify the name and last known mailing address of the

participant and alternate payee. Social security numbers, dates of birth and the

date of divorce are not required under the Code, but most plan administrators

require this information to process and calculate benefits payable to the alternate

payee, especially if the awarded benefits are to be based upon the lifetime of the

alternate payee. (I.R.C. §414(p)(2)(A) and ERISA §206(d)(3)(C)(i))

A domestic relation’s order is any judgment, decree, or orders including a

property settlement agreement which:

a. relates to the provision of child support, alimony or marital property rights

to a spouse, former spouse, child or other dependent of a participant.

b. is made pursuant to a state domestic relation’s law, including a community

property law. (I.R.C. §414(p)(B)(i)(ii) and ERISA §206(d)(B)(ii)(I)(II))

The qualified status of the domestic relation’s order is determined only by the

plan administrator in accordance with I.R.C. §414(p) and ERISA §206(d).

The order must create or recognize the existence of an alternate payee's right to,

or assigns to, the right to receive all or a portion of the benefits. (I.R.C.

§414(p)(1)(A)(i) and ERISA §206(d)(3)(B)(i)(I))

In the case of any payment before a participant has separated from service, an

order may provide that payments to the alternate payee can begin on or after the

date on which the participant attains the earliest retirement age under the plan

whether or not the participant has actually retired. The earliest retirement age

means the earlier of:

a. the date the participant is entitled to a distribution under the Plan, or

b. the date the participant reaches age 50, or, if later, the earliest date on

which the participant could receive benefits if the participant separated

from service. (I.R.C. §414(p)(4)(B)(i)(ii) and ERISA

§206(d)(3)(E)(ii)(I)(II))

An Order that is determined to be qualified will remain qualified with respect to a

successor plan of the same employer or a plan of a successor employer (§ 414(a) of the

I.R.C.).

Information in regard to a Qualified Domestic Relations Order can be obtained from the

I.R.C. §414(p), Employee Retirement Income Security Act (ERISA) of 1974 §206(d) and

the Retirement Equity Act of 1984 (REA-84), Public Law 98-397 §104, which amended

certain sections of ERISA to improve the delivery of benefits to an alternate payee.

I.R.C. §401(a)(13) creates an exception to the anti-alienation requirements of Code

§401(a)(13)(A). ERISA qualified plans are subject to the anti-alienation rules unless they

are divided by means of a domestic relations order that is determined to be qualified by

the plan administrator.

B. Procedures for Qualifying a Domestic Relations Order as a QDRO

Procedures are set forth in the IRC and ERISA. The procedures are often

misunderstood by attorneys and routinely not followed by plan administrators.

More often companies out-source the process to companies that have large

departments set-up for QDRO processing. Fidelity Investments, for example, has

established a business for their plan sponsors to deal with QDRO’s. All plans are

required to establish procedures,12however, experience with these matters

suggests that many companies have not. The IRC and ERISA provide no

sanctions for failure to provide procedures so therefore the lack of procedures are

absent consequences.

The plan has 6 basic procedures that are required:

1) The plan must have written procedures.

2) The plan must promptly notify the participant and alternate payee of receipt of

an order.

3) The plan must mail a copy of the procedure to the participant and alternate

payee.

12 IRC § 414(p)(6)(B); ERISA § 206(d)(3)(G)(ii)(II)

4) The plan must determine whether the order is qualified within a reasonable

amount time.

5) The plan must mail a notice to the participant and alternate payee notifying

them whether or not the order is a QDRO.

6) The plan must separately account for the alternate payee portion while the

plan is reviewing the order.

Upon receipt of a domestic relation order, the plan administrator is required to

“promptly” notify the participant and alternate payee that the plan received an

order and notify them of the procedures. The problem here is that “promptly” is

not defined and experience suggests that few plans follow this procedure. The

second requirement is that the plan should determine13 “within a reasonable time”

whether or not the order is a qualified domestic relations order. An additional

problem is, “reasonable amount of time” is also not defined. Many plans think

that the 18-month rule applies and that they have 18-months to approve the

QDRO. This is not the case. The-18 month rule has nothing to do with time

allowed to review a QDRO.

During the time that an order is being reviewed, the plan must separately account

for amounts that would have been paid to an alternate payee if the alternate had

received benefits during the period, as if the order had been determined to be a

QDRO. This does not require the plan to suspend payments that are already being

paid to a participant if the plan is in pay status. It simply requires separate14

accounting. Our experience is that we have seen plan administrators go both

ways in regard to plans in pay status. That is, we have seen plans that will

suspend payments or reduce the payment being made to the participant and hold

the anticipated benefit for the alternate payee. Correspondence and/or

communications from the attorneys, the court, and the parties, which in turn have

swayed the plan into taking some action, also influence many plans.

13 IRC § 414(p)(6)(A)(ii); ERISA § 206(d)(3)(G)(i)(II) 14 IRC § 414(p)(7)(A); ERISA § 206(d)(3)(H)(i)

C. Documentation Used in the Process of Qualification

Most often the documentation requested from a plan are a benefits calculation in

regard to a defined benefit plan and a valuation and/or the last valuation in regard

to a defined contribution plan. Plans have also established other documentation

procedures to minimize the confusion and misinformation between the plan

administrator and the attorney seeking information. They may include:

a. A QDRO approval and/or rejection.

b. An internal record of QDRO telephone communications.

c. A request for a benefit calculation.

d. A request for QDRO benefits payment (Distribution Form)

e. A benefit payment worksheet (How to calculate a defined benefit under the

terms of the Plan).

f. A benefit payment adjustment worksheet.

The documentation used is generally the same as the procedures previously

discussed, as well as the review process discussed below. The plan must

determine whether or not the order complies with the terms and conditions of the

plan.

D. QDRO Review Procedures

Most plans have established their own procedures in dealing with QDRO’s.

Below is a sampling of those procedures:

a. Identify the plan that will pay benefits.

b. Identify who will receive the benefits.

c. Identify the amount, percentage or formula used to determine the amount to

be paid.

d. Identify the date on which the payemnt of benefits to the alternate payee are to

begin and the form of benefit.

e. Identify when the payments will stop.

f. Identify what happens when the alternate payee dies.

g. Identify what happens when the participant dies.

For the order to qualify, the order must satisfy the requirements under IRC §

414(p) and provide sufficient administrative information to process the order.

Probably the most difficult part of the QDRO procedure for a plan administrator

is to make certain that the plan does not risk the qualified status of the plan. As

such, most plan administrators will use extreme caution in their decision making

process. However, a lump sum payment to an alternate payee under age 59 1/2

from a 401(k) plan, for example, will not lose its status as a qualified plan even if

the payment were made contrary15 to the terms and conditions of the plan. The

current trend of plans is to make payemnt to alternate payees at the earliest

possible time. The immediate payment cuts down on administrative costs and

plan liability. Even defined benefit plans are beginning to make premature

distributions more often. Not only does it cut down on current costs but solves

problems like not being able to find the alternate payee because of numerous

address changes. The problem exists though, unlike defined contribution plans,

that a plan could be substantially under-funded and, if too many alternate payees

take a distribution from such plans, it could result in actuarial losses and increased

costs to sponsors.

If the plan determines that the order is not a QDRO, the plan administrator must

notify the participant and alternate payee in writing of their determination. Most

often, the plan will provide details as to why the order is not qualified. Usually

the order is modified and returned to the plan. If the status as to whether or not an

order is qualified is not satisfied within the 18-month period, the plan is then

15 IRC § 401(k)(2)(B)(i)(III)

required to make payments, or in some cases resume payments to the person that

would have received the payments if there were no order. The plan administrator

has broad discretion in this matter. If an order is determined to be qualified all

amounts shall be paid according to the QDRO. If amounts have been withheld

and/or segregated, those should also be paid. In effect, this allows the order to be

administered retroactively with regard to the benefit division.



III. ANALYZING AND VALUING RETIREMENT BENEFITS


III. ANALYZING AND VALUING RETIREMENT BENEFITS



A. Conducting a Preliminary Valuation

Discovery, analysis and evaluation should be completed before the

negotiation and drafting begins.

The importance of valuing retirement benefits for divorce cannot be

overemphasized. Viewed as an asset, the value of a retirement plan can, in many

cases, constitute the single largest marital asset. There are certain assumptions

made and tables used, which when altered, can significantly change the final

value of a participant’s retirement plan.

Defined contribution plans have the least amount of valuation issues while

defined benefit plans have the greatest number of issues. On occasion a

participant wishes to keep his entire interest in his retirement plan, and in

exchange, the non-participant former spouse will retain the equivalent value in

other marital property, such as investment accounts, equity in the home, vehicles,

etc. Often this can be an efficient and cost effective means of assigning half of

the value of the plan to the non-participant former spouse, especially if the value

is not very large.

There are different accepted methods of determining the present value of a

defined benefit retirement plan. Different methods of determining the present

value of a retirement plan will yield surprisingly different results. An “economic”

present value calculation uses different assumptions than an “actuarial” present

value calculation.

The interest or discount rate is one assumption that differs between the two

methods. Typically an actuary will rely on a tiered interest rate structure using

rates published by the Pension Benefit Guarantee Corporation (PBGC). The rate

structure that the PBGC produces has, in effect, an insurance premium or

guarantee built into these rates, which are paid by the employer in calculating the

employer’s pension liability. An insurance premium is not necessary in the case

of determining the value of a monthly benefit to an individual. The cost of the

plan to the employer, is not the same as the fair value to the employee.

An economic present value calculation will usually use an interest rate that is

based on the U.S. Treasury Bond Yield, for example. U.S. Treasuries are the

most creditworthy of all debt instruments since they are backed by the "full faith

and credit" of the U.S. Government. Using Treasuries as a barometer is

considered the risk-free rate, meaning the minimum rate of return an individual

can expect when considering all other types of investments.

Life expectancy of a participant based on gender and race is another important

element to consider. The United States life tables and national vital statistics

reports, described in another section of the outline, are excellent sources for

estimating the reasonable life expectancy of an individual. Be aware of actuarial

present value calculations that may consider life expectancies well over 100 years

of age, as their assumptions tend to mimic those of an employer seeking to

conservatively calculate it’s liability to fund a pension plan.

In determining the present value of a retirement benefit for purposes of a property

offset or buy-out against other post-tax marital property, it is important to use

assumptions that are suitable and logical in regard to the divorcing party. The

assumptions used in an economic present value calculation are more appropriately

geared towards a real life situation rather than a book of numbers.

A present value of a pension16 calculation has 5 basic factors, 2 of which are

assumed, which directly affect the final present value. These are (1) duration of

the payout period based on life expectancy, (2) mortality, (3) dollar amount of

benefit, (4) the participant’s tax bracket, and (5) the assumed interest rate. These

factors become a chain of assumptions upon which the calculation of the present

value is supported by the weakest link.

A key relationship is that the longer the payout period, the higher the present

value. The duration or payout period is based on 3 factors: The participant’s age,

the normal retirement age and the life expectancy.

Another approach is to look for the “control point” in a pension. It is pure

speculation as to when the participant will actually retire. However, the age at

which the participant has the absolute and non-forfeitable right to retire is certain.

Therefore, have the pension valued at the earliest possible retirement age.

A mortality discount is used to take into account the probability that the

participant will decease prior to commencing his or her pension. Pensions are

promises of future benefits, unlike a defined contribution plan. Under a pension

you are promised a benefit at a future date but one of the requirements is that you

live until that date. Under many plans a single participant will forfeit his or her

promised retirement benefit if they die prematurely.

The Plan Administrator usually provides the monthly benefit that is used to

calculate a pension valuation. It would be wise to ascertain the last valuation of

the accrued benefit. Many plans can be as long as 18-months in arrears with

updating their actuarial calculations. You may consider doing your own

calculations by seeking a copy of the Plan Document.

16 See Steinke v. Steinke 126 Wis. 2d 372, 376 N.W.2d 839 (1985)

The tax discount17 may possibly be the most debatable assumption used in the

valuation process, next to the assumed interest rate. The common question is

what tax bracket is the participant in now, or likely to be in during retirement?

Here is where the question of certainty comes up again. If one thing is for certain,

we know that tax rates and tax laws will continue to change in future years. A

rule of thumb currently being employed by many evaluators is to simply discount

the present value by 20%, the same discount rate used to withhold on distributions

from qualified plans18 unless a more suitable19 tax discount rate can be

ascertained.

The interest rate assumption20 used to value a pension is without question the

most critical of all the previous mentioned assumptions. The single most

important mathematical relationship to know and understand is the lower the

assumed interest rate used in the calculation, the higher the present value.

Conversely, the higher the rate used, the lower the present value. For example, if

a pension promises to pay $1000 per month for 10 years the present value is

$98,770 using a 4% discount rate, whereas the present value is $78,942 using a

9% rate. These are the lump sums needed, based on the discount rate used, to

provide $1000 per month for 10 years. The inverse relationship between interest

rates and present value results from the fact that at a lower interest rate

assumption, a larger lump sum of money would be required to provide the same

monthly income over the specified period of time.

Other valuation issues may include vesting, cost of living adjustments (COLA),

coverture fraction formulas, shortened life expectancy, and larger tax discounts.

PRACTICE TIP: Many clients are adamant about retaining their pension that

they worked so hard to accrue over many years of service. Having a pension

17 See Corliss v. Corliss 107 Wis. 2d 338, 320 N.W.2d 219 (Ct. App. 1982) 18 I.R.C. § 3405©(1)(B) and (e)(1)(A)(I) 19 See Laribee v. Laribee 138 Wis. 2d 46, 405 N.W.2d 679 (Ct. App. 1987) 20 See Bouchard v. Bouchard 107 Wis. 2d 632, 321 N.W.2d 330 (Ct. App. 1982)

valuation completed is necessary to understand the value or worth of a plan, but

with the above thoughts in mind, why would anyone want to offset their pension

with other marital property? In reality, the participant may very well be paying a

former spouse for something they may never realize. Great care and thought need

to go into a property offset against a pension.

As previously discussed there are not many issues when valuing a DC plan.

However, you need to be aware of the valuation date to make certain that you get

up-to-date information. The same tax discounts should apply to defined

contribution plans as defined benefit plans. You need to consider the date upon

which company contributions and forfeitures are added to the plan. Some

companies will wait until they file their corporate income taxes to make their

respective employer contributions to a plan. That means that company

contributions could be over 18-months in arrears. Forfeitures are contributions

made to a participant plan from the non-vested portion of a terminated employee’s

plan. If a distribution is being planned to a participant or alternate payee that was

50-years old before January 1, 1986, you have additional considerations. The

possibility of using 10-year forward averaging and capital gains tax treatment still

applies. Lastly, the limits on contributions to plans have increased dramatically

over the past several years. A participant’s DC account could receive as much as

$42,000, and as much as $170,000 could be allocated to a defined benefit plan.

Don’t disregard the contribution dates, it could cost your client over $200,000!

PRACTICE TIP: If you’re looking to free up some cash in a dissolution case and

the parties have substantial “rollover” IRA accounts from a previous employer

plan consider transferring the rollover IRA to a company sponsored retirement

plan that allows such contributions and then divide the plan with a QDRO that

requires an immediate distribution.

1. Social Security

In 1939 Social Security benefits were designed around the demographic of a

married couple with one breadwinner. That is, a spouse, usually the female,

remained at home and provided domestic household duties while the other

spouse provided an income and other benefits to the household. Today, many

families have dual income and approximately half of all marriages end in

divorce. Social Security reduced the poverty level among seniors from 35%

to 10% as of year 2000; the last year such information was made available.

However, the benefits as we know them today are not in sync with regard to

divorce. For example, only 2.4% of married seniors are below the poverty

level while 21% of divorced seniors are below the poverty level. A large

portion of these (73%) divorced seniors under the poverty level are women.

