QDRO CORNER: Concurrent Payments of FERS and CSRS Pensions

When a person becomes employed by the federal government will determine whether they earn an interest in the Civil Service Retirement System (“CSRS”) or the Federal Employees’ Retirement System (“FERS”). CSRS was closed at the end of 1983 and FERS began in the beginning of 1984.

Former federal government employees may have an interest in both CSRS and FERS systems. These employees may have been an employee under CSRS, left the employ of the federal government for a period, and then returned when FERS was the pension system provided to employees.

When these benefits are paid to the retired participant, they are paid in a single, combined payment. The retired participant receives an annual statement which describes the benefit paid from each retirement system, and any COLA applied thereto. In addition, if a survivor benefit was selected at retirement (or awarded pursuant to a Court Order) the statement will show the amount of benefit and to whom it is awarded.

This annual statement is helpful for a few reasons. First, the amount awarded to the soon-to-be former spouse can easily be calculated. This knowledge will help both parties plan financially for the future.

Second, to confirm whether the retiree is receiving a benefit from one or both pension systems. Some people who were CSRS employees at the time the plans switched were required to or had the option to switch to FERS. For these participants, they would no longer have a CSRS interest, as it would have been transferred to FERS. As such, any award to a soon-to-be former spouse from CSRS in this case would worthless.

Alternatively, if the benefit is coming from both systems the parties can properly allocate the division between the plans, or shift the soon-to-be former spouse’s benefit to come entirely from one plan. Parties may want to shift the soon-to-be former spouse’s benefit to be from one plan only so that there is only one domestic relations order needed.  

Finally, the domestic relations order dividing the pension interest must state the name of the plan it is dividing. Being able to confirm if a retiree is receiving benefits from one or both retirement systems is incredibly helpful to ensure the former spouse will receive the proper amount of benefits. If this is not confirmed, the former spouse may receive less than anticipated once payments to the former spouse begin, and may have waived interest in all other benefits. This situation would leave the former spouse potentially without recourse to enforce the agreement and get what they expected.

If the annual statement is not available for any reason, it is best practice to include in the agreement as much information as possible to ensure the former spouse receives the intended amount, such as the amount that the retiree receives on a monthly basis, and the estimated amount the former spouse should receive on a monthly basis. In addition, if the parties believe but are unsure if the benefits are entirely from one retirement system, the agreement should include a paragraph that the parties will cooperate to ensure the former spouse receives they entire benefit, including, if necessary, a second Court Order to divide the other pension interest and direct payment of the difference from the retiree until the second Court Order is put in place.

Finally, a consideration here too is whether enough information is being exchanged for the parties to be making informed decisions. If the attorney has any concern that a party is not going to receive the agreed upon amount they should be sure to send their client a written communication with their concerns, recommended action, and suggested language for the agreement.  This will make clear the attorney’s concerns with the agreement and proposed solutions. This communication will help to protect the attorney against any malpractice claims in the event the agreement does not provide the former spouse with the expected benefits.

If you have a case where a party may have both benefits and you need assistance in drafting settlement agreement language, proposing language for a judgment of divorce, or determining the best way to divide the benefits to implement the parties’ intended division, call us. We offer consultations on federal benefits and flat fee retainers for defined scopes of work in this area. Contact our office at 240-396-4373 to schedule a consultation today. 

About the Author

Leslie Miller has prepared hundreds of retirement orders for federal, state and local governments as well as a wide variety of private, religious, and educational organizations. The experience with so many retirement plans helps Leslie advise clients with their own retirement division goals.

Remarriage Restrictions and Pension Payments

All retirement transfers and payments must be handled carefully.  It is critical that the parties be advised of additional steps they may need to take beyond getting the QDRO prepared and submitted. Many of these steps are simple, such as having the alternate payee provide his/her account information in order to receive the funds.  Without this,  the plan may not be able to make payment at all or will withhold an improper amount of taxes if the correct forms are not submitted.