Currently, a couple must be married for at least 10 years for the spouse to be

eligible to receive benefits based on her former spouses work history. A

divorced spouse married for less than 10 years is not entitled to a benefit

based on the former spouses work history. Of course spouses can still collect

benefits based on their own work history. At last count, marriages that ended

in divorce lasted an average of 7 years. This system could potentially create a

myriad of problems and concerns for the attorney.

Consider the following:

If a spouse divorces a worker after 40 years of marriage, the spouse is entitled

to a spousal benefit of 50% of the benefit earned by the worker as long as the

worker is living. Should the worker die, the divorced spouse is entitled to a

benefit equal to the worker’s full benefit. On the other hand, if a worker has 4

Consecutive spouses and married to each of them for 10 year or more, each

spouse is entitled to the same benefits as the worker married to a single spouse

that paid the same amount of taxes. The benefits paid to former spouses could

be staggering.

A divorced person that was married to a much older worker may get

substantially more benefits than a divorced person that was married to a

worker with the approximate same age. That’s because the older worker’s

spouse is more likely to collect survivor benefits, which are more generous

(75%) than spousal benefits (50%).

Social Security is governed by federal regulations. Therefore Social Security

is not allowed to be treated as property for purposes of divorce21. However,

although Social Security may not be treated as marital property, the benefits

are considered income for purposes of support. Therefore Social Security

benefits in pay status can be used to meet maintenance and child support

obligations. When computing support obligations and factoring Social

Security the attorney needs to consider the tax consequences (up to 85%)

where not all Social Security income is taxed.

In some cases, maintenance obligations are negotiated to cease when a former

spouse becomes eligible for Social Security benefits. As you may be aware,

the normal retirement age has changed. Age 65 is the normal retirement age

for those people born before 1937. The normal retirement age is 65 plus 2

months if you’re born in year 1938 and an additional 2 months for each year

thereafter. For those born between 1943 and 1954, the age is 66. For those

born between 1955 to 1969, the normal retirement age is 66 plus 2 months for

each month born after 1955. Anyone born after 1960 will wait to age 67 to

collect full benefits. Of course, at age 62 we all are allowed a reduced benefit,

which is about a 20% reduction. However, when a divorced dependant spouse

receives benefits at age 62, the reduction approximates 25%.

Note that Medicare benefits are not available until a beneficiary turns age 65.

If a reduction in maintenance is considered at age 62, there could be a

significant cost for health care benefits.

21 See Wis. 2d 604, 323 N.W.2d 153 (Ct. App.1982)

Your client may receive social security in one of two ways: (1) based on their

own contributions to the system or (2) as a spouse of a worker based upon the

worker’s contributions. Your client will receive benefits based upon the

calculation of benefits that provide them the highest possible benefit. In order

for your client to receive benefits from a former spouse, they must also be

eligible for benefits regardless of whether or not they have commenced a

benefit. This point may be particularly important if you represent a dependant

spouse that is older than a contributing spouse and the dependant spouse has a

substantially lower contributory history. Other factors are that the dependent

spouse is at least 62 years old and not remarried.

However, if the dependant spouse remarries and that marriage eventually

ends, the dependant spouse may apply for benefits based on the contributions

of either spouse (assuming 10 years or more of marriage). If as discussed

above, a dependant spouse has been married to 4 other contributing spouses,

each for 10 years or more, the dependant spouse is entitled to benefits based

upon the largest benefit payable from any of the contributing spouses.

Benefits are also available if the contributing spouse predeceases the

dependant spouse provided they were married for 10 years or more and the

contributing spouse was fully insured (40 quarters or 10 years) at death and

the dependant spouse has not remarried. Under this circumstance the

dependant spouse is eligible for benefits payable at age 60. This important if

the dependant spouse is near age 60 and considering remarriage. Another

quirk is remarriage will not prevent eligibility if the dependant spouse is

disabled and subsequently gets remarried between the ages of 50-59.

2. Defined Contribution Plans

DC plans usually have an individual account balance, which is valued, at least

once each year on the “valuation date”. Be prepared to ascertain the valuation

date. The value of the plan illustrated on a participant statement reflects the

last valuation date and could potentially be over 18-months old. Because of

technological advances, many plans can value their individual accounts on a

daily basis. These plans are relatively easy to divide whether using a dollar

amount or based upon a percentage of the total plan assets.

Assigning an alternate payee an exact dollar amount from a defined

contribution plan will produce that stated dollar amount. Often a plan will

require an effective date of the award, and additional verbiage assigning the

applicable market value fluctuation to that awarded share. If you use a stated

dollar amount some plans may forbid the assignment of market value gains

and/or losses on an alternate payee’s award. They may require that an exact

dollar amount or percentage be awarded as of the date the plan accepts the

QDRO or the date that the alternate payee applies for a distribution.

Calculating a percentage award of the plan may ease the burden of trying to

anticipate market gains and losses.

PRACTICE TIP: Determine the factual rights of the participant under the

plan as it relates to the sub-accounts. For example, many plans allow in-

service distributions from one sub-account and not the other. It might be

appropriate to single out a certain sub-account to assign to an alternate payee.

An example might be to require a 100% award of the “after tax” portion of the

plan and require an immediate distribution. The proceeds of which could be

used to pay attorneys fees and reduce consumer debt, for example.

3. Joint and Survivor Benefits

A QDRO may designate an alternate payee as the joint and survivor for pre-

retirement and post-retirement benefits whether or not the QDRO is a

“Separate Interest” QDRO or a Shared Interest QDRO. However, a plan that

is already in pay status, may have limited or irrevocable benefits in place.

Particular to ERISA plans, and regardless of the circumstances, the joint and

survivor option previously elected may not be changed, even by a court order.

However, there a few plans we are aware of, particularly WRS and many

other state teacher’s plans, where options already in pay status may be altered

and changed after the date of divorce.

There are three methods to securing a joint and survivor protection for your

alternate payee. The first method would be to provide the alternate payee with

a “Separate Interest” QDRO that specifically states that the participant’s death

will not affect benefits payable to the alternate payee. The second method is

to specifically name the alternate payee as the surviving spouse for both pre

and post retirement survivor benefits. The third method is a combination of

the previous two methods in that a Separate Interest QDRO is drafted and the

alternate payee is named as the surviving spouse to any pre-retirement

surviving annuity and/or a post retirement survivor annuity. Please note that

the latter method may eliminate the participant’s ability to name a subsequent

spouse as the surviving spouse to future accrued benefits.

Under a “Separate Interest” QDRO (discussed later) it is acceptable to allow

the alternate payee to name a beneficiary under an optional form of payment.

Such optional form of payment could be in the form of 60 payments certain

and life form, for example. The Retirement Equity Act of 1984 (REA)

contains an example in which the alternate payee elected a 60-month certain

and life annuity payment and designated her son as the beneficiary to the

remaining payments if she did not survive the 60 months. Our opinion is that

under the payment certain option, you may elect anyone, including a

subsequent spouse, to collect the remaining unpaid benefits. In the REA

example, however, the “child” constitutes an “allowable” alternate payee

under the statutory definition. If the alternate payee chooses a beneficiary that

is not defined as an alternate payee, it could be easily argued by the plan that

the designation does not satisfy the statute requirements. For certain, the

statute is clear that an option of a “joint and survivor” annuity is not allowable

with a subsequent spouse. The difference of course is that one form of benefit

is paid over the lifetimes of the spouse and former spouse while a period

certain is a finite payment. The impact on the benefits paid is also altered in

the event of an election of a joint and survivor annuity.

Furthermore, assume that the QDRO requires that the former spouse is to be

named the surviving spouse for purposes of the survivor benefit paid and the

language is very general. The participant may be prevented from naming a

subsequent spouse or another beneficiary without first obtaining the consent

of the former spouse alternate payee.

Whether to use the Separate Interest QDRO or the Shared Interest method

when dealing with the survivor benefit issue depends upon each case.

However it is clear that most “model QDRO’s” take a conservative approach

and opt for naming the alternate payee as the surviving spouse.

What about a situation where the plan is in pay status and the participant

previously elected a survivor option, thus reducing his monthly benefit in the

process? Does the survivor benefit option have a present value? A recent

Court of Appeals case22 absolutely confirms that it does. At the time of

divorce the husband had been receiving a pension and social security in the

amount of $3,451 per month. The wife was still working as a teacher and

earning $2,833 per month. The court eventually got around to treating the

pension as income rather than an asset. The court also recognized that the

survivor benefit is a marital asset but did not include the $52,000 value of the

survivor option in a division of the marital property. In short, the court

decided that since the pension was treated as income, and there was no

22 See Cir. Ct. No. 01FA004940 Appeal No. 03-1140

assurance that the survivor would ever collect the benefit, the survivor option

was simply a derivative of that income. Had the pension been treated as

property, the survivor benefit would have also been property.

Contrary and prior to this decision, the author finished a case in Kenosha

County with nearly the exact same circumstances. However, the husband

participant was 65 years old and the non-participant wife was 50 years old and

they were married a relatively short 12 years. Nearly 80% of the pension was

accrued prior to the date of marriage. Nonetheless, in a conference with

counsel, Judge Wagner indicated that she would treat the entire pension as

income and the survivor benefit as an asset. The author believes the largest

factor in this case was the age discrepancy and that the wife was likely to

collect on this survivor benefit.

Also see Court of Appeals case No. 98-2905-FT Johnson v. Johnson. This

case also involves a pension that is in pay status. However, Northwest

Airlines in this circumstance provided a 50% survivor option to the husband at

no additional cost due to his disability. The husband appealed that the court

erred in not valuing the survivor benefit but the court affirmed. However, the

court stated “We do not mean to indicate, however, that had husband and wife

selected reduced benefits so as to assure the wife continuing pension benefits

in the event of husband’s death, that this would not be a proper factor for the

court to consider in ordering the distribution of the pension benefits.”

PRACTICE TIP: The survivor benefit issue is a separate issue23. It is

allowable to fully divide the entire accrued survivor benefit as of the date of

death for example, and then divide the accrued benefit as of the date of

divorce. Therefore, the parties may negotiate the survivor benefit issue

independent from the division of the marital portion of the retirement benefit.

23 See Herdt v. Herdt 152 Wis. 2d 17, 447 N.W.2d 66 (Ct. App. 1989) Civil Service survivor benefits

4. Retiree Health Care Benefits

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires that

most employers sponsoring group health plans offer employees and their

families the opportunity for temporary extension of health coverage at group

rates, in certain instances where coverage under the plan would otherwise

cease. If you are a spouse covered by a medical plan, you have the right to

choose continuation coverage for yourself if you lose group health coverage

for divorce or legal separation from spouse, among other circumstances.

Under COBRA a divorced spouse may extend medical coverage and dental

coverage for up to 36 months.

The plan participant is required to notify the employer that a “qualifying

event” has occurred. A qualifying event is divorce. You will be given 60

days from the date a notice is mailed to you to inform the company COBRA

administrator if you want COBRA coverage. You may forfeit your COBRA

coverage rights if you do not notify the employer that you want continuation

coverage within 60 days of a qualifying event. Employers are not required

nor are they responsible to notify you of your eligibility for COBRA as a

result of divorce. Therefore, it is obvious that the attorney needs to address

this issue early in the divorce matter and collect as much information

regarding the cost and available options for health care.

When the payment or cost of health care benefits becomes an issue to a non-

participant spouse, while the participant spouse has full or partially paid

benefits, many times the cost of benefits can be calculated and accounted for

in an unequal property offset or a maintenance agreement.

The cost for COBRA coverage is the same cost as the group plan, plus the

employer may also charge a 2% administration fee.

The new Health Savings Account (HSA) is a trust like account created by an

individual, not an employer. They can be divided for divorce purposes and

the account could be used to pay COBRA premiums.

The military is much more liberal in regard to former spouse health coverage.

The Uniformed Services Former Spouses Protection Act permits former

spouses to continue receiving commissary, exchange, and heath care benefits

after a divorce in certain cases. In order to qualify for continued benefits a

former spouse must show that the service member served at least 20 years of

creditable service, that the marriage lasted at least 20 years and that the period

of the marriage overlapped the period of service by at least 20 years. A

former spouse who meets these requirements is known as a 20/20/20 former

spouse and is entitled to full commissary, exchange and heath care benefits.

Former spouses that do not meet these requirements lose their commissary

privileges once the divorce is final.

In cases where the service member served 20 years of creditable service, the

marriage lasted 20 years, but the period of the marriage overlapped the period

of service by only 15 years, the former spouse is entitled to full military

medical benefits only for a transitional period of one year following the date

of divorce. After this period the spouse is eligible to purchase a Department

of Defense (DOD)-negotiated conversion health policy.

The former spouse may not remarry and retain coverage nor enroll in another

employer sponsored health plan. All former spouses who don’t meet the

requirements above are entitled to the DOD Continued Health Care Benefit

Program, a premium type, temporary health plan for 36 months until

alternative coverage can be obtained. However, the non-member spouse must

enroll within 60 days of the date of divorce or they will lose full military

health care benefits.

You may also need to consider a qualified medical child support order

(QMCSO). A QMCSO is a medical child support order issued under state law

that creates or recognizes the existence of an alternate recipient’s right to

receive benefits that a participant or beneficiary is eligible to receive under a

medical plan and which satisfies certain additional requirements contained in

ERISA Section 609(a). Also, the plan administrator of the medical plan is

required to treat a notice pursuant to ERISA Section 609(a)(2)(ii) as a

QMCSO with the same force and affect until the actual QMCSO is filed with

the plan.

For purposes of a QMCSO an alternate recipient is any child of a participant

who is recognized under a medical support order as having a right to

enrollment under a group health plan with respect to such participant. Lastly,

ERISA also requires that self-funded medical must recognize QMCSO’s.

As part of divorce settlement a husband agreed to pay and maintain his former

spouse on his medical plan for two years. Instead of arranging for her to elect

benefits under COBRA, the husband continued her enrollment under his

group medical plan for almost 5 years after she had lost eligibility. When he

eventually notified the plan, the plan24sued him for fraud. The U.S. District

Court found him liable for reimbursement of over $100,000 in claims paid on

behalf of his former spouse. Subsequently, Biondi made malpractice claims

against his divorce attorney for failing to tell what he needed to do to obtain

COBRA coverage for his former spouse and also failing to tell him that he

needed to advise the medical plan of the divorce.

5. Plans with Special Issues

The bifurcation of retirement plans under Government sponsored plans,

church plans, tax exempt organizations and foreign plans are generally not

24 U.S. District Court Trustees of the AFTRA Health Fund v. Biondi

subject to ERISA and therefore may be very difficult to deal with. However,

today § 403(b) and § 457(b) plans are subject to the QDRO rules. Also tax

exempt organizations may now sponsor 401(k) plans.

Federal Government (non-military) orders are called Qualified Court Orders

and are not subject to the QDRO rules and ERISA. The rules for Civil

Service Retirement System (CSRS) and the Federal Retirement System

(FERS) are found at 5 CFR §838.211(a)(30) and 5 CFR §838.621 (a) subparts

C and F.

Generally under CSRS and FERS a former spouse (not referred to as alternate

payee) may not receive a portion of an employee annuity before the employee

annuity is paid to the employee. Also, the Government will only accept an

order that reflects a certain type of formula and/or share of an employee’s

annuity. It may be expressed in a fixed dollar amount, a percentage or

fraction, a formula set forth by statute25 or a pro rata share using a coverture

fraction formula which is specific to 5 CFR §838.621(a).

Military Plans are governed under the Uniformed Services Former Spouses’

Protection Act (USFSPA) which is the government’s version of ERISA

regarding divorce and division for governmental plans. Preparing a Military

plan or qualified court order is similar to a QDRO for an ERISA type plan.

Military plans however, have a number of unique features that you should be

made aware of. The order must allocate the benefits as either a percentage of

disposable retired pay26 or retainer pay or as a flat dollar amount. The

Military specifically prohibits the use of a formula or coverture fraction

formula method to divide benefits. In either event, under these circumstances

it makes it extremely difficult to provide a fair and equitable division. There

are some creative options that can make it much easier to divide the benefits

25 See 5 CFR §838.305(b)(1) 26 See Loveland v. Loveland 147 Wis. 2d 605, 433 N.W.2d 625 (Ct. App. 1988)

equitably. For example, the state court could retain jurisdiction and modify

the terms of the order at the time of benefit commencement for example. In

that manner, the order could be modified at retirement age using a flat dollar

amount or percentage based on a formula set forth in the marital settlement

agreement.

Each church plan has its own terms and conditions in regard to rules, which

define the division of the plan assets incident to a court order. Although a

church plan is generally not covered by ERISA, a plan may choose to be

governed by ERISA. In the author’s experience he has never come across a

church plan that is governed by ERISA. Rightly so, why would the plan want

to be burdened by a pile of red tape when they are not required to do so?

City of Milwaukee and County of Milwaukee Plans: Court orders are not

recognized by City and County plans not covered under the Wisconsin

Retirement System. The City of Milwaukee and County of Milwaukee are

exempt from ERISA and the IRC § 414(p) under Wisconsin Statute 66.81.

The Plans will however accept a wage assignment upon commencement of

benefits. If this is the only alternative we offer the following suggestions: The

non-employee spouse will have no control over the timing of the benefit

commencement. Death, disability, form of benefit27 and termination of

employment need to be discussed and negotiated. Upon the death of the

participant, the non-participant spouse loses all rights to a wage assignment

order. A life insurance policy could be secured on the life of the participant

and the named beneficiary could be the non-participant spouse. The amount

of coverage should be the future value of benefits or a negotiated amount

between the future value and present value. This is because the present value

increases as each year passes and/or the participant gets closer to retirement

age. A domestic relations order28 (DRO) is drafted which outlines the terms

27 See Lindsey v. Lindsey 140 Wis. 2d 684, 412 N.W.2d 132 (Ct. App. 1987) 28 See Lindsey v. Lindsey 140 Wis. 2d 684, 412 N.W.2d 132 (Ct. App. 1987)

and conditions of the division. In the Lindsey matter the husband was a City

of Milwaukee pension plan participant and the court ordered a division of the

plan in addition to a requirement that the participant elect a certain type of

payment option that would provide the former spouse with survivor benefits.

At a hearing the husband produced a letter from the City Attorney to the effect

that the payout plan for the pension in question had to be selected by the

participant and the previous court order drafted was not applicable. The wife

appealed and the appellate court reversed. In short, the trial court has

discretion regarding the “mechanics of its division.” To guard against future

problems the court retained jurisdiction and suggested that “maintenance” if

still a factor will be reexamined at the time the participant makes a pension

election.

Taxes will also be an issue with bifurcated City and County plans. The City

or County will not recognize the wage assignment as a taxable distribution to

the non-employee spouse nor will they consider the issuance of a 1099-R.

Taxes could be calculated and an after tax payment made with the wage

assignment. However, the most appropriate solution would be a maintenance

agreement upon commencement with the court retaining jurisdiction to

enforce. The DRO must be properly drafted to cover all the possible

contingencies.

B. Determining the Impact of Inflation and Vesting

If a plan contains either a specified or unspecified cost of living adjustment

(COLA) clause, an inflation adjusted interest rate should be applied. Most, not

all, ERISA plans don’t contain COLA’s. Most, but not all, government including

City, State and Federal plans contain a cost of living clause. Wisconsin

Retirement System does not contain a COLA clause. What it has is a “benefit

adjustment” based upon investment results. Therefore no COLA is specified but

the plan has averaged an increase near 6% annually over the last 15 years. The

plan may provide a COLA but the rate is unspecified. The plan document may

contain language that uses a benchmark rate such as the Consumer Price Index as

the rate.

Most states, including Wisconsin,29 recognize all retirement benefits as

distributable assets regardless of whether or not the retirement benefit is vested.

This issue went as far as the California Supreme Court in the Marriage of

Brown30where the court rejected the idea that non-vested benefits were mere

“expectancies” and not distributable. The employee’s right to benefits upon

completion of performance is a contractual right and therefore included as marital

property. The court did not determine that the present value of a vested pension is

the same as one with a lack of vesting. Lack of vesting should be considered and

the final pension value discounted for the lack of vesting. However, the

discounting methods are ripe for argument. One of the methods employed is to

discount the plan for the probability of death prior to vesting or termination of

employment before the participant becomes fully vested. To discount for the

probability of death, the formula to use is similar to the mortality discount

previously discussed. An occupational expert may have to be consulted regarding

the probability of termination of employment prior to full vesting. Obviously,

these methods complicate the issues and increase the cost of handling a divorce.

Assigning an alternate payee an exact dollar amount per month from a defined

benefit31 plan will produce that stated dollar amount, which the plan pays at a

certain date, such as the date the participant attains age 65. However, the actual

date of the alternate payee’s application for benefits may provide for a different

dollar amount. For example, if the alternate payee is awarded $500 based upon

the participant’s age 65 benefit, the alternate payee would receive $500 per month

at the participant’s age 65 and the benefit would stop at the participant’s death if

29 See Bloomer vs. Bloomer 84 Wis.2d124, 267 N.W. 2d235 (S. Ct. 1978) 30 See Brown 15 Cal.3d838, 847, 126 Cal.Rptr.633 1976 31 I.R.C. § 414(p)(2)(A)(B)(C)(D)

the alternate payee were not deemed the “surviving spouse”32. If the alternate

payee were to commence her benefit at any other time, the benefit would be

adjusted actuarially. Awarding an exact dollar amount may restrict the alternate

payee from participating in future service credits, subsidies, and cost of living or

benefit enhancements, unless specifically awarded.

PERCENTAGE DIVISION: Often the marital settlement agreement will assign

an alternate payee a certain percentage of the participant’s retirement benefits,

without any specification as to the effective date of the award. A percentage

award is acceptable, however specification of the effective date of the award is

recommended. Such date may be expressed as of the date of divorce, as of the

valuation date closest to the date of divorce or it could also be determined as of

the date of commencement as an example. If no date is specified and the Plan

“qualifies the order” it is likely that the percentage will apply upon application for

benefits.

MARRIAGE COVERTURE FORMULA: This is one of the most

misunderstood methods of dividing a pension. In the Journal of Forensic

Economics, Volume IV, Winter, 1990, pp. 47-54, the author Ralph A. Frasca

points out four coverture methods of dividing pensions. Using a fraction formula

to divide retirement plan benefits is popular in many states. A fraction formula

can be designed to exclude from division any benefits attributable to a

participant’s service prior to the marriage. Alternatively, it can be designed to

include a proportionate share of increases due to higher salaries earned by the

participant, and benefit improvements made by the plan for inflation, after the

date of divorce. A fraction formula is commonly referred to as a marriage

coverture adjustment, or a time formula. An example to assign one half of the

“marital portion” of a participant’s retirement benefits may look like this:

32 I.R.C. § 414(p)(5)(A)(B)

½ X

Number of months of Participant’s

creditable service accrued as of the

date of divorce (or during marriage)

X 100

= Alternate Payee's percent of

Total number of months of

Participant’s creditable service at the

earlier of Participant’s retirement or

Alternate Payee’s application for

benefit commencement

total retirement benefit earned

as of the earlier of

Participant’s retirement or

Alternate Payee’s application

for benefit commencement

A marriage coverture formula is often advantageous to the alternate payee

because it will allow her to participate in future service credits, enhancements and

entitlements under the plan. The largest increase in benefit accrual will normally

occur in the final five or ten years of service. When used for this purpose, the

benefit paid to the alternate payee is determined at the time of application for

benefits rather than the date of divorce. Most plans pay a benefit based on the

number of years of service multiplied by a formula using the “final average

earnings” method. As a result, this will dramatically increase the final benefit.

When the QDRO requires the plan to provide a benefit payable to an alternate

payee based upon the final benefit payable to the participant, it will generally be a

division of the greatest benefit payable. This is an excellent negotiating tool for

the alternate payee to provide the maximum benefit determined on the number of

years of marriage. It is recommended that this be negotiated in advance and

specified in the Marital Settlement Agreement to avoid problems during the

drafting stage.

The marriage coverture formula has also been applied by the State of Wisconsin

in Court of Appeals District IV. However, the formula is used to arrive at a

percentage of a divisible plan rather that as the formula set forth in a QDRO. In

the Marriage of Halverson v. Halverson Case No. 00-1884, the coverture fraction

was applied to arrive at the appropriate percentage other than a 50/50 division to

use on a WRS QDRO. In this case, the parties were married for approximately

7.5 years and the husband was a participant in the WRS plan for approximately 20

years. The court used 6.5 years as the numerator. Therefore, 32.5% was

considered as a marital component of the plan. The QDRO awarded 16.25% to

the former spouse. Another interesting part of this case is that the court used 6.5

years as numerator even though the marriage was 7.5 years in length because the

participant did not work for a full year during the marriage due to brain surgery.

Although the pension is a marital asset, the court has discretion in its division.

C. Using Mortality Tables

A key relationship for the attorney to understand is that the longer the duration or

payout period, the higher the present value of a pension. The duration is based on

three factors: (See Appendix E)

a. the participant’s present age

b. the participant’s assumed retirement age

c. the participant’s life expectancy

Once understood, the relationship between a short and long payout periods

becomes obvious. The longer the payout period the greater the present value.

PV $ Now PV at Retirement

Deferral Period Payout Period

45

65

85 Application of Mortality Discount (the probability of death before retirement) $1000/ Month

General Rule: Higher PV: the shorter this period the longer this period Lower PV: the longer this period the shorter this period

Early Normal Retirement Retirement

85 45

Basically there are two kinds of pension valuations used today. They are an

actuarial valuation and an economic valuation. Both valuation methods have five

basic factors that directly affect the final present value. They are (1) the duration

or payout period, (2) mortality discount, (3) dollar amount of the benefit, (4) the

participant’s tax bracket, and (5) the assumed interest rate. Unfortunately, these

elements become a chain of assumptions upon which the calculation of the

present value is supported by the weakest link. In other words, if any of the five

factors turn out to be incorrectly assumed, the present value calculation is

inaccurate.

While it is true that most valuations provide recent and credible sources for these

assumptions, different sources can be used to produce different results. Just as

important as knowing the sources of these assumptions is knowing why and how

these assumptions affect the participant’s present value of their pension.

An actuary will most often site the mortality tables published by the PBGC and

specifically the 1983 GAM table, which is the Group Annuity Mortality table. In

some circumstances, based on age and gender, the table may stretch a life

expectancy to over 108 years. On the other hand, most economists use the Vital

Statistics of the U.S. Life Tables Volume II, Section 6, Publication Number (PHS)

84-1104. In some cases, separate life tables can be used which specifically apply

to unhealthy individuals. This approach was successfully used in a Texas

court33and had the affect of lowering the value of the pension due to the shorter

life expectancy.

An argument has been made in other states for the use of unisex tables in valuing

pension benefits because of doubt concerning the constitutionality of making

distinctions between males and females. Unisex tables average out the mortality

rates for females and males. In a valuation where gender based tables are used in

33 Marriage of Butler (Tex. App.) 543 S.W.2d 147 (1976)

determining the present value, a female participant will be required to surrender a

greater dollar amount than would an identical situated male participant.

Nonetheless, does your client want to know the value of the pension as it pertains

to them and their circumstances or would they rather have a valuation based upon

a variety of unrealistic assumptions? It might be that the practitioner could use

both. The actuarial valuation uses a blended table, however its use is designed to

even out the cost of the plan to the employer. The U.S. Supreme Court held that it

was unconstitutional for employers to pay a smaller pension benefit to women

because women, as a class, live longer.

Another life expectancy discount commonly applied to a pension valuation is

referred to as the “mortality discount.” The mortality discount takes into account

the probability of death prior to the date the pension benefit is commenced. In

most defined benefit plans the participant will forfeit his/her promised retirement

benefit in lieu of a pre-retirement survivor annuity, usually 50% of the accrued

benefit payable for the life of the survivor, and actuarially adjusted for age and

gender of the survivor. Most often, these are only payable to surviving spouses,

and in some rare plans, to surviving children under age 18 and even more rare to a

named survivor of your choice. Statistics used are found at the same Life Tables

sited above when an economic valuation is used. The PBGC GAM tables have

the mortality discounts built into the tables.

The third factor is the monthly benefit or dollar amount used in the calculation.

The Plan Administrator most often supplies the monthly benefit and is a

calculation based on, for the most part, the participant’s average prior earnings,

the number of years of service, multiplied by a given factor. If the monthly

benefit is not supplied it can be accurately calculated using the formula set forth

in the plan document or Summary Plan Description.

The fourth factor is the participant’s income tax bracket. Apart from the interest

rate assumption, the tax discount may possibly be the most debatable assumption

in the valuation process. The question most commonly asked is what tax bracket

is the participant in now, and what tax bracket will they be in at retirement. One

thing is certain, we know tax rates and tax laws will change in the future. A

common rule of thumb being used is to discount the present value by twenty

percent. This figure is derived from the rule (Unemployment Act of 1983) that

requires a plan administrator to withhold twenty percent federal taxes from

distributions from lump sum qualified retirement plans. There is some support for

the twenty percent discount and it comes from the Statistical Abstracts of the

United States, 2001, which suggest that an average retiree has an effective tax rate

of 17.6% with a variance of 2.4%. Obviously, you will find circumstances where

the tax discount should be reduced and/or increased.

The final assumption in regard to the pension valuation is without question, the

most critical of all the assumptions. The interest rate assumed will have a

dramatic affect on the lump sum present value calculation. An important

mathematical relationship to know and understand is that the lower the interest

rate assumed, the higher the present value will be. Conversely, the higher the

interest rate, the lower the present value. The inverse relationship between

interest rates and the final present value of the pension becomes obvious. Be

careful of the pension valuation prepared by the actuary that uses a four-tiered

interest rate approach. The actuary is assuming decreasing interest rates over the

period from the date of valuation to the date of retirement. Using this rate

structure will produce an artificially high present value because of the low interest

rate assumption during the deferral period and a decreasing interest rate

assumption during the payout period. In the Bouchard case34the use of a 5% rate

prescribed by the State of Wisconsin’s insurance code for valuing annuities

(formerly the standard used in Wisconsin) was rejected. That was in a year

during which yields on U.S. Treasury Bonds and Bill were 12.8% and 10.6%

respectively. Clearly the court was ruling in favor of realism in this case.

Throughout the past decade, the author has seen the use of the PBGC rates

34 Bourchard vs. Bourchard (107 Wis. 2d632, 321 N.W.2d 330 (1982)

conflict with the realities of the current market interest rates. In the Herbst case35

the court clearly rejected the actuarial valuation over the economic valuation as

more “realistic” interest rate approach.

The author has an obvious bias toward the economic valuation process because

the actuarial method has numerous unrealistic assumptions tied to the calculation.

For example, Actuaries who employ the four tiered interest rate structure

discussed above are really valuing the employer’s liability to the plan, not the

value of the plan to the employee. The rates and table inherent in the PBGC data

are typically lower, on a weighted basis, than those used by economists. This is

due to the ultra conservative nature of the PBGC in insuring the plan against the

possibility of default for under-funding in the event of termination. Thus the rate

structure that the PBGC produces has an insurance premium built into these rates,

paid by the employer in calculating the employer pension liability. The actuaries’

calculations don’t relate to a single life, but rather a diverse cross-section of

hundreds and thousands of individuals and is not applicable to an individual

pension plan and its participants. The PBGC structure inadequately accounts for

inflation, lack of liquidity, and the fact that a historically short-term interest rate is

being assumed over a relatively long period of time. In other words, is the

liability or cost of the plan to the employer the same as the value of the plan to the

employee? At what point does the usefulness of the pension benefit matter? If

the actuary assumes a life expectancy to age 108, does the income stream really

have any usefulness or value to 108 year old?

Whether it is an actuary or economic valuation of the pension, the valuation

should contain notes describing the basis for certain assumptions used and other

pertinent data. As of late, the ratio of economic value to the actuarial value

actually increased as interest rates have declined since beginning their decent in

2002.