A very important rule that some pension plans have is a restriction regarding the remarriage of the former spouse. Typically, the restriction is that if the former spouse remarries prior to reaching a certain age, then the payments to the former spouse of his/her share of the employee’s annuity (during the employee’s lifetime) will terminate. Under certain plans, the payment can be resumed upon proof that the former spouse’s subsequent marriage has ended by death or divorce. With other plans, the payment cannot be resumed and is in fact terminated forever. If a former spouse is relying heavily on these payments, this is a very important piece of information that should be conveyed to the client not only in discussions to ensure they understand but also with a follow-up written communication. The follow-up letter will serve as a reference to the client and also help protect the attorney from a potential malpractice claim. Since the income received from a spouse’s pension is typically a substantial sum to the former spouse, the recipient must be put on notice of any decisions that could impact their ability to receive such funds.

Another consequence of remarriage before a certain age is that some plans will terminate a survivor benefit award that may have been made to the former spouse. Some plans will terminate the survivor benefit award forever, whlle others will allow it to be resurrected upon proof that the subsequent marriage has ended by death or divorce. A warning to the client verbally and a follow-up in writing is similarly important here for the same reasons as those listed above.

Some former spouses will receive a minimal share of a pension plan and/or survivor benefit to secure their entitlement to health insurance coverage. For these former spouses, a remarriage may not be important in terms of the income they expect to receive but very important as it relates to other benefits, such as health insurance. If they remarry and lose their survivor benefit, then they could also lose their entitlement to these other benefits.

Here are some examples of plans with remarriage restrictions:

Federal Employees’ Retirement System and Civil Service Retirement System: If the former spouse remarries before age 55, then they will lose their survivor benefit unless they were married to the employee for 30 years or more. If the former spouse’s subsequent marriage ends by death or divorce, they can reinstate their entitlement to the survivor benefit.

Military Pension: If the former spouse remarries before age 55, then they will lose their survivor benefit. If the former spouse’s subsequent marriage ends by death or divorce, they can reinstate their entitlement to the survivor benefit.

Foreign Service Pension System: If the former spouse remarries before age 60 they will lose their entitlement to the employee’s annuity (during the employee’s lifetime) forever. Entitlement to a survivor benefit will be terminated, however it can be reinstated if the subsequent marriage ends in death or divorce.

Other plans such as the Inter-American Development Bank Staff Retirement Plan require that the parties determine whether payment to the former spouse will be impacted by their remarriage.

What about the remarriage of the employee/participant?

The Inter-American Development Bank Staff Retirement Plan will require that the parties determine whether payments to the former spouse will be impacted by the participant’s remarriage. This is rare. 

For most plans, the remarriage of the participant does not impact payment of the employee’s annuity or the survivor benefits to the former spouse if all paperwork has been timely submitted and accepted.

With a military pension, the former spouse must be designated within one-year from the date of divorce to receive the survivor benefit. If not, when the military member remarries, the new spouse will automatically be the beneficiary of the survivor benefit on the one-year anniversary of their marriage to the military member.

Other plans may not impose any impact on the former spouse if the participant remarries. For the participant though, they will want to look into timely designating the new spouse for any survivorship benefits – even if the full amount was awarded to the former spouse. This is because some plans, like FERS and CSRS will allow the new spouse to be a sort-of back-up designee, in the event the former spouse dies before the participant – then the new spouse will be the recipient of the survivor benefit upon the participant’s death.

Overall, the key takeaway here is that all plans are different and have their own rules. These rules may cause major changes to a participant or former spouse’s benefit, and therefore the attorneys must ensure that the parties are carefully advised of all the potential implications of their future actions.

QDRO Corner: FERS Annuity Supplement – MSPB Decision!

The MSPB is the Merit System Protection Board. It is a quasi-judicial agency existing within the executive branch of the federal government. One of its tasks is to review the “significant actions of the Office of Personnel Management.” The Office of Personnel Management (OPM) is the administrator of the Federal Employees’ Retirement System (FERS).

A part of the FERS pension is the Annuity Supplement. This is a benefit paid to certain employees upon their retirement and is meant to act as an early social security payment to encourage these employees to retire early. Such employees this applies to are law enforcement, air traffic controllers, firefighters, and the like. This Annuity Supplement is paid between the person’s retirement and age 62 when the full payment from the FERS pension is paid.

Within the regulations governing the administration of FERS, there are sections describing how to divide each element of FERS. The provision regarding the Annuity Supplement says that it would be treated (for the purpose of any court order) in the same way the employee annuity is treated. OPM had initially understood this language to mean that if the annuity supplement was not explicitly divided within the court order (as is required for the division of the employee annuity), then it would not be divided.