35 Marriage of Herbst Case No. 98-FA-222) unpublished

D. Other Benefit Division Considerations

The most commonly used age for valuing the retirement benefit is the “normal

retirement age” under the plan. This is usually age 65 for most ERISA type plans,

much sooner for government plans. With more and more people opting for early

retirement, using the normal retirement age may be inappropriate in some cases.

Under the terms and conditions of most defined benefit plans, the active

participant will have the non-forfeitable right to retire at any time after attaining a

certain age (sometimes a minimum number of years of service are required) such

as 55. It is pure speculation as to the date that a participant will actually retire,

but the age at which the participant has the absolute right to retire is referred to as

the “control point.” Although the actual age is speculative, the control point is

certain. The author believes that even though you may not use the control point

information at trial or in negotiations, determining the value of the plan at the

“earliest allowable” retirement date is valuable information. This is even more

important if you represent the non-participant spouse.

Don’t overlook the importance of determining the date on which the valuation

will be made. Failure to recognize and determine the financial ramifications of

such a date could have serious consequences. Many DC plans allow for

discretionary profit sharing contributions that are determined at year-end but may

not be deposited until 3-4 months later. Also, some voluntary contributions may

not post in the account until after the valuation date. In a DB plan, under most

circumstances, using the same valuation date as the retirement date leaves the

benefits payable at retirement or to your alternate payee, unknown and most likely

increased by future service credits, most often undetected by you.

PLAN LOANS: It should be determined whether a qualified plan loan is a marital

debt. Any amount borrowed from a plan by the participant is taxed as a

distribution unless the loan is not more than the lesser of (1) $50,000 or (2)

greater of $10,000, or one half of the non-forfeitable accrued benefit to the

participant. The loan must be repaid within 5-years and must be amortized in

level installments over its term with payments not less frequently than quarterly.

The 5-year amortization requirement does apply to any loan used to acquire a

principal residence. Loans will generally only be an issue with defined

contribution plans. Defined contribution plans have a definite account balance for

each participant as well as an alternate payee if the alternate payee has retained

her share with the plan. If loans are allowed within the terms and conditions of a

plan, a QDRO may provide the right to borrow from the plan to the alternate

payee. More often than not, plan documents require that the “participant” is an

active employee, therefore loans would not be available to an alternate payee

because they would not be an active employee. If all or a portion of the loan

becomes taxable, it is subject to premature distribution rules and ordinary income

taxes to the participant and/or alternate payee. Loans and the tax consequences

should be considered in the equitable division of the marital property.

RETIREMENT AGE: It is important for the attorney to ascertain the earliest

retirement age under the plan that is being divided via QDRO. Most defined

benefit plans provide early retirement at the participant’s attainment of age 55.

However some plans define the earliest retirement age as a function of the number

of years of service or age plus years of service. Benefits paid sooner than the

normal retirement age are subject to reduction for early commencement. For

example, if a participant has earned a benefit equal to $1,000 per month payable

at age 65, he may be allowed to receive it early, at age 55, in reduced form, such

as $500 per month. The accrued benefit is reduced to compensate for the

extended payout period.

In a standard defined benefit plan, benefits are not payable to an alternate payee

until the participant attains the earliest retirement age under the plan. While the

age of the alternate payee may impact the amount of benefit she receives under an

independent interest QDRO, it has no impact on her ability to commence receipt

of benefits.

Compare the age of the participant to the age of the alternate payee. Determine

the earliest retirement age of the participant, which is the point at which benefits

are payable to the alternate payee. If there is a large discrepancy in age between

the alternate payee and the participant, it is possible that the awarded benefit will

never become payable to an alternate payee. In some instances it is worthwhile to

explore creative and cost effective solutions to the variety of problems that may

be encountered.

For example, assume that you have a 60-year-old male participant that has

accrued a vested lifetime benefit equal to $2,000 per month. Assume the alternate

payee is age 50, and she is awarded 50% of his benefit, or $1,000 per month. If

the alternate payee is to receive benefits in the amount of $1,000 per month, they

will be based on the participant’s lifetime and will cease upon his death, often

referred to as “if, as and when” type QDRO’s. If benefits are to be paid to the

alternate payee over her lifetime, which is most often the intent, then the amount

she receives must be actuarially converted to accommodate her age and life

expectancy under the terms of the plan. Given the age difference between the

parties in this example, a benefit of $1,000 payable for the lifetime of the

participant may only yield $350 per month for the lifetime of the alternate payee.

This is because the alternate payee is younger, expected to live longer, and thus

receive payments over a longer period of time.

PRACTICE TIP: Further assume that the plan allows for a 100% joint and

survivor annuity equal to $1,600 per month payable over the lifetimes of both the

participant and his former spouse. The 100% joint and survivor annuity is less

than the option that would provide the participant with a monthly benefit for his

lifetime alone because it is reduced by the costs associated with paying the benefit

out over the lifetimes of two individuals. A shared interest QDRO could require

benefits to be paid in the form of a 100% joint and survivor annuity, with the

alternate payee deemed the “surviving spouse”. The QDRO could for example,

award the participant $1,200 per month (which is more than 50% of the accrued

$2,000 he would have received with a straight 50/50 division) and the former

spouse $400 per month (which is more than the actuarial equivalent she would

have received under an independent interest QDRO). At the participant’s death,

which is likely to be substantially earlier than the alternate payee’s in this

example, the alternate payee would receive $1,600 per month until her death

(which is substantially greater than what would otherwise be payable to her under

an independent interest QDRO). This example demonstrates how analyzing the

spousal benefits in each particular marital situation could provide increased value

to each party and potentially solve a myriad of financial issues.

Summary:

The common threads, which flow through different pension valuations, have, in a

comparative sense, varying effects on the present value outcome simply because

of the methods and sources used. One thing is for certain, the relationships of

interest rates to the present value or duration to the present value are mathematical

truisms, which are only modified or distorted by the methods of valuation

employed.

FACTORS AND ASSUMPTIONS AFFECT ON PRESENT VALUE

High Interest Rate Lower Present Value Low Interest Rate Higher Present Value Early Retirement Age Higher Present Value Normal Retirement Age Lower Present Value Shortened Life Expectancy Lower Present Value Cost of Living Adjustment Higher Present Value Marriage Coverture Adjustment Lower Present Value Larger Tax Discount Lower Present Value

The closer a person is to retirement, the larger the present value. The value of the

pension peaks at the retirement date. This makes sense when you consider that

with any length of a deferral period, that the plan, or individual saving for

retirement has time to let the funds compound at interest. At retirement, the fund

is no longer growing and must then be annuitized or liquidated to pay out the

desired monthly benefit. As each year passes subsequent to the retirement date,

less and less money is needed in the form of a lump sum to provide the required

income over the remaining payout period.

Understanding how each of these elements of a present value calculation relate to

the final value of the plan, whether the attorney represents the participant or the

participant’s spouse, will only strengthen the attorney’s ability to negotiate a fair

settlement on behalf of their client.



IV. TIPS AND STRATEGIES FOR EFFECTIVE DRAFTING AND

IMPLIMENTATION


IV. TIPS AND STRATEGIES FOR EFFECTIVE DRAFTING AND

IMPLIMENTATION



A. Interpretation of Order From Court

The Plan Administrator should take certain steps whether the plan pre-approves or

does not pre-approve an order when it’s received. The Plan Administrator has a

statutory obligation to determine if a court order meets the requirements of §

414(p) of the Code. This obligation must be completed in a reasonable amount of

time after the plan has received the order36. When a proposed draft is reviewed

the “reasonable time” rule does not begin until the plan receives the final order

signed by the court.

The statutes do not define “reasonable time.” In the absence of regulations it’s

not clear what the maximum amount of time is allowable for reviewing an order.

Many attorneys believe that the 18-month period as referenced in the QDRO

provisions is the period required for a “qualified” status. This is incorrect because

the statute is only referenced in regard to the requirement that the Plan must

segregate payments that would have otherwise been paid to the alternate payee

and have not been paid pending the “qualification” process by the Plan37.

Therefore the 18-month period does not apply to the “reasonable” time period for

qualification. Our experience is that most plans provide a response within 30-45

days.

B. Establishing Administrative Procedures

36 IRC § 414(p)(6)(A)(ii); ERISA § 206(d)(3)(G)(i)(II) 37 IRC § 414(p)(7)(E); ERISA § 206(d)(3)(H)(v)

In connection with the written procedures discussed below the plan must

determine if a particular order meets the requirements of IRC § 414(p). In doing

so the plan should adopt the following administrative procedures:

a. Identify the Plan that will pay the benefits

b. Identify who will receive the benefits

c. Identify the amount, percentage or formula used to determine the

amount to be paid to the alternate payee

d. Identify the date which benefits are to be paid to the alternate payee

and the form of payment

e. Identify when the benefit payments will cease

f. Determine what happens when the alternate payee dies after the order

is approved but before benefits are paid

g. Determine what happens when the participant dies after the QDRO is

approved

C. Communicating QDRO Procedures to Participants and Alternate Payees

For plan years beginning on or after January 22, 2001, the Department of Labor

requires that the Summary Plan Description of a pension plan include either a

description of the plans’ QDRO procedures or a statement indicating the

participant’s and an alternate payee can obtain a copy of the plan’s procedures

from the plan administrator, at no charge.

All qualified plans are required to have the following:

1. A QDRO procedure in writing

2. A statement proclaiming that each individual identified in the DRO, as

being entitled to benefits from the plan, shall be mailed a copy of the

written QDRO procedures at the address cited in the DRO upon

receipt of the DRO.

3. The procedure must allow the alternate payee to designate a

representative for the receipt of such notices that are sent to the

alternate payee.

4. The procedures must be reasonable in nature.38

5. The plan must follow the written procedures so any unwritten

procedures should be put into writing. See Appendix D for a sample

written procedure.

A Plan Administrator should never release information regarding a participant

without receiving written authorization from the participant. If a participant

refuses or fails to provide such authorization a properly served subpoena to the

Plan Administrator will accomplish the same.

D. Required Information and Elements of the QDRO

The Order must designate each alternate payee. An alternate payee is any spouse,

former spouse, child or other dependent of the participant who is recognized by a

domestic relations order as having a right to receive all or a portion of the benefits

payable under the plan with respect to the participant. (I.R.C. §414(p)(8) and

ERISA §206(d)(3)(K))

The Order must clearly specify the amount or percentage of the participant's

benefits to be paid to alternate payee, or the manner in which the amount is to be

determined. (I.R.C. §414(p)(2)(B) and ERISA §206(d)(3)(C)(ii))

The Order must specify the number of payments or the period to which the order

applies. (I.R.C. §414(p)(2)(C) and ERISA §206(d)(3)(C)(iii))

The Order must specify each plan to which the order applies. (I.R.C.

§414(p)(2)(D) and ERISA §206(d)(3)(C)(iv))

38 ERISA §§ 206(d)(3)(G)(ii)(I), 206(d)(3)(G)(ii)(II) and 206(d)(3)(G)(ii)(III)

The Order must specify the name and last known mailing address of the

participant and alternate payee. Social security numbers, dates of birth and the

date of divorce are not required under the Code, but most plan administrators

require this information to process and calculate benefits payable to the alternate

payee, especially if the awarded benefits are to be based upon the lifetime of the

alternate payee. (I.R.C. §414(p)(2)(A) and ERISA §206(d)(3)(C)(i))

A domestic relation’s order is any judgment, decree, or orders including a

property settlement agreement which:

a. relates to the provision of child support, alimony or marital property rights

to a spouse, former spouse, child or other dependent of a participant.

b. is made pursuant to a state domestic relations law, including a community

property law. (I.R.C. §414(p)(B)(i)(ii) and ERISA §206(d)(B)(ii)(I)(II))

The qualified status of the domestic relation’s order is determined only by the

plan administrator in accordance with I.R.C. §414(p) and ERISA §206(d).

The order must create or recognize the existence of an alternate payee's right to,

or assigns to, the right to receive all or a portion of the benefits. (I.R.C.

§414(p)(1)(A)(i) and ERISA §206(d)(3)(B)(i)(I))

The order cannot require the plan to provide any type or form of benefits, or any

option, not otherwise provided under the plan. (I.R.C. §414(p)(3)(A) and ERISA

§206(d)(3)(D)(i))

The order cannot require the plan to provide increased benefits determined on an

actuarial value. (I.R.C. §414(p)(3)(B) and ERISA §206(d)(3)(D)(ii))

The order cannot require the payment of benefits to an alternate payee that are

already required to be paid to another alternate payee under a previous order.

(I.R.C. §414(p)(3)(C) and ERISA §206(d)(3)(D)(iii))

In the case of any payment before a participant has separated from service, an

order may provide that payments to the alternate payee can begin on or after the

date on which the participant attains the earliest retirement age under the plan

whether or not the participant has actually retired. The earliest retirement age

means the earlier of:

c. the date the participant is entitled to a distribution under the Plan, or

d. the date the participant reaches age 50, or, if later, the earliest date on

which the participant could receive benefits if the participant separated

from service. (I.R.C. §414(p)(4)(B)(i)(ii) and ERISA

§206(d)(3)(E)(ii)(I)(II))

Clearly an attorney should not simply fill in the blanks of “model documents”, but

rather gain a thorough understanding of the retirement plan and its benefits,

leading to his/her own draft to submit to the plan administrators. Discovery,

analysis and a pension valuation should be completed before the negotiation and

drafting of a QDRO begins.

An Order that is determined to be qualified will remain qualified with respect to a

successor plan of the same employer or a plan of a successor employer (§ 414(a)

of the I.R.C.). Information in regard to a Qualified Domestic Relations Order can

be obtained from the I.R.C. §414(p), Employee Retirement Income Security Act

(ERISA) of 1974 §206(d) and the Retirement Equity Act of 1984 (REA-84),

Public Law 98-397 §104, which amended certain sections of ERISA to improve

the delivery of benefits to an alternate payee. I.R.C. §401(a)(13) creates an

exception to the anti-alienation requirements of Code §401(a)(13)(A). ERISA

qualified plans are subject to the anti-alienation rules unless they are divided by

means of a domestic relations order that is determined to be qualified by the plan

administrator.

E. Separate Interest vs. Shared Payment QDRO

Every divorce is different, and every plan is different. In determining which

format is most beneficial to the parties, consider the age difference between the

parties and how close they are to retirement age. Independent interest QDRO’s

usually provide the most equitable means of division when the parties are

relatively close in age and in good health. Also consider the health of the parties.

Shared interest QDRO’s are usually beneficial when terminal illness afflicts one

of the parties. Shared interest QDRO's are usually the only form of QDRO

permissible once the participant has already retired.

PAYABLE OVER LIFE OF ALTERNATE PAYEE OR PARTICIPANT: The

most typical type of QDRO, an independent interest QDRO, assigns benefits to

the alternate payee over the alternate payee’s lifetime, regardless of survival of

the participant. In securing an independent interest QDRO it is essential to clearly

define the intent. Phrases such as “actuarial equivalent”, “payable over the

alternate payee’s lifetime” will reduce the likelihood of misinterpretation by the

plan administrator. There have been numerous malpractice cases where the

alternate payee’s benefit has either been forfeited or has ceased at the death of the

participant because the QDRO preparer mistakenly assumed that benefits would

be payable to the alternate payee for her lifetime.

A shared interest QDRO will pay benefits to the alternate payee over the lifetime

of the participant. This means that retirement benefits will cease to be paid to the

alternate payee upon the death of the participant. A shared interest may also

provide for pre-retirement and post-retirement survivor benefits to be paid to the

alternate payee upon the death of the participant, however they do not come

without a cost.