Around 2016, OPM changed its interpretation and decided it would divide a retired employee’s Annuity Supplement, and that such division would apply retroactively even if the court order was silent on the matter. As such, OPM would be treating the Annuity Supplement the same as the employee annuity by dividing it in the same manner that the employee annuity is divided. The reason for this was to create continuity between FERS and its predecessor plan, the Civil Service Retirement System (CSRS). Under CSRS participants did not pay into social security, so the benefit under CSRS is larger than under FERS because CSRS was designed to include the social security benefit. Since the Annuity Supplement is an approximation of a social security payment but to certain FERS participants, OPM believed it needed to correct its approach.

This decision caused a change to a great many retiree’s benefit payments. Not only would the people receiving the Annuity Supplement have to divide those funds, but their benefits were further reduced to pay the amount of the Annuity Supplement that their former spouse should have been receiving since the employee retired.

One affected retiree appealed OPM’s decision to divide his Annuity Supplement and to retroactively adjust the payments to his former spouse in 2018. Due to a lack of quorum on the MSPB, the case had been sitting until its decision in November 2023.

The MSPB decided that OPM’s original treatment of the Annuity Supplement, i.e.: as a separate element of the FERS plan that must specifically be divided was the correct interpretation. As such, any payments that OPM adjusted during the period 2016 through the MSPB’s decision in 2023 must be reversed.

The MSPB’s analysis explains that the language of the regulations requires the treatment of the two elements under the court order to be the same. The treatment is first whether the part of the plan is divided. Second, if it is divided, how is the former spouse’s share to be calculated. The regulations do not require that the two pieces, specifically the Annuity Supplement and the employee annuity, be calculated in the same manner. More importantly, also, that OPM’s justification that the FERS and CSRS plans should have continuity in these areas was unsupported. The fact that they are different plans and interact with social security differently inherently means that the two plans should be different in their administration.

What does this mean for the attorney handling a divorce that includes a FERS pension?

As per usual, be specific. First, does the annuity supplement even apply? If the federal government employee’s job is nothing like law enforcement, air traffic control, or firefighter, chances are they are not even eligible for the benefit. If they are eligible though, be clear, and award the former spouse a share if that’s what the parties agree. Make sure the award is in the parties’ agreement and the court order dividing the FERS pension. Notably, OPM will not double-check the parties’ agreement to make sure everything made it into the FERS Order. However, OPM can reject the order if additional awards are made in the court order that are not included in the agreement or divorce decree.

If you represent a client and federal government retirement benefits are at issue, contact us at 240-396-4373 can schedule a consultation with us to discuss the benefits, how they are accrued, what can be divided, and how long the division process takes.

Sharing our Love with QDRO Tips

Roses are red, violets are blue. We love sharing QDRO Tips with you. This Valentine’s Day we are showing our love by sharing some QDRO Tips:

Earnings, Gains, and Losses are your Friend – The market is quite volatile now and has been for quite some time. Additionally, some 401k, 403b, and similar plans are taking longer than before to effectuate a division of such accounts. Including earnings, gains, and losses on a retirement transfer amount to a former spouse/alternate payee will make it seem like those funds had been in the former spouse/alternate payee’s name since the date the parties decided to value the account. Excluding earnings, gains, and losses on the transfer amount means the participant/account holder will enjoy (or suffer) all fluctuations due to market changes. Imagine, the account has $100,000 as of 2/14/2024 and the parties agree the divide it equally, excluding earnings, gains, and losses. The former spouse will always get $50,000 but if the market falls the participant will end up with less than $50,000 in the account after the transfer is complete. Since no one can predict what the market will do, including earnings, gains, and losses on the transfer amount ensure that both parties will be affected proportionally in such a transfer.

Remember the Survivor Benefit – When dividing a pension, it is important to remember there is a portion paid during the participant’s lifetime, and there is an optional portion that can be paid out after the participant’s death. To continue the payment after the participant’s death is called the survivor benefit. State law dictates whether the survivor benefit is treated the same as the payment made during the participant’s lifetime. It is best to address whether the former spouse will receive a share of the survivor benefit. In the event the parties are divorcing in a state that treats these as separate assets, failing to do so could preclude the former spouse from receiving the benefit at all.

You can Withdraw from Your IRA at age 59 ½ - With the retirement age creeping ever higher for access to social security funds, parties should remember they can access other retirement funds sooner. This can really help parties trying to plan for retirement while going through a divorce. Though, these clients may also benefit from the counsel of a financial planner.

Shared or Separate Pension Interest Division – Some pensions can only be divided such that the former spouse receives money only if, as, and when the participant receives money from the pension. If that’s the case, for the former spouse to receive payments after the death of the participant they will need to be awarded a survivor benefit. Some pensions may also be divided so that the former spouse can begin to receive payments when they choose, and have the payment made for their lifetime. There are sometimes complex actuarial considerations in this decision, but ultimately is a decision the parties need to make.

401ks can Fund Alimony and Child Support Arrears Payments – If a party does not have sufficient funds to pay alimony or child support arrears directly, a court order can be entered to make such payment from the obligor’s 401k. Such court order must specify the purpose of the payment is for alimony or child support (as opposed to division of marital property) so that the tax will be charged to the obligor rather than the payee.

Get Plan Documents Early – Too often parties agree to a division of retirement benefits, only to learn that the plan does not allow for their agreed-upon plan. The parties then have to go back to the negotiating table (or court) to find a new way forward. Getting the plan documents early allows the parties to move forward knowing their options so they know what they agree upon will be allowed by the plan.

Pick Your Title: QDRO, EDRO, or COAP – “QDRO” is a term of art defined under the Employee Retirement Income Security Act (ERISA). Not all retirement plans are governed by ERISA, however, and those plans do not like to use ERISA language. As such, they have adopted other preferred titles, such as Eligible Domestic Relations Orders or Court Order Acceptable for Processing. While some plans are particular about the title of these orders submitted to them, others are not. But it is important to know that picking the wrong name could result in a rejection, even if the rest of the order would otherwise be acceptable.

Some Plans are not Divisible – Plans governed by ERISA are required to be divisible by court order in some manner. For plans not governed by ERISA though, no division mechanism is required, and in fact, the plans can have a non-alienation clause prohibiting the transfer of the asset. Many of these plans are for highly compensated individuals such as partners and shareholders of large organizations. If the funds in these accounts are marital funds that should be divided, the parties will likely need to find some other asset to transfer instead.

If you have additional questions about QDROs, contact our office at 240-396-4373.

Major Differences in ERISA Governed Plans, and Non-ERISA Governed Plans

The Employees’ Retirement Income Security Act (ERISA), as revised, includes many protections for former spouses (or soon-to-be former spouses) as it relates to the submission of QDROs. Chief among them is that once a plan is on notice of a former spouse’s viable claim to the participant’s interest in the plan, the plan has a responsibility to protect that former spouse’s interest through the submission of a court-executed QDRO or the expiration of 18 months, whichever first occurs.

What are these protections?

For a defined contribution account the plan will usually prevent the participant from taking loans or making withdrawals from the account. For defined benefit accounts the plan can go as far as preventing the participant from commencing benefits or pausing benefit payments altogether, or can begin to withhold a portion for the former spouse pending the final order. For financially dependent spouses, the submission of a draft order for the purpose of implementing these protections can be a tactic to preserve the marital estate while the divorce is pending.

What is a viable claim from a former spouse?

ERISA does not clearly define what needs to be submitted to a plan for these protections to be put in place. Most ERISA-governed plans are very cautious and will put up protections when they receive a draft DRO.

Non-ERISA governed plans, however, only have such regulations if they are specifically written into their plan rules. Non-ERISA governed plans can protect their participants much more strongly. Imagine this scenario: a draft QDRO is submitted to the plan to ensure it will be accepted by the plan once in final form. The plan takes a while to review, but then responds with a few small edits.

The former spouse makes the edits and submits the draft for a second review. The plan again takes a while to complete the review. During that time the participant retires and commences benefits. The plan then responds to the former spouse’s second draft with substantial changes due to the participant’s retirement changing the benefits being available to the former spouse. Now the former spouse has to scramble to get the QDRO entered and to chase the participant for their share of the benefits that have been paid to the participant.