SEGREGATED BENEFITS: A QDRO that assigns a benefit to an alternate payee

that is independent of the participant’s employment status and survival is

considered a separate interest QDRO, or an independent interest QDRO. An

independent interest will allow the alternate payee to collect benefits at the

participant’s earliest retirement age (or the age the participant would have attained

the earliest retirement age39 under the terms of the plan) or later, regardless of the

survival of the participant. The plan administrator is directed to provide the

alternate payee with benefits payable over her lifetime. Essentially the benefits

awarded to the alternate payee are segregated from the benefits of the participant.

In doing so, the alternate payee should not need to be deemed the “surviving

spouse” of the participant to collect benefits for her lifetime. This is usually the

most equitable and efficient manner in dividing defined benefit retirement plans.

Also, it will provide the least cost to the participant. That is, the participant’s

benefit will be reduced only by the amount awarded to the alternate payee,

without further reduction for the costs associated with survivor benefits. On

occasion this approach will prohibit other options such as cost of living

adjustments, subsidies, or a reversion to the participant upon the premature death

of the alternate payee.

The opposite approach to an independent interest QDRO is a shared interest

QDRO. A shared interest QDRO essentially treats the parties as a married

couple, instead of single individuals. In certain circumstances this may be

appropriate. The alternate payee receives a portion of the participant’s benefit

during retirement and survivor benefits can be secured in the same fashion as if

the parties were married. Rather than segregating the benefits and having the

alternate payee receive benefits based on her own lifetime, the benefits are paid

based on the joint lives of the parties.

F. Suggested Language

Countless times the author has read marital settlement agreements that simply

state to “divide the retirement interest” in half. I’m sure you realize by now that

39 I.R.C. § 414(p)(4)(B)(I)(ii)(I)(II)

some very critical issues cannot simply be divided in half. In fact, in a defined

benefit situation, an exact “equal” division is unlikely in the eyes of the lay person

due to the actuarial assumptions used in the division of the benefits. Obviously

the attorney needs to carefully articulate the myriad of issues facing the final draft

in the marital settlement agreement.

Language needs to be clear on simple matters such as the actual name of the plan

being divided. You need to address the method used to bifurcate the benefits, and

the date to be used in valuing the benefit for division. The marital settlement

agreement should also address survivorship issues, cost of living increases, or

future contingent benefit increases, subsidized benefits and language that the

participant will not take any action that could jeopardize or reduce the benefits

assigned to the alternate payee. Here’s a sampling of some suggested language

for a variety of situations:

If you want to provide a single lump sum from a defined contribution and have

the award adjusted for account fluctuations from the date of the divorce to the

date of distribution the following language may be acceptable:

The amount assigned to Alternate Payee shall be equal to fifty percent (50%) of all account balances in the Plan with respect to the Participant as of the date of divorce, (date of divorce) or the Plan valuation date closest to the date of divorce.

Alternate Payee shall receive her portion of the Participant's account balance stated above in a single lump sum payment after this Order has been accepted by the Plan Administrator as a Qualified Domestic Relations Order and Alternate Payee has completed such notice of application for distribution of benefits as required under the terms and conditions of the Plan and in the manner in which Alternate Payee requests to receive and/or transfer said account balances. Such distribution shall fully satisfy the Alternate Payee's rights under this QDRO.

The lump sum payment to Alternate Payee may be made as soon as practicable after this Order has been approved as a Qualified Domestic Relations Order. The lump sum amount stated above shall be adjusted for any market value and/or investment gains or losses from the effective valuation date of the award to the date of valuation for distribution to the Alternate Payee. Any distribution from the Plan pursuant to this QDRO shall be made in accordance with normal Plan procedures.

If you want to award a pro-rata share of an early retirement subsidy, the following

language may be acceptable:

The Alternate Payee shall be entitled to a pro-rata share of any early retirement subsidy provided to the Participant on the date of his retirement (including any temporary, supplemental payments made to the Participant). In the event the Participant retires early after the Alternate Payee has already commenced benefits on an unsubsidized basis, the amounts payable to the Alternate Payee shall be recalculated according to the Plan Administrator’s practices and the Plan’s actuarial principles, in order to provide the Alternate Payee with a pro-rata share of such subsidy (including a pro-rata share of any temporary supplement payable to the Participant). The Alternate Payee shall only receive her portion of any temporary supplement as long as the Participant is eligible for and receiving such supplemental payments.

If you want to require that proceeds from the QDRO distribution be used to pay

attorney fees or other possible debts the following language may be acceptable:

Alternate Payee shall receive her portion of the Participant's shares stated above in a single lump sum payment after this Order has been accepted by the Plan Administrator as a Qualified Domestic Relations Order and Alternate Payee has completed such notice of

application for distribution of benefits as required under the terms and conditions of the Plan and in the manner in which Alternate Payee requests to receive and/or transfer said account balances. Alternate Payee is hereby ordered to elect to receive a portion of her awarded share in the form of a taxable distribution with a net payment not less than the amount of the Attorney’s fees that she has incurred. Alternate Payee is hereby ordered to pay all Attorneys’ fees that she has incurred upon receiving the distribution of her award. The Plan shall not be held responsible for enforcing the obligations of the Alternate Payee. Such distributions shall fully satisfy the Alternate Payee's rights under this QDRO.

If you want to provide for an independent interest QDRO you have a variety of

alternatives. Typically an independent interest would require the alternate payee

to meet certain age requirements to commence a benefit, usually the participant’s

age 55 or if deceased, the age the participant would have attained age 55.

However, if you want to award an independent interest and provide a pre

retirement survivor annuity (a benefit could be paid prior to age 55) the following

language may be acceptable:

The assignment of an independent interest of the Participant’s

benefits to the Alternate Payee herein shall not be reduced, abated

or terminated as a result of death, disability or termination of

employment of the Participant. Plan benefits shall be payable to

the Alternate Payee even if the Participant dies prior to, or after

commencement of Alternate Payee’s benefit, or prior to or after the

commencement of the Participant’s benefit. The Alternate Payee

shall be treated as the surviving spouse of the Participant for

purposes of Sections 401(a)(11) and 417 of the Internal Revenue

Code to the qualified pre-retirement survivor annuity (QPSA)

benefits provided by the Plan, if the Participant should predecease

the Alternate Payee, subject to the following conditions: (1) the

Alternate Payee would be entitled to receive a QPSA benefit based

only on the Participant’s pension benefit accrued as of the date of

divorce; and (2) the QPSA benefit protection will expire as soon as

the Alternate Payee commences receipt of her awarded benefit as

set forth in paragraph 1 of this Order.

This sample language is not designed to address all the retirement benefit issues

that may arise in each domestic relations matter or QDRO. Further, some of the

sample language while helpful in facilitating a draft; it is not meant to satisfy all

or any of the requirements of a QDRO. See the appendix for a sample defined

benefit QDRO and defined contribution QDRO.

G. Calculating the Division of Pensions and Other Offsetting Assets

As previously stated, there are five factors that determine the present value of a

pension. And, the most critical of all the factors is the interest rate or discount

rate assumed. If your considering an offset situation, it makes financial sense to

look at the value of the pension in terms of the risk tolerance of the individual to

be certain that you are comparing a fair value. For example, many times one

party opts to retain the home while the other party retains his/her pension.

Assume that you represent the non-participant spouse and they would prefer to

retain the residence. If the non participant spouse is accustomed to putting their

long term investments into stock, and/or stock mutual funds for example,

assuming a 4% interest rate on the value of the pension for offset purposes will

result in a substantially larger present value. If as a result of that valuation

assumption you were unsuccessful in reaching an offset agreement, did you really

provide counseling that was in the best interest of the individual? Probably not

because the value of the pension using a 4% discount rate artificially increased the

true value of the pension to that individual. The correct way to handle this

situation is to fully understand the calculation and illustrate several interest rate

assumptions, which will put you into a much better negotiation position. Often

times attorneys request a pension valuation from their expert and they receive a

report that indicates that the present value of a pension is X amount of dollars.

The attorney sticks to that number as if it’s a bank account balance and many

times will even litigate the issue. On the other hand, if you represent a client that

is largely unsophisticated, maintains mostly bank assets if any, using a more

conservative interest rate might be most suitable. However, under a circumstance

such as this additional financial counseling is likely warranted because your client

might be putting themselves into a financial situation that they may not able to

sustain for any length of time.

H. Tax Issues

1. Distinctions between IRC and ERISA Title I

The Employee Benefits Security Administration (EBSA) is responsible for

administering and enforcing the fiduciary, reporting and disclosure provisions

of Title I of the Employee Retirement Income Security Act of 1974 (ERISA).

At the time of its name change in February 2003, EBSA was known as the

Pension and Welfare Benefits Program. At the time of this name change, the

Agency was upgraded to a sub-cabinet position with the establishment of

Assistant Secretary and Deputy Assistant Secretary positions.

The provisions of Title I of ERISA, which are administered by the U.S.

Department of Labor, were enacted to address public concern that funds of

private pension plans were being mismanaged and abused. ERISA was the

culmination of a long line of legislation concerned with the labor and tax

aspects of employee benefit plans. Since its enactment in 1974, ERISA has

been amended to meet the changing retirement and health care needs of

employees and their families. The role of EBSA has also evolved to meet

these challenges.

The administration of ERISA is divided among the U.S. Department of Labor,

the Internal Revenue Service of the Department of the Treasury (IRS), and the

Pension Benefit Guaranty Corporation (PBGC). Title I, which contains rules

for reporting and disclosure, vesting, participation, funding fiduciary conduct

and civil enforcement, is administered by the U.S. Department of Labor. Title

II of ERISA, which amended the Internal Revenue Code to parallel many of

Title I rules, is administered by the IRS. Title III is concerned with

jurisdictional matters and with coordination of enforcement and regulatory

activities by the U.S. Department of Labor and the IRS. Title IV covers the

insurance of defined benefit pension plans and is administered by the PBGC.

Prior to 1978 reorganization, there was overlapping responsibility for

administration of the parallel provisions of Title I of ERISA and the tax code

by the U.S. Department of Labor and the IRS, respectively. As a result of this

organization, the U.S. Department of Labor has primary responsibility for

reporting, disclosure and fiduciary requirements; and the IRS has primary

responsibility for participation, vesting and funding issues. However, the U.S.

Department of Labor may intervene in any matters that materially affect the

rights of participants, regardless of primary responsibility.

Pre-ERISA Legislation: Initially, the IRS was the primary regulator of private

pension plans. The Revenue Acts of 1921 and 1926 allowed employers to

deduct pension contributions from corporate income, and allowed for the

income of the pension fund’s portfolio to accumulate tax-deferred. The

participant realized no income until monies were distributed to the participant,

provided the plan was tax qualified. To qualify for such favorable tax

treatment, the plans had to meet certain minimum employee coverage and

employer contribution requirements. The Revenue Act of 1942 provided

stricter participation requirements and, for the first time, disclosure

requirements.

The U.S. Department of Labor became involved in the regulation of employee

benefits plans upon passage of the Welfare and Pension Plan Disclosure Act

in 1959 (WPPDA). Plan sponsors (employers and labor unions) were required

to file plan descriptions and annual financial reports with the government;

these materials were also available to plan participants and beneficiaries. This

legislation was intended to provide employees with enough information

regarding plans so that they could monitor their plans to prevent

mismanagement and abuse of the plan funds. The WPPDA was amended in

1962, at which time the Secretary of Labor was given enforcement,

interpretive and investigative powers over employee benefit plans to prevent

mismanagement and abuse of plan funds. Compared to ERISA, the WPPDA

had very limited scope.

ERISA: The goal of Title I of ERISA is to protect the interest of participants

and their beneficiaries in employee benefit plans. Among other things,

ERISA requires that sponsors of private employee benefit plans provide

participants and beneficiaries with adequate information regarding their plans.

Also, those individuals who manage plans, along with other fiduciaries, must

meet certain standards of conduct. The law also contains detailed provisions

for reporting to the government and disclosure to participants. Furthermore,

there are civil enforcement provisions aimed at assuring that plan funds are

protected and participants who qualify receive their benefits.

ERISA covers pension plans and welfare benefit plans (e.g. employment

based medical and hospitalization benefits). Plan sponsors must design and

administer their plans in accordance with ERISA. Title II of ERISA contains

standards that must be met by employee pension benefit plans in order to

qualify for favorable tax treatment. Noncompliance with these tax

qualification requirements of ERISA may result in disqualification of a plan

and/or other penalties.

Important legislation has amended ERISA and increased the responsibilities

of EBSA. For example, the Retirement Equity Act of 1984 reduced the

maximum age that an employer may require for participation in a pension

plan; lengthened the period of time a participant could be absent from work

without losing pension credits; and created spousal rights to pension benefits

through qualified domestic relations orders in the event of divorce, and

through pre-retirement survivor annuities. The Omnibus Budget

Reconciliation Act of 1986 eliminated the ability of employers to limit

participation in their retirement plans for new employees who are close to

retirement, and the ability to freeze benefits for participants over age 65. The

Omnibus Budget Reconciliation Act of 1989 requires the Secretary of Labor

to assess a civil penalty equal to 20% of any amount recovered for violations

of fiduciary responsibility.

The department’s responsibilities under ERISA have also been expanded by

health care reform. The Consolidated Omnibus Budget Reconciliation Act of

1985 (COBRA) added a new part 6 to Title I of ERISA which provides for the

continuation of health care coverage for employees and their beneficiaries (18

–36 months) if certain events would otherwise result in a reduction in benefits.

More recently, the Health Insurance Portability and Accountability Act of

1996 (HIPAA) added a new part 7 to Title I of ERISA aimed at making health

care coverage more portable and secure for employees, and gave the

department broad additional responsibilities with respect to private health

plans.

2. Non-Qualified Plans, Stock Options and Welfare Benefit Plans

Section 457(f) plans are referred to as non-qualified deferred compensation

plans and in less common circles sometimes called “Rabbi Trusts.” Typically

they are designed to attract and retain highly compensated employees by tying

the benefits paid to the employee over a long-term employment contract. The

IRS recognizes these types of plans as non-qualified40 and they are not subject

to ERISA. The primary reason is the benefits (whether funded or unfunded,

or phantom stock) or accounts are subject to the claims of the businesses

general creditors. Therefore, if the business has financial problems in the

future, the assets in the plan are subject to paying the business debts. On the

other hand, ERISA plans are not subject to the claims of the business creditor

nor are the participant’s assets in the plan subject to the claims of their

respective creditors. In other words, the plan’s assets are at risk of loss until

they are actually paid and/or distributed to the participant and/or alternate

payee. Most plans have written provisions in regard to how the plan will

divide benefits incident to divorce, if at all.

As we enter the 21st Century, attorneys will need to become more

knowledgeable regarding non qualified stock options. Traditionally stock

option plans have been used as way for companies to reward top management

and key employees and link their interest with those of the company. Those

plans were commonly referred to as “golden handcuffs.” A survey conducted

in 1997 found that more than a third of large U.S. companies have broad-

based stock option plans covering all or a majority of their employees, not just

key employees. That’s more than double the figure in 1993.

A stock option is the right to purchase a specified number of shares of stock

for a specified price, at specified times. The price at which the option is

granted is called the grant price and in many cases is the market price of the

stock at the time the option is granted. Whether the option is granted to

provide income, for past services, as an incentive for future services, or for no

consideration at all, an option holder has finite term to exercise the option or

they are subject to loss. So with an option contract, time is a critical factor. If

you are entering an agreement using a deferred payment agreement, to avoid

problems the risk of forfeiture of the option going unexercised while value

40 I.R.C. § 83

exists should be addressed to avoid economic loss or a potential malpractice

claim.

Most courts, including Wisconsin41treat stock options as marital property.

What most courts don’t agree on is the manner of valuation and/or division.

In Chen v. Chen, the court clearly struggled with placing a value on stock

options. Instead, the coverture fraction formula and order of a net after tax

payment due upon exercise of the options was used. The courts have to deal

with a myriad of issues. They need to determine if the options are a result of a

reward for past service and thus completely marital or are they an incentive

for future services. What about stock options that have no value. If a value

cannot be determined can they be divided? Are they vested or unvested

options?