Alternatively, some non-ERISA governed plans have voluntarily put stricter protections in place for more day-to-day type activities. Specifically, the Thrift Savings Plan (federal government employees and military) requires spousal consent for any withdrawal or loan. While this is great to protect the marital asset, for a person who otherwise needs access to the funds for say, paying an attorney’s retainer fee, it may be a way for the former spouse to block the participant’s access to funds in a time of need. Recently, Congress has considered adding similar protections to ERISA, though no final decision has been made.

Why would these restrictions not be in the existing draft of ERISA?

Perhaps because the title of the statute is the Employees’ Retirement Income Security Act – as some courts have noted, the intent is to protect the asset of the employee, not their beneficiary. However, the protections exist once the former spouse’s claim is raised perhaps because the statute recognizes the need to transfer retirement funds to a more financially dependent spouse. After all, the need for QDROs and QDRO protections arose as divorce became more acceptable and there was one party with substantial retirement assets from employment and the other party had little to no retirement due to being a fulltime homemaker. As a former spouse has a marital claim to the retirement asset, they have a different standing from any other beneficiary.

As attorneys, what can we do to best protect our clients?

Gather information about the plan as early as possible. Figure out what are the plan’s procedures and how quickly they review and implement QDROs. If there is any concern regarding depletion of assets ask the plan what is required to freeze the account. Get the QDROs drafted in advance of a divorce. If there is no freeze on the account from any action prior to the divorce, then upon divorce the plan is unaware of any claim from the former spouse and will allow the participant to make any decision allowed under the plan rules. Not only does this protect the former spouse as best as possible, but it also gets the transfer done as close to the divorce as possible. It allows the parties to move forward from the divorce without the need to go back and get this done later, and as unattached as possible.

Have additional questions?  Contact our office at 240-396-4373. 

Intergovernmental Organizations: Basic Elements to Consider

Intergovernmental Organizations, such as the World Bank, Inter-American Development Bank, the International Monetary Fund, the Asian Development Bank, and the United Nations (to name only a few), have retirement programs with unique rules for division pursuant to a divorce.

First, it is important to note that these organizations are not bound by US law, and therefore are not required to accept a US or state court order dividing one of their employee’s retirement interests. Many of these organizations, including the ones listed above do accept court orders for the purpose, so long as it conforms to the organization’s rules and regulations. The reason is because they want to promote law-abiding behaviors without waiving their privileges and immunities that they enjoy through their status as an intergovernmental organization.

Major points to consider in negotiating or arguing for retirement benefits provided by this organizations:

1. Survivor benefits. Most of these organizations will not allow a court order dividing the pension benefit to reference survivor benefits. Typically, these organizations require a former spouse survivor benefit be secured by the filing of a beneficiary designation form with the plan’s administrating office. Thus, it is important to require the participant to fill out and submit such form timely, and that such requirement is included in an enforceable document other than the order dividing the retirement benefits.

2.  Cost of survivor benefits. Most of these organizations do not allow for the cost to provide the survivor benefits to the former spouse to be shifted, and may require that the reduction be taken from the participant’s portion of the pension benefit. Where this is the case, parties can usually determine an equal amount by which they reduce the former spouse’s share of the benefit to effectively shift the reduction for the survivor benefits. However, since this involves more work and clear language in the separation agreement (or presentation of evidence to the court) it is wise to advise your client of the potential need for this early on, or to obtain as much information as possible so this is not a surprise after everything is resolved.

3.  Limitations on total award from the retirement plan. Many of these organizations include a limit on how much a participant’s retirement benefit can be reduced from all sources. In effect, the organization wants to secure some amount of the retirement benefit for the participant. The result in dividing it for a divorce means that sometimes the amount awarded to the former spouse must be reduced so that the participant still receives the minimum amount required from the plan. Specifically, imagine a case where the entire service is marital so the former spouse would receive 50% of the entire pension benefit. Then, the former spouse also wants a survivor benefit, but the reduction for the survivor benefit must come from the participant’s share of the pension. This would result in the participant receiving less than 50% of the pension benefit during their lifetime, which violates the plan’s rule that the participant cannot receive less than 50% of their pension benefit. So, in order for the plan to accept the division, the former spouse must either reduce their share of the pension to effectively shift the cost of the survivor benefit to the former spouse, or the former spouse must waive the survivor benefit.