Most courts are using a four-step process with dividing options. The first step

is to trace the options to past and/or future services. The second step is to

determine the portion that is related to compensation for past service. This is

usually determined by when the options were granted during the marriage in

relationship to when they vest. All vested options at the date of divorce would

be considered a marital asset unless a portion was vested prior to the marriage.

The third step is determining the portion that was granted for future services.

Those would be all the shares granted but don’t vest until a later date. The

marital share of those options can be determined using a fraction formula.

The result will then be divided between the parties. A value could be placed

on the option as of the date of divorce for property offset purposes or as in

Chen v. Chen, a deferred payment arrangement could be negotiated.

3. Defined Benefit and Defined Contribution Plans

41 See Chen v. Chen 142 Wis. 2d 7, 416 N.W.2d 661 (Ct. App. 1987)

A plan may allow an alternate payee to elect a distribution immediately after

the plan receives the order and deems the order “qualified”. A plan may not

require an alternate payee to receive their distribution immediately unless the

alternate payee’s account value is less than $500042. Payments to an alternate

payee under a QDRO are not taxed to the participant; they would not be

subject to the premature distribution penalties and would not interfere with the

participant receiving a lump sum distribution in the future. Furthermore, the

distribution to the alternate payee could be rolled over into an IRA. All

distributions from qualified retirement plans (with the exception of

distributions to children via QDRO for child support purposes) are considered

ordinary income to the recipients, and taxed as such. A direct distribution

from a defined contribution plan to an alternate payee is pursuant to a QDRO

is exempt from the 10% federal and 3.3% Wisconsin state premature

distribution penalties that would otherwise apply to distributions prior to age

59½. Please note that once the distribution is rolled over or transferred to an

IRA, the exemption from the premature distribution penalties no longer

applies.

Distributions from defined contribution plans that are not directly rolled over

into an IRA or other qualified retirement plan are subject to an automatic 20%

federal tax withholding. The rollover of assets from one qualified plan to

another qualified plan is permissible, provided that the receiving plan will

accept rollovers from other plans. Most often, however, alternate payees will

opt to transfer their awards into an IRA.

Therefore, there are two ways an alternate payee may be able to receive

benefits from the plan that are eligible for a rollover; a direct rollover to

another plan or Individual Retirement Arrangement (IRA), or a rollover paid

to the alternate payee.

42 I.R.C. § 411(a)(11)

a. If the alternate payee elects a direct rollover to another qualified plan

(provided the subsequent plan accepts rollovers) or IRA the payment

will not be taxed in the current year and no income tax will be

withheld. The plan benefits cannot be rolled over to a ROTH IRA,

SIMPLE IRA or an Education IRA because they are not traditional

IRA’s.

b. If the alternate payee elects to receive the payment in cash, the

alternate payee will receive only 80% of the gross payment. Under the

Unemployment Act of 1983 the Plan Administrator is required to

withhold 20% of the payment and send it to the IRS for federal income

tax withholding. The amount is credited to the alternate payee and if

the tax turns out to be less than the amount withheld a refund will be

given after the taxes are filed.

The payment will be taxable to the alternate payee unless it is rolled

over into another qualified plan or IRA. The alternate payee can

rollover the payment that was received within 60 days after they

receive the payment. The amount rolled over will not be taxed until it

is withdrawn from the IRA or qualified plan. If the alternate payee

wants to rollover 100% of the payment to a traditional IRA for

example, the alternate payee must find other money to make-up the

20% difference that was withheld. If the alternate payee rolls over

only the 80% that was received, the alternate payee will be taxed on

the 20% that was withheld and not rolled over.

Any payments made to an alternate payee that is not the spouse or former

spouse (i.e. child of the participant) via QDRO will be considered taxable

income to the participant. Usually this type of award is made for purposes of

collecting child support.

The IRS requires that the Plan provide written information to the alternate

payee regarding the tax consequences of a distribution from a qualified plan

via a QDRO. Suggested language issued by the IRS is below:

“This notice contains important information you will need before you

decide how to receive your Plan benefits.”

This notice is provided to you by the ABC Plan Administrator because all

or part of the payment that you will soon receive from the ABC plan may

be eligible for rollover by you or your plan administrator to a traditional

IRA or another qualified employer plan. A traditional IRA does not

include a Roth IRA, SIMPLE IRA or education IRA (Coverdell).

If you have additional questions after reading this notice, you can contact

your plan administrator at the following address”:

I. How to Effectively Work With the Plan Administrator

Discovery, analysis and evaluation should be completed before the negotiation

and drafting begins! This cannot be over emphasized. Once you have determined

that your client or the client spouse is a participant in defined benefit or defined

contribution plan you should contact the plan administrator to obtain as much

information as possible about the plan. You need to request a copy of the plan

document so that the benefit formula and other provisions can be fully

understood. If the plan has a “model QDRO,” request this document as well.

You should find out if the plan pre-approves QDRO’s (most do) and the correct

channel for pre-approval and final submission. You should discuss with the plan

administrator whether or not the plan has any special provisions that need to be

addressed in the QDRO. You will find a sample Form that can be used as the first

contact with the plan administers. (Appendix E).

After the Discovery, analysis, evaluation, and negotiation are done, a proposed

draft should be completed and approved by the participant and alternate payee.

Then submit the proposed draft to the plan administrator for their review and/or

pre-approval. It is typical that the plan may require some language changes. You

should determine the relevance of the changes to the alternate payee and

participant and get their approval. After the pre-approval is made, the participant

and alternate payee should sign the original QDRO and submit the same to the

court for its approval. When court approval is made, the QDRO should be mailed

“certified, return receipt requested” to the plan administrator per the previous

instructions that you obtained. Once the plan administrator “qualifies the order”

as a QDRO, a notice should be sent to both parties. If the order is not “qualified”

the plan will return the order with an explanation of what needs to change.

PRACTICE TIP: Seek an interpretation of how the plan will administer the

distributions based upon the QDRO language. If the plan explains how the

benefit will be calculated and/or paid to the alternate payee, it is likely those

unpleasant or unexpected surprises will not occur. The request for a

determination is best sought when the proposed QDRO is sent to the plan

administrator for pre-approval. In that manner, if the plans’ administration is

different than your understanding changes can still be made without costly re-

drafts and potential litigation.

Many plan administrators will provide you with a “model” QDRO specific to

their plan. Certainly using the “model” QDRO will make your task much easier

and assuming you follow the form, the plan administrator will “qualify” the order

much more efficiently and quicker that a draft they have never seen before. We

see numerous different models from a variety of sources and there are

approximately 15 “model QDRO’s” on the State Bar web site. However, some of

these QDRO’s are very good while other are simply not so good. Many others are

drafted in a manner that would be unfair to the alternate payee. We have even

seen QDRO’s that unfairly reduce the retirement benefits paid to the participant.

Consequently a one or two works for all “model form” QDRO simply does not

exist in the perfect world. Therefore, a model form QDRO should be looked over

carefully to determine the impact on the retirement benefits payable to each party

and whether or not the party wants their benefits allocated in the manner

suggested by the model QDRO.

Clearly an attorney should not simply fill in the blanks of “model documents”, but

rather gain a thorough understanding of the retirement plan and its benefits,

leading to his/her own draft to submit to the plan administrators. Discovery,

analysis and a pension valuation should be completed before the negotiation and

drafting of a QDRO begins.

J. Administering Distributions

As we’ve discussed in other areas, administering a distribution is treacherous

ground. And, you may use the distribution for a variety of reasons and solve a

myriad of financial problems such as reducing debt or paying attorney fees. The

problem is that a QDRO distribution cannot be used collateral. It also cannot be

paid to the attorney trust account (must be spouse, former spouse, child or

dependant of the participant) or another third party without triggering tax

consequences to the participant. Therefore, if the QDRO is being used for an

unorthodox approach, it is very important to keep track of the distribution and/or

distribution dates. Keeping in touch with the plan administrator will usually yield

an anticipated date of distribution. In that manner, you should have a fair idea as

to when the distribution will be made. The distribution could be mailed (changing

the address of record, and then change it back after the distribution) to the

attorney’s address of record and held until the alternate payee signs it over to the

attorney’s trust account for deposit, as an example.

You will also note that we discussed the 20% federal tax withholding. But it’s

worth repeating that state taxes are not automatically withheld and in many cases,

the actual tax could be substantially more than the tax withheld. Of course there

are those rare occasions that the tax could be actually less. In that case, it likely

occurred with a very small distribution.

Once the QDRO is drafted and approved, the attorney should note that an

“automatic” distribution would not occur, even if the QDRO requires it. Once

approved, the alternate payee will need complete a plan distribution form and

submit it to the plan administrator. Plans that use daily valuation systems will

usually yield a fairly short time frame for the distribution to get to the alternate

payee. Plans that use monthly, quarterly and even annual distributions will

experience a longer delay in receiving a distribution.

Most experienced financial advisors can calculate with pinpoint accuracy the tax

consequences of distributions. In addition, with much less accuracy however, a

financial advisor can give your client a fair assessment of the future purchasing

power of their distribution and whether it makes suitable and logical financial

sense to rollover the proceeds or use it for another purpose. As previously stated,

the vast majority of clients may have substantial assets, but most are wrapped into

IRA’s, 401(k)’s, and other employer sponsored plans. If your client lacks liquid

after type investments, savings and money market assets, this should trigger red

flag in that your client spends most of what they make. In that manner, it

behooves the client to get expert financial advice that will project a long-term

approach to their short-term decision making before they suffer the consequence

of a lifelong financial mistake. A good financial advisor can illustrate likely

retirement scenarios based upon your client’s income and tax consequences. It’s

even possible to pinpoint the amount of savings and investment required and the

rate of return needed to answer a host of financial questions such as:

How much money do I need at retirement?

Am I saving enough now or do I need to be saving more?

Am I going to run out of money or is my money going to run out first, before I

die?

What rate of return is needed for the money that I do have to meet the goals that

I’ve set?

Most clients don’t deal fairly with their retirement plan needs. They fail to

recognize that their income will need to continue to rise. They get falsely secure

with fixed income streams that have no opportunity to increase the monthly

stream of income. They fail to recognize that real estate tax bill or rent will

continue to rise. That medical insurance and health care costs will continue to

rise. The cost of food, clothes and transportation will also rise. These costs need

to be accounted for and necessary planning done well in advance of their

retirement years. Most clients find that they are not saving enough. Straight talk

and tough answers are the keys to their success. Client’s financial goals will not

be met by purchasing a hot stock or investing in any single financial product. In

many cases, clients need to be prepared for the somewhat less than an obvious

answer to their financial woes. They may need to find another job or take a

second job. They could also increase the risk of their investment portfolio, but

most people find themselves reducing their expected lifestyle or working much

longer than they would have had they done good planning.

K. Pitfalls You May Encounter – Taking Preventive Risk Management Actions

There is not a statutory time limit which a practitioner must prepare and/or

complete the QDRO process. It is obviously in the best interest of the alternate

payee to have the QDRO drafted and filed as soon as possible. Likewise, it is in

the participant’s best interest to delay the draft and filing as long as possible.

To protect your alternate payee, the attorney should contact the Plan

Administrator and place them on written notice that your client has a potential

claim to the participant’s benefits. A notice may prevent your clients rights from

being lost or reduced in an unorthodox manner. Even though this is not

technically a DRO or QDRO, most Plan Administrators will take notice of the

written correspondence and freeze all distribution paperwork or take other

procedures they feel necessary under the circumstances to protect the alternate

payee benefit for no other reason than the fear of litigation.

Often attorneys opt to include certain security devices in marital settlement

agreements that are designed to better insure compliance with the other

agreements contained in the agreement. Unfortunately, the practical application

of such security devices often has less than the intended effect. For example,

acceleration clauses with respect to support are often included and triggered by

non-compliance. Such clauses can bring with them problems with front-loading

and recapture as described above.

Life insurance and trusts are also considered security devices. Problems emerge

when the intended insured fails to qualify for the level of coverage needed.

Further attorneys must be diligent about tracking any beneficiary changes that

could trigger major probate problems.

Phantom stock interest in a company owned by the payor spouse is sometimes

used to “secure” payment of ordered support or other obligations. Binding

agreements are difficult to draft and enforce. Beyond the difficulty in drafting,

there are effects on other stockholders, which negate or weaken the payee’s

spouse’s interest. Attorneys must be diligent about detecting buy-out provisions

in corporate agreements and determining if such provisions can be overwritten.

Otherwise, stockholders could buy the payee spouse’s “security interest” from

him or her at a much-reduced price.



V. ADDRESSING ETHICAL ISSUES – PRACTICAL AND LEGAL

PROBLEM AREAS

Attorney Diane Diel

V. ADDRESSING ETHICAL ISSUES – PRACTICAL AND LEGAL

PROBLEM AREAS

Attorney Diane Diel

A. Attorney-Client Privilege

B. Malpractice Issues and Avoidance – Limiting Your Liability

Failure to account for 100% of the retirement benefits, including supplemental

benefits, cost of living adjustments, plan improvements and a myriad of other

issues can result in future litigation over issues that could have been resolved

years earlier. Keep in mind that most QDRO’s that pertain to DB plans may not

provide benefits to an alternate payee for 20 or 30 years from now!

Many attorneys fail to identify the various retirement plan benefits that employees

are participating in. In a recent case, I interviewed a former spouse who came to

see me about rolling over her 401(k) plan that she was awarded in her recent

divorce. The client’s former spouse was an employee of UPS. I asked her what

did her attorney do with the defined benefit plan? Was a present value established

and the value offset with another marital asset? The client looked befuddled and

told m that she was told that this “IS” the retirement plan. I referred her back to

her attorney and then I learned that she did not have an attorney and that her

former spouses attorney was a “friend of the family” that handled the entire

matter for them. I was informed that they “didn’t have adequate assets” to argue

over, so it was determined that one attorney could save them both a lot of money

in their divorce proceeding. You can only imagine the phone call that I received

from the attorney. To make a long story short the defined benefit plan had a

present value in excess of $100,000! In this case a conflict was present being a

“friend of the family.” There was also an appearance that he was representing

both parties even though she signed a statement reflecting that the attorney

represented the participant and not the alternate payee. In addition, I worked with

this particular attorney for nearly 20 years and he was more than familiar with

retirement benefits and failed to disclose the defined benefit plan.

Disciplinary Proceedings – Board of Attorneys Professional Responsibility:

See Case No. 98-2497-D where the Board of Attorneys Professional

Responsibility Complaint against Attorney John P. Louderman, III, for failure to

send a QDRO to the court for its approval in a divorce action until more that six

years after being ordered by the court to do so. Attorney Louderman received a

public reprimand for his misconduct.

ROLE OF THE EXPERT: The effect of equitable distribution upon divorce has

created a new emphasis toward the economic aspects of marriage. These include

valuation, division and tax considerations of marital property. The concept of

equitable distribution of property also brought the need for attorneys to find and

use experts to establish many of the values. Just about every divorce case

involves tax issues and retirement plan issues, some simple, some complex. The

attorney and client need the help of the expert in these matters.

The financial expert in particular can provide a myriad of services to the client

and attorney. These include developing a theory of the case, valuation of a

business, marshaling the assets, providing tax advice, preparing an expert report,

testifying at trial, assisting the attorney in cross-examination of the opposing

expert as well as helping to negotiate a settlement. No case should be settled

without consideration of the tax aspects of the entire settlement. Finally, the

expert may also help the attorney in following-up after the divorce is final to

facilitate an equitable and orderly bifurcation of the marital assets. These include

the transfer of assets from one spousal account to another, assistance with the

draft of the QDRO, follow-through with the change of beneficiary designations,

re-title of assets, estate planning issues etc.

Be certain to check with your financial advisor to see that they have the proper

level of errors and omission (professional liability) insurance. Many advisors

such as the author carry specific professional liability insurance for providing

advice to attorneys related to the financial aspects of divorce, taxes, financial

planning and investments.