   • This limit applies to all reductions, so if the participant has multiple marriages and is providing survivor benefits and a share of the pension to multiple former spouses or a current spouse, it is important to check that this rule is followed. Typically, if a draft order is submitted to these plans, they will advise if there is an issue here.

4.  Title of the Court Order. Since the plans are not bound by US laws, they will reject any document (even if otherwise acceptable) if it is called a Qualified Domestic Relations Order because that is a term specific to the Employee Retirement Income Security Act. Some organizations, like the World Bank, require the payment to the former spouse be called Spousal Support. Other organizations simply prohibit the term QDRO but will accept anything else. Especially if dealing with the World Bank, it is important to use the correct terminology in the agreement or other court orders.

   •  A special note here, there are cases in both Maryland and DC that state even though the World Bank requires the phrase “Spousal Support” to be used in their orders, that the courts can divide the benefits pursuant to the jurisdiction’s property division statutes similar to US-based retirement programs.

5.  Cash Balance and Commuted Benefits. Some of these programs include a cash balance benefit or allow the participant to receive a lump sum benefit at the beginning of their retirement followed by a monthly benefit. The organizations may require that these benefits each be discussed separately in the pension division order. Therefore, it is important to discuss in trial or in an agreement.

While there are other aspects to each plan that should be given special consideration these are the major points that come up frequently in these cases. As with all retirement benefits, the most important step is getting all the information early in the case to know all the elements that need to be addressed during the divorce process. We can assist in obtaining plan documents and determining benefits available for division in these types of cases. Depending on your needs, we can provide some services on a flat fee basis. For assistance and information regarding fees, please contact us at 240-396-4373.

QDRO Corner: The Only Certainties are Death and Taxes

Many of our clients tend to skim over the details of their agreements, instead focusing on the big items, such as how much will a retirement equalization amount be, but they ignore the details of how the funds will actually be transferred.  

1.    A Domestic Relations Order is Needed

Yes, many attorneys still forget to tell their clients that a QDRO (or similar order) is usually needed to transfer retirement assets after the divorce is final, or fails to explain the consequences of delaying.  As this firm states regularly, the best practice is to draft the order with the Agreement, and submit it to the court at the divorce hearing, or submit it as soon as possible after receiving the final order from a trial. If a client prefers to wait for any reason, be sure they are advised of the potential issues related thereto. 

The biggest issue if a party decides to wait on the QDRO is the death of the account holder before the QDRO transfer occurs. After a divorce, the account holder can change the beneficiary for their retirement accounts without consent from the former spouse. A retirement plan will appropriately pay the beneficiary(ies) listed upon being notified of their participant’s death. Once the funds leave the plan’s control and are sent to the beneficiary(ies) a QDRO is not helpful. The former spouse’s only option at that point is to sue the beneficiary(ies) for the funds. That is a less-than-ideal scenario for everyone involved.

Alternatively, the plan participant may not want to share their retirement assets with their former spouse and may move them to other accounts, or even cash them out to make the funds harder to find. In the case where the funds are simply moved to another retirement account, a QDRO can still be used. The problem is that information from the new account would have to be obtained. If the funds were withdrawn, then the former spouse has to chase through the participant’s finances and likely determine the post-tax equivalent they should receive. And, if the participant didn’t want to share the asset to start, the passage of time will not likely change their mind and make them suddenly cooperative. Many former spouses in this situation end up spending lots of money on attorneys’ fees to figure out what happened, and then figure out an alternative method to be made whole.

2.    Tax

Most agreements will describe the retirement equalization transfer as being “tax-free” because it is incident to divorce. As attorneys, it is our job to instruct clients that the transfer is “tax-free” to the spouse who owns the account from which the funds will be taken so long as the funds leave the account due to a QDRO (or similar order).

The transfer is also “tax-free” to the spouse receiving the funds if the funds are rolled over into an eligible retirement account. The spouse receiving the funds should be made aware that when the spouse takes the funds out of the retirement account, the spouse will then be taxed on the funds as if they had been that spouse’s funds all along. In addition, if the spouse receiving the funds takes the funds as cash, instead of rolling them into an eligible retirement account, then the funds will be taxed.