C. Conflicts of Interest



VI. SPECIAL ISSUES


VI. SPECIAL ISSUES



A. Death of a Participant – Survivorship Protection43

Pension benefits in pay status may cease being paid or they could are forfeited to

the plan upon the death of a single plan participant44 prior to or after the

commencement of the benefits. If a plan will recognize an independent interest

QDRO, the alternate payee’s awarded share of the participant’s benefits will not

be affected by the participant’s death. If the alternate payee is deemed the

“surviving spouse” for pre-retirement survivor annuity (QPSA) benefits, said

QPSA benefits may commence immediately after the death of the participant, or

they might be delayed until the date the participant would otherwise have been

eligible to receive retirement benefits. The terms and conditions of the plan

apply.

PRACTICE TIP: Attempt to determine whether or not pre-retirement survivor

benefits are necessary to secure the alternate payee’s awarded share for the

remainder of the alternate payee’s life. If they are not necessary, excessive

verbiage may be confusing. If they are necessary, be certain to specify to what

extent the alternate payee is covered. Many plans allow only one “survivor”.

Otherwise the alternate payee may experience a windfall upon the death of the

participant at the expense of the widow. For example, a participant is divorcing

and has 20 years of service and accrued a benefit of $1000 per month. A QDRO

awarded the former spouse a 50% interest in the participant’s monthly-accrued

benefit as of the date of divorce. Assume over the next 10 years the participant’s

benefit increases to $2000 per month and the QDRO provided for a 50% joint and

survivor annuity to his “former spouse”. Subsequently, the participant dies

43 See Mausing v. Mausing 146 Wis. 2d 92, 429 N.W.2d 768 (1988) 44 See 29 U.S.C. § 1055(a)(2) Provides joint and survivor annuity to spouse regardless if death occurs before or after retirement

prematurely and now his former spouse now receives $1000 per month (50%

survivor) and his current widow receives nothing.

B. Disability of Participant

In some plans the disability of a participant can trigger commencement of

retirement benefits, regardless of age. If a participant becomes disabled and

pension eligible, then the alternate payee becomes eligible to receive pension

benefits, even if the disability is prior to the earliest retirement age. Conversely,

the disability of a participant could also prohibit an alternate payee from

commencing receipt of her benefit until the date on which the participant would

have attained the normal retirement age under the plan. For example, if disability

triggers a benefit unrelated to the pension, such as an insurance benefit, the terms

of the plan may read that the participant will not become eligible to commence his

benefit until his age 65. If these are the terms and conditions of the plan, then the

alternate payee will not be eligible to commence receipt of her benefit until the

participant reaches age 65.

PRACTICE TIP: A general clause that requires the alternate payee’s benefit be

payable at the time and in the manner described, regardless of a participant’s

disability, should be sufficient for the Plan to notify you if the terms of the Plan

are contradictory to the intent of the parties. In general, if the plan provides for

disability benefits payable from the plan, special language needs to be inserted

regarding the allocation of those disability benefits. If disability is paid from a

separate insurance policy for example, a QDRO does not generally need to

address disability, other than the consequence with a Shared Interest QDRO and

disability could trigger a delay in benefits.

C. Termination of Employment of Participant

Termination of employment prior to retirement eligibility will generally not cause

benefits to become payable under a defined benefit plan. However, the terms and

conditions of the plan will apply. Normally the participant and alternate payee

must wait until the participant attains the earliest retirement age under the plan

before either of them can begin receiving benefits. Some plans require a

terminated employee to wait until the normal retirement age before they become

pension eligible. Language to the effect that the alternate payee is allowed to

select the earliest retirement age of the participant under the plan is sufficient to

facilitate a distribution at the participant’s termination, provided the plan will

recognize the participant as retirement-eligible upon termination.

D. Death of Alternate Payee

In a defined benefit plan, if the alternate payee dies prior to the commencement of

benefits, said benefits will usually revert to the participant or be forfeited to the

plan. If the alternate payee dies after commencement of benefits, the form of

benefit elected at retirement will determine whether any amounts are payable

following death. Often an alternate payee is limited to selecting a single life only

option, which means that nothing further will be payable after death. In the event

the Plan allows for payment under a period certain option, such as one that

provides guaranteed payments for a specified period of months regardless of the

survival of the payee, then an alternate payee may elect such option and designate

a beneficiary, including a subsequent spouse.

Generally beneficiary designations are not allowed by an alternate payee in a

defined benefit plan unless a specific death benefit is payable. Several plans pay

lump sum death benefits, a proportionate amount of which can be awarded to an

alternate payee in a QDRO. The terms and conditions of the Plan will apply.

Although a plan administrator is not required to accept a QDRO that names the

children of the marriage as “contingent alternate payees”, some will. I.R.C. §

414(p)(8) states that the order must name each alternate payee. It does not limit a

QDRO to name a single alternate payee. The same Code also states that an

alternate payee may be a spouse, former spouse, child or other dependent of the

participant. If a plan accepts a QDRO with contingent alternate payees, usually it

is only for the pre-retirement period that such contingent alternate payees will be

recognized. In other words, the children of the marriage may receive the alternate

payee’s benefits if the alternate payee dies prior to alternate payee

commencement of benefits. However, once the primary alternate payee begins to

receive benefits, the form of benefit elected will determine whether or not

amounts will be payable after death.

If an alternate payee is awarded a portion of a defined contribution plan, often the

award is distributable immediately, and there is no concern over how the alternate

payee’s share will be paid in the event of death. However, some defined

contributions require that a separate account be maintained for the alternate

payee’s award, and alternate payee is restricted from taking a distribution until the

participant terminates employment, dies, becomes disabled or is eligible to retire.

In such circumstance, the alternate payee should be allowed to name a beneficiary

to the proceeds of alternate payee account. The beneficiary may be any person

that the alternate payee may choose, including a subsequent spouse. It is also

possible to require the alternate payee to maintain the former spouse as the

beneficiary, which could be used to secure or guarantee support payments in the

event of a premature death for example. Nonetheless, it is often an overlooked

bargaining tool.

PRACTICE TIP: In a defined benefit plan, don’t risk complete forfeiture of the

alternate payee’s benefits if alternate payee dies prior to commencement of

benefits. A QDRO can specify that the alternate payee’s benefits shall revert to

the participant in the event of alternate payee pre-retirement death. While not all

plans will approve this provision, in most cases it is worth an attempt. The

alternate payee gains nothing from this reversion clause except that additional

concessions could be secured for the alternate payee in exchange for including it.

If a plan will recognize the children of the marriage as contingent alternate

payees, the drafter of the QDRO may wish to confirm how the plan interprets

“child of the participant”. Some plans will recognize a child of the participant

regardless of their age. Other plans will define such term as a minor child, and

once that child reaches the age of majority they are no longer eligible to be

considered a contingent alternate payee, regardless of the fact that he or she is still

the child of the participant. If allowed, you could effectively get an alternate

payee’s awarded share to the alternate payee’s children in the event of premature

death before benefits commence. It is possible that the participant may remarry.

You need to be certain with the language that you are not giving away the entire

survivorship benefit to the alternate payee. Therefore language should be

included to limit the alternate payee’s awarded share to the date of divorce if that

is desired.

E. Early/Late Retirement Benefits

Subsidized early retirement benefits are often offered by employers as

enticements to retire early. In other words, if an employer wants to reduce the

work force, it may offer an increase in retirement benefits to induce more

employees to retire early. Sometimes these types of benefits are referred to as

supplemental social security benefits or temporary benefits. In some cases, an

employer will offer the same benefit payment otherwise payable at age 65 to an

employee that is only age 60, without any reduction for early retirement. The

difference between the total benefit payable at age 65 and the reduced benefit that

would otherwise be payable at age 60 is the subsidized portion of the benefit. In

many cases the plan allows for a social security subsidy in that the plan pays a

benefit prior to age 62 that is the equivalent of the total benefit plus social security

at age 62. In other words, the benefit is reduced by the amount of social security

paid at age 62 to allow for better budgeting and consistent cash flow through the

retirement years.

A subsidized benefit is often offered as a result of the number of years of service

performed by a participant. It can be argued that the alternate payee is entitled to

receive a proportionate amount of any early retirement subsidy paid to the

participant. However, an alternate payee generally cannot receive any portion of

a subsidized early retirement benefit until the participant is actually receiving

subsidized retirement benefits and a QDRO assigns45 her a proportionate share of

the same. If an alternate payee begins to receive benefits prior to the retirement of

the participant, and the participant subsequently retires with subsidized early

retirement benefits, many plan administrators will recalculate the alternate

payee’s benefit upon the participant’s retirement so that the alternate payee also

receives a share of the subsidy that the participant has started to receive, if the

QDRO so directs.

Subsidized benefits may not be freely disclosed by the plan, and as such can be

difficult to identify. Even if a plan denies payment of subsidized early retirement

benefits in the past, it is very possible that it could happen in the future. QDRO’s

can provide for the division of subsidy, even if it is not payable at the time.

PRACTICE TIP: To avoid possible disagreements, negotiations with the parties

prior to QDRO preparation should include whether and how to divide potential

subsidized early retirement benefits. Subsidized early retirement benefits are

often a function of all of the years of service a participant completes. The most

equitable means of dividing a subsidy may be to limit the alternate payee’s

entitlement to an amount that is proportionate to her awarded share of the

participant’s benefit, as compared to the total unsubsidized retirement benefit.

45 See Alby v. Alby 155 Wis. 2d 286, 445 N.W.2d 632 (Ct. App. 1990)

APPENDIX A

Sample defined benefit QDRO:

STATE OF WISCONSIN CIRCUIT COURT

FAMILY COURT BRANCH WAUKESHA COUNTY

In re the Marriage of: Barbie Mattel, Petitioner, And Ken Mattel, Respondent.

Case No. 00-FA-0000

QUALIFIED DOMESTIC RELATIONS ORDER

This matter having been brought before the Court with the Honorable Judge presiding on Any date, by the petitioner, Barbie Mattel, and the respondent, Ken Mattel, and with the Circuit Court of Waukesha County having approved the distribution of an amount determined herein from the Any Plan EMPLOYEE RETIREMENT PLAN ("Plan"), to which this Domestic Relations Order (“Order”) applies. PARTICIPANT: ALTERNATE PAYEE:

Ken Mattel Any Address Waukesha, Wisconsin 00000 Social Security # 000-00-0000 Date of Birth 00/00/00 Barbie Mattel Any Address Waukesha, Wisconsin 00000 Social Security # 000-00-0000 Date of Birth 00/00/00

PLAN TO WHICH ORDER APPLIES:

Any Plan. EMPLOYEE RETIREMENT PLAN (hereinafter referred to as "Plan")

The Plan Administrator is directed to recognize an independent interest for the Alternate

Payee in the accrued benefit of the Participant under the Plan as of Any Date to the extent

of fifty percent (50%) of such accrued benefit. Should the Plan provide for any

percentage cost of living adjustments to the Participant's benefit, if any, said percentage

cost of living adjustments shall also apply to the Alternate Payee's awarded benefit in the

same percentage amount. Should the Plan provide for any fixed dollar post-retirement

increases to the Participant's benefit, if any, said fixed dollar post-retirement increases

shall also apply to the Alternate Payee's awarded benefit in an amount proportionate to

her awarded share as compared to the total accrued benefit of the Participant at

retirement. This paragraph is not to be construed to require the Plan to provide increased

benefits to the Alternate Payee determined on the basis of actuarial value.

The independent interest of the Alternate Payee shall be payable to her under the terms and conditions of the Plan. The Alternate Payee may elect benefits to be paid in any form available to the Participant under the Plan, other than a joint and survivor annuity with a subsequent spouse. The awarded benefit shall be actuarially adjusted to be based upon the life expectancy of the Alternate Payee under the terms of the Plan. The number or period of payments made to the Alternate Payee will depend on the form of benefit chosen in which the distribution is to be made. In the absence of an election, the single life annuity payable over the life of the Alternate Payee will be the option selected. If the Alternate Payee elects a single lump-sum distribution from the Plan, if any, said lump-sum distribution shall fully satisfy the Alternate Payee’s portion awarded in this Order. Alternate Payee may elect the earliest retirement age of the Participant or later as the time that her benefits are to commence, provided the Participant has attained (or would have attained) said earliest retirement age regardless of whether or not he has commenced benefits. The Alternate Payee's benefit shall be subject to actuarial reduction for early commencement of benefits based on the terms and conditions of the Plan. Pursuant to §414(p)(4)(B) of the Internal Revenue Code (IRC), the term "earliest retirement age" means the earliest of:

a. the date on which the Participant is entitled to a distribution under the Plan, or b. the later of:

(i) the date the Participant reaches age 50, or (ii) the earliest date on which the Participant could begin receiving benefits under the Plan if the Participant separated from service.

The Alternate Payee shall be entitled to a pro-rata share of any early retirement subsidy provided to the Participant on the date of his retirement (including any temporary, supplemental payments made to the Participant). In the event the Participant retires early after the Alternate Payee has already commenced benefits on an unsubsidized basis, the amounts payable to the Alternate Payee shall be recalculated according to the Plan Administrator’s practices and the Plan’s actuarial principles, in order to provide the Alternate Payee with a pro-rata share of such subsidy (including a pro-rata share of any temporary supplement payable to the Participant). The Alternate Payee shall only receive her portion of any temporary supplement as long as the Participant is eligible for and receiving such supplemental payments.

Covenants regarding the Non-Alienation of Benefits: Pursuant to §414(p)(3) of the IRC, this Order:

a. does not require the Plan to provide any type or form of benefit or any option not otherwise provided under the Plan,

b. does not require the Plan to provide increased benefits determined on the basis of actuarial value, and

c. does not require the Plan to pay benefits to Alternate Payee which are required to be paid to another alternate payee under an order previously determined to be a Qualified Domestic Relations Order.

No death benefits or Plan benefits will be payable to the Alternate Payee if she dies prior to commencement of benefit awarded in this Order. Alternate Payee's awarded benefit shall revert to the Participant if she predeceases the commencement of her benefit awarded in this Order. Upon the Alternate Payee’s death after benefit commencement, the form of benefit selected by the Alternate Payee shall determine whether any amounts are owed to any beneficiary upon her death. The assignment of an independent interest of the Participant's benefits to the Alternate Payee herein shall not be reduced, abated or terminated as a result of the death, disability or the termination of employment of the Participant. Plan benefits shall be payable to the Alternate Payee even if the Participant dies prior to, or after, commencement of Alternate Payee’s benefit, or prior to the commencement of the Participant’s benefit.

The Alternate Payee shall include all of the taxable portion of said retirement benefits if, as and when received in her gross taxable income. For purposes of §72 and 402(e)(1)(A) of the Code, the Alternate Payee's portion shall be allocated on a pro rata basis between the present value of such distribution and the present value of all other benefits payable with respect to the Participant. Said retirement benefits when paid, shall not be taxable income or tax deductible on the Participant’s income tax returns. If the Alternate Payee does not receive retirement benefits as and when provided for herein, or if at any time after the benefits are paid they shall thereafter cease, and in either event, the benefits intended for the Alternate Payee are paid to the Participant, the Participant will make payments out of his separate income, assets or both, equal in all respects to those payments provided for herein. Participant shall continue to make the payments until the retirement benefits begin or resume directly to the Alternate Payee.

In the event that the Pension Plan to which this Order applies is terminated with an unfunded liability and Pension Benefit Guaranty Corporation (PBGC) pays benefits in connection with such plan, and if the amount of the total benefit to be paid to both the Participant and Alternate Payee is thus decreased, then the Participant's benefit and the Alternate Payee's benefit each will be decreased proportionately in accordance with the formula set forth under paragraph 1 above. It shall be the responsibility of the Participant and the Alternate Payee to keep the Plan Administrator of the Plan advised of their respective current addresses. The Plan is administered by Except as set forth herein, all rights in and to Participant’s benefits under the Plan are awarded to the Participant. IT IS FURTHER ORDERED that a true copy of this Order be served upon the Plan Administrator and the Order shall take effect immediately and shall remain in effect until further order of the Court. Jurisdiction is retained by this Court until the awarded benefits are paid to the Alternate Payee by the Plan Administrator.

Ordered on the Any Date, but

dated this ___________ day of ________________________________, 2004.

BY THE COURT _______________________________________ Circuit Court Judge, Waukesha County

APPROVED AS TO FORM ONLY: ______________________________________________________________________________ Attorney Kantluze Attorney Willuze Attorneys for Petitioner Attorneys for Respondent

APPENDIX B

Sample Defined Contribution QDRO

STATE OF WISCONSIN CIRCUIT COURT FAMILY COURT BRANCH

MILWAUKEE COUNTY

In Re the Marriage of: BARBIE MATTEL, Petitioner, And KEN MATTEL Respondent.

Case No. 005-FA-0000000

QUALIFIED DOMESTIC RELATIONS ORDER

This matter having been brought before the Court with the Honorable Judge presiding on Any Date, by the petitioner, Barbie Mattel, and the respondent, Ken Mattel, and with the Circuit Court of Milwaukee County having approved the distribution of an amount determined herein from the ANY PLAN 401(k) PLAN (“Plan”), to which this Domestic Relations Order (“Order”) applies. IT IS SO ORDERED as of this Any Date that pursuant to Internal Revenue Code ("IRC") §414(p), and §206(d)(3)(B) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), the following Order is intended to constitute a Qualified Domestic Relations Order ("QDRO"), as it relates to the Participant's provision of child support, alimony payments or marital property rights to Alternate Payee and is made in accordance with the State of Wisconsin domestic relations law. The term "Participant" means Ken Mattel, whose Social Security Number is 000-00-0000, whose date of birth is 00/00/00, whose last known mailing address is 0000 South Any Street, Milwaukee, Wisconsin 00000, and who is a Participant in the Plan that is administered by the ANY PLAN 401(k) Board of Trustees, located at 00000 West Any Street, Suite 000, Milwaukee, Wisconsin 00000.

The term "Alternate Payee" means Barbie Mattel, former spouse of the Participant, whose Social Security Number is 000-00-0000, whose date of birth is 00/00/00, and whose last known mailing address is 0000 West Any Street, Milwaukee, Wisconsin 00000-0000. Alternate Payee is recognized by this Order as having the right to receive all or a portion of the benefits payable under the Plan with respect to the Participant.

The amount assigned to Alternate Payee shall be equal to fifty percent (50%) of all account balances in the Plan with respect to the Participant as of the date of divorce, Any Date or the Plan valuation date closest to the date of divorce. Alternate Payee shall receive her portion of the Participant's account balance stated above in Article 3 in a single lump sum payment after this Order has been accepted by the Plan Administrator as a Qualified Domestic Relations Order and Alternate Payee has completed such notice of application for distribution of benefits as required under the terms and conditions of the Plan and in the manner in which Alternate Payee requests to receive and/or transfer said account balances. Such distribution shall fully satisfy the Alternate Payee's rights under this QDRO.

The lump sum payment to Alternate Payee may be made as soon as practicable after this Order has been approved as a Qualified Domestic Relations Order. The lump sum amount stated in paragraph 3 above shall be adjusted for any market value and/or investment gains or losses from the effective valuation date of the award to the date of valuation for distribution to the Alternate Payee. Any distribution from the Plan pursuant to this QDRO shall be made in accordance with normal Plan procedures.

Nothing contained in the Order shall be construed to require any Plan or Plan Administrator to:

a) provide any type or form of benefit, or any option, not otherwise provided under the Plan

b) provide increased benefits (determined on the basis of actuarial value), or c) pay benefits to Alternate Payee which are required to be paid to another

alternate payee under another order previously determined to be a qualified domestic relations order.

Copies of this Order must be promptly served upon the Plan Administrator, who shall within a reasonable period after receipt of this Order, determine whether this Order is a QDRO and notify Participant and each Alternate Payee of such determination.

The Alternate Payee shall include all of the taxable portion of said retirement benefits if, as and when received in her gross taxable income. For purposes of §72 and 402(e)(1)(A) of the Code, the Alternate Payee's portion shall be allocated on a pro rata basis between the present value of such distribution and the present value of all other benefits payable with respect to the Participant. Said retirement benefits when paid, shall not be taxable income or tax deductible on the Participant’s income tax returns.

The death of the Participant prior to the time that funds are disbursed to or for the benefit

of the Alternate Payee pursuant to the terms of this Order shall not affect in any manner

the payment to be made to the Alternate Payee as specified in this Order.

Should the Alternate Payee die before the funds to be paid to the Alternate Payee or for

the Alternate Payee’s benefit pursuant to the terms of this Order have been disbursed,

such payment shall be made to the Alternate Payee’s estate.

Except as set forth herein, all rights in and to Participant’s benefits under the Plan are awarded to the Participant. The Court retains jurisdiction over this Order to amend it in order to establish or maintain its qualification as a QDRO under the Internal Revenue Code. IT IS FURTHER ORDERED that this Order shall take effect as soon as administratively reasonable after receipt and acceptance of a court entered qualified domestic relations order and shall remain in effect until further order of the Court. Jurisdiction is retained until this Order has been accepted by the Plan Administrator, and the Alternate Payee has received her awarded share in full.

Ordered on the Any Date, but

dated this ___________ day of ________________________________, 2004.

BY THE COURT ______________________________ Circuit Court Judge, Milwaukee County

APPROVED AS TO FORM ONLY: ___________________________ ______________________________ Attorney Kantluze date Attorney Willuse date Attorneys for Petitioner Attorneys for Respondent

APPENDIX C

Sample Written QDRO Procedure:

1) The Plan Administrator of the ABC Defined Benefit Retirement Plan in

accordance with IRC § 414(p) has adopted the following procedures to

determine whether a court order qualifies as a QDRO and to administer

distributions to participants and alternate payees according to the QDRO.

2) Upon receiving legal process, the Plan shall immediately respond to said

service of process.

3) The Plan will comply with the court order only if it meets the requirements

for a QDRO as set forth in § 414(p) of the Code and any other applicable

regulations and court decisions.

4) Individuals seeking a QDRO may not rely on the Plan Administrator for

advice regarding which type of QDRO is most appropriate for them. The

Plan only provides factual information concerning the participant’s benefits

along with the terms and conditions of the Plan. Individuals should consult

with their own attorney regarding such issues.

5) Upon receiving a court order that is issued pursuant to a state domestic

relations law or a community property law that pertains to benefits under the

Plan which provides for child support, maintenance payments, or marital

property rights for the benefit of a spouse, former spouse, child or other

dependant of the participant or former participant, the Plan Administrator will

promptly do the following:

a. Notify the participant and any alternate payee of the receipt of the

QDRO

b. Send a copy of the Plan’s written procedure to the participant, the

alternate payee and each designated representative of the participant

and alternate payee and copies of any other notices or written

communication

6) The Plan Administrator will review the QDRO and have legal counsel or

other consultants review the order to determine whether or not it complies

with IRC § 414(p).

7) Such determination shall be performed in a reasonable period of time after

receipt of the order and notice to all interested parties

8) The Plan Administrator shall determine the status of the court order and

identify the participant’s account.

9) If the court order meets all the requirements pursuant to the terms and

conditions of the Plan, ERISA and the IRC § 414(p) the Plan shall then do

the following:

a. Notify the participant and alternate payee of the Plan’s findings in

writing

b. Comply with the terms of the QDRO

10) If it’s determined that the order is not a “qualified domestic relations order”

the Plan Administrator shall advise the participant, the alternate payee and

each representative in writing and state why the requirements have not been

met. If the QDRO is not revised the Plan will pay benefits to the participant

in accordance with the terms and conditions of the Plan.

11) If benefits under the Plan would have been distributed to the alternate payee

during the period while the order is being reviewed, the Plan shall separately

account for such payments.

12) If within 18months from the receipt of the QDRO the order is deemed

“qualified” the separately accounted payments shall direct those payments to

the alternate payee.

13) If the order is deemed to be not “qualified” the plan shall continue to

withhold any payments to the alternate payee until the plan receives notice

that no QDRO will be forthcoming during the 18 month period.

14) If at the end of the 18 month period the order has not been determined to be

“qualified” the Plan Administrator shall release any segregated or withheld

amounts to the person that would have received the benefits in a manner is if

there had been no QDRO, or in accordance with the terms and conditions of

the Plan.

15) If the determination that the order is a QDRO is made more than 18 months

after the amounts have been segregated, benefits paid to the alternate payee

will be applied on a prospective basis only.

APPENDIX D

RE: Participant: Social Security #: Date of Birth:

PROFIT SHARING, PENSION PLAN AND RETIREMENT ACCOUNT

AUTHORIZATION

Consent is hereby given you to provide with a current and, if requested, yearly summary of my plan and subsequent changes and any and all of the following information required concerning any profit sharing plan, pension plan, or retirement account in which I have any right, title, or interest as required by ERISA. The information you will provide will be used to determine if my pension benefits, and the value, should be offset against other assets or divided under a court order. Therefore, it is important that the following questions be answered completely and accurately. Space has been made available for more than one plan. Plan Participant’s Signature 1. Name of Employing Entity:_______________________________________________ 2. Name plan for which the Participant above participates in: _____________________ _______________________________________________________________________ 3. Name & Address of Plan Administrator(s): __________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 4. Type of Plan (Def. Benefit, Def. Contr., Money Purchase, Etc): _________________ 5. Date Employee began participating: _______________________________________ 6. Date of Employment:

Defined Benefit Plan(s)

6. If Defined Benefit Plan, what is the Normal & Early Retirement Ages? _______________________________________________

8. If Defined Benefit plan, what is the accrued LIFE-ONLY monthly benefit, not

projected, beginning at the normal and early retirement ages. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 9. Are cost-of-living adjustments (COLA) made to the benefit(s) each year? _______ YES ________ NO a.) Statutory _______ YES ________ NO b.) based on CPI _______ YES ________ NO 10. If yes, what is the average COLA applied to retirement benefits each year?

__________ % Plan #___________ 11. Is there a provision, (e.g. 30 & out, 25 & out rule) when the employee participant

could retire? If so, at what age or date, state the benefit (e.g. full retirement benefit, reduced)

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 12. Is there a supplemental benefit payable until the Participant commences Social

Security?

_______ YES ________ NO Plan Number: __________________

13. If necessary, can an accrued monthly benefit if defined benefit plan or contributions with interest if DC plan, be determined since the date of Marriage?

_______ YES ________ NO

14. In yes to No. 12, what is the accrued monthly benefit, or contributions made w/interest & gains, since

____ Mo. ______ Day_______ Year $______________

Defined Contribution Plan(s) / Money Purchase Plan(s)

15. Date Employee began participating or contributing to the def. Contribution plan? _____________________________________________________________________

16. Employee contributions made to date: ________________________________________________________________________ 17. Employee contributions accumulated with interest to date: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 18. Employer contributions made to date: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 19. Total Contributions accumulated with interest to date: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 20. Current total account balance (if any): ________________________________________________________________

Following pertains to all plans listed

21. Valuation Date(s) (if not daily or monthly ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

22. Current vested interest: _________________________________________ 23. Vested percentage: ____________________________________________ 24. If not vested, date vesting will begin: ________________________________ 25. What is the number of years required for an employee to be 100% vested?

:_________________________________ 26. Amount of the current plan that remains non-vested and the value

thereof:____________________________________ 27. Earliest date employee is eligible to retire and receive early retirement benefits:

:_______________________________ 28. Amount of early retirement benefit, if any: :_________________________________ 29. Is there an outstanding loan to the participant:

________ YES __________ NO Plan # ______________ Amount repaid, if any: __________________ Amount currently owed: __________________

30. Amount currently available for loan or withdrawal: _________________________________ Note to the Attorney and/or Participant, please insert date of marriage above

Comments: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

30. If, or pertaining to defined contribution plan(s) please attach or enclose a history of transactions, contributions, withdrawals

or allocations prior to the above date in Quest #13. (Date of Marriage) ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

Questions relating to division by Court Order (e.g., Qualified Domestic Relations Order)

32. Is this plan subject to division by way of a Qualified Domestic Relations Order or

Qualified Court Order?

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 33. Is there a current alternate payee pursuant to a prior Qualified Domestic Relations

Order or Qualified Court Order? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 34. If the plan(s) is subject to division by way of a Qualified Domestic Relations Order,

have you developed any procedures, policies or forms with respect to the drafting of a QDRO? (If yes, please furnish copies of such procedures, policies and/or forms)

_______ YES ________ NO

35. If the plan(s) is subject to division by QDRO, does the plan allow for an immediate

lump-sum distribution to an alternate payee?

_______ YES ________ NO

36. If not within a reasonable time after a QDRO or otherwise has been entered, when is the Alternate Payee eligible for a distribution?

37. Can an amount, defined contribution plan or otherwise, be awarded which would

exceed 50%. _______ YES ________ NO

38. If a defined benefit plan, can the Alternate Payee be awarded an independent interest,

i.e. separate interest? (Benefit payable over the life of the Alternate Payee independent of the participant’s life expectancy)

_______ YES ________ NO

39. If an independent interest is not possible under the terms and condition of the plan(s), can the Alternate Payee be named as a survivor to:

a.) post-retirement survivor benefit _______ YES ________ NO b.) pre-retirement survivor benefits _______ YES ________ NO c.) pre-retirement survivor annuity _______ YES ________ NO d.) lump-sum death benefit _______ YES ________ NO

Comments: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 40. If an independent interest is possible under the terms and conditions of the plan, is it

possible to secure or grant pre-retirement survivor benefits? (i.e. if the Participant predeceases his/her retirement would the Alt. Payee receive their awarded portion over Alt. Payee’s life?)

_______ YES ________ NO

41. If an independent interest is possible under the terms and conditions of the plan, will the Alternate Payee receive her awarded share of the retirement benefit regardless of the survival of the Participant before/after retirement?

_______ YES ________ NO

42. Would the Participant be eligible for any early retirement supplement?

_______ YES ________ NO

43. If the Participant receives disability pay in lieu of retirement pay, will the plan allow

the alternate payee to receive a portion of the disability pay?

_______ YES ________ NO

44. Does the Plan(s) offer any other form or type of subsidy?

_______ YES ________ NO

45. Would the Alternate Payee be entitled to any such subsidized benefit should it be

addressed in the QDRO?

_______ YES ________ NO 46. Are contingent Alternate Payees permitted to be named in a QDRO, or can the A/P

name a beneficiary to their portion? 47. Are early retirement benefits made available to terminated employee under the

plan(s)?

_______ YES ________ NO

48. Is the Plan Participant Retired at this time (i.e. is the plan in pay status?)

_______ YES ________ NO

49. If yes to question 47, please indicate the survivor election made and the name of the

survivor/beneficiary. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 50. Are there any other plans, terminated, frozen, or otherwise, that the participant is, or

may have, an accrued benefit in which may have resulted in a merger, acquisition, or the creation of a new plan?

_______ YES ________ NO

51. If the answer to No. 49 is yes, please provide the name of the plan, and the name and

telephone number of the plan administrator ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

52. Name of each plan employee has been a participant in since their initial date of

employment: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 53. Is the employee an active participant in any stock option, executive deferred

compensation, equity participation plan or program?

_______ YES ________ NO

54. Does the employee participant or named individual (page 1) have ownership equity in the company for which he is employed?

_______ YES ________ NO

55. As of what date is this information current?

___________________________________ BY:____________________________________ Title:____________________________________ Date:___________________________________ Telephone:_______________________________ Please attach a copy of the summary plan description, which upon request must be furnished to a plan participant as required by the Pension Reform Act of 1974.

Documents

QDRO CREATION IN WISCONSIN - Divorce Financial Solutions, LLC · stockholders with greater than 10% of stock. Transactions pursuant to divorce decrees under domestic relations orders