The “tax-free” transfer language is not a means to exempt the funds being transferred from being taxed ever, instead, it is simply notice that so long as the funds are transferred from one retirement account to another that at the time of the transfer no taxes will be paid, and particularly that however the former spouse decides to receive the funds, the participant will not suffer any tax consequences.

Ultimately how the former spouse wants to receive the funds is up to the former spouse (unless they have agreed to something specific in the settlement agreement). Whether they want to roll the funds over to a retirement account or take some or all of the funds as cash is a question they may want to discuss with a tax professional or financial planner so they can have a better idea of the tax implications they may be facing.

While some cases may have special circumstances in which the delay of a QDRO is the best practice, those situations from our experience are quite rare.  If that is the case, then language protecting the former spouse’s interest and outlining the next steps and timing should be clearly explained in the agreement.

Contact our office at 240-396-4373 if you need assistance with your QDRO.

Note: While the bulk of this article is specific to ERISA-covered plans such as 401k, 403b, etc., the same logic applies to retirement plans not covered by ERISA such as IRAs. The method of the transfer may be different, however.

QDRO Corner: Clever Work-Arounds for Common Plan Prohibitions

It’s a common situation, the parties finally reach an agreement after painstaking negotiations, and rather than have someone change their mind, the parties sign the agreement before checking the rules of the retirement plan. They then hire an attorney to draft the QDRO. The QDRO attorney then has to tell the parties that they’ve agreed to something the retirement plan cannot accommodate and they have to go back to the negotiation table with their divorce counsel. Speaking from experience, this is pretty bad news to have to tell parties.

Pension Plans and the Cost for Survivor Benefits.

Many pension plans, like FERS and CSRS for federal government civilian employees, allow for the cost of the survivor benefit to be shifted. Meaning, that the retirement order can state that one party or the other will fully bear the burden of any reduction incurred for the future survivor benefit. Other plans, such as the military retired pay, Maryland State Retirement and Pension System, and most international organization retirement systems, do not allow for such shifting and instead require that the reduction be taken “off the top” or before the benefit payment is divided between the parties.

 The common issue we see is that parties have agreed to shift the cost of the survivor benefit for a plan that does not accept that language in their retirement orders. For many agreements, this cost in particular is a large point of contention and is only awarded to the former spouse on the condition that the former spouse would pay that cost. So what now?

In cases where a reliable estimate can be obtained or prepared the best case is to simply change the phrasing. Instead of using a formula in the retirement order in which the plan has to fill in the information, do it based off of the estimate and reduce the former spouse’s share to a percent of the whole. To best protect each parties’ interests, include a clause that says once the participant begins to receive benefits the parties will revisit the calculation to ensure the proper amount is awarded to the former spouse. This way the retirement order is in place as of the divorce, and the former spouse is already receiving a reduced benefit to account for the survivor benefit from the start of the benefit payments. If the estimate done during the divorce is too different from the actual payments, the parties can have an amended retirement order prepared and submitted. 

If no reliable estimate can be prepared, the parties can still agree as they would, to the formula amount awarded to the former spouse, but that once the benefit payments begin, the former spouse will reimburse the participant on a regular schedule for the cost of the survivor benefit, upon proof being shown of the cost, until an amended QDRO can be effectuated.

Neither of these are as simple as having the plan shift the cost themselves, but they are good back-up solutions to an otherwise potentially deal-breaking situation.

Defined Contribution Accounts and Earnings, Gains, and Losses

Parties can agree that a transfer out of a 401k-type account include earnings, gains, and losses thereon from a certain date through the date of transfer. This allows the transfer amount to go up and down with the market investments of the account until they are transferred to the former spouse. Recently, some financial institutions have stopped allowing for this calculation, instead requiring that the transfer amount be described as occurring on the date of transfer.

This can result in wildly different outcomes. For example, imagine a transfer amount was $50,000 with earnings, gains, and losses as of the date of divorce and the transfer actually happens 6 months thereafter. During those 6 months, the market crashes and suddenly that $50,000 is equivalent to $20,000 after the earnings, gains, and losses are applied. The parties clearly intended that the former spouse should receive $20,000 in such a circumstance. If this plan prohibition was in place, however, then the former spouse would receive $50,000, and the participant would have a substantially smaller balance remaining in their account than the parties intended. So, what now?

If the account funding the transfer is no longer the person’s active retirement account, as in there are no contributions, withdrawals, or active investment scheme changes happening in the account the solution is to simply reduce the former spouse’s share to a percent and describe the transfer amount as the percent as of the date of transfer. From the example above, if the $50,000 with gains and losses the former spouse was supposed to receive would be 50% of the account, then after the market crashes and the entire account balance is $40,000, the former spouse would still receive 50% of the account, but it would be $20,000.

What if the account is receiving mandatory employer contributions? The parties may want to get a financial professional involved, but they could estimate where the account balance should be at the time, they anticipate the transfer to be made based off of expected employer contributions during that time. With the estimated contributions and market fluctuations thereon added, the parties could come up with a percent of the account for the former spouse’s share, with a continency to prepare an amended QDRO if something wild happens in the meantime.

Keeping with the same figures, if the former spouse should receive 50% or $50,000, that means the account has $100,000 at the time of the valuation. If the parties anticipate that the employer contributes $20,000, the former spouse should receive $50,000 or 41% of the account. Market changes will impact the transfer amount here, same as above. 

If you run into a similar situation and need help finding a creative solution contact us at 240-396-4373 and we can discuss your case and if we can help.

Unconventional QDRO Uses: Can a QDRO Require that a Participant Receive Payments By a Specific Date?

When dealing with the division of pension interests one of the first questions to ask is should the division be done as a shared or separate interest. In short, the separate interest division gives the former spouse/alternate payee authority in when they will begin to receive pension benefits, with little to no restrictions based on the Participant’s decisions, and is paid over the former spouse/alternate payee’s lifetime. With a shared interest division, the former spouse/alternate payee will only receive benefits if, as, and when the Participant does, and requires a survivor benefit to continue to receive benefits if they outlive the Participant.

In a shared interest division, which may be the only kind of division available the former spouse/alternate payee usually wants some kind of guarantee or at the very least notice of when the Participant will begin to receive their benefits. This desire is completely logical – for retirement income planning it’s important to know when income from each source will be received.

So many people ask, can we include in the QDRO that the participant will retire and begin to receive pension benefits on or before a certain date, and the answer is no, we cannot. A QDRO is instructions from the Court to the retirement plan for how to divide the plan benefits once they are being paid, in accordance with the plan’s existing payment rules. Under no circumstances does the retirement plan (divorce or otherwise) have the authority to require the participant to retire and begin to receive benefits. Therefore, the QDRO cannot create that authority.

So the next question that we’re asked is could that language be included in a settlement agreement, or can it be asked of the judge in a trial? This answer completely depends on state law, so it’s best to consult with a local family law attorney for specifics.  

Is the former spouse/alternate payee then left to the whim of the participant in a shared interest division?

Unfortunately for the former spouse/alternate payee that answer is yes. The most helpful provision in an agreement that we’ve seen, which can be put in the QDRO is that the participant waives privacy with respect to their pension benefits so that the former spouse/alternate payee can receive information from the pension plan as to when the participant may be retiring and the amount of the participant’s benefit.

This does not mean that the pension plan will take the initiative to reach out to the former spouse/alternate payee to notify them that the participant has filed to begin receiving benefits. Rather, it means that the former spouse/alternate payee may reach out to the pension plan to see if the participant has filed to begin benefit payments. If so, the pension plan would also have benefit payment estimates prepared that they could share with the former spouse/alternate payee. The pension plan will not likely run additional estimates at the request of the former spouse/alternate payee if they were not already prepared for the participant. This waiver of privacy is simply access to existing information.

Are there any exceptions to this?

In a presentation from an attorney in California, we heard of a law in California that could require the participant to begin making direct payments to their former spouse if the participant were of retirement age but continued to work. The presenter explained this came from a case where an employee continued to work out of spite, hoping to work until their death so their former spouse would not receive a penny of their pension. The court allegedly required the employee to begin making payments to the former spouse from his salary until he began to receive benefit payments from his pension. The presenter also stated that a few other Western states were considering similar laws. (DISCLAIMER: this information is included to show the differences between states across the nation. Attorneys at Markham Law Firm are not licensed to practice in California. We are relying on the information presented by the California attorney as of 2022, and California’s laws may have changed since then. It is important to consult with an attorney in each state in which your divorce may occur so you can choose the state that makes the most sense for your circumstance.)

It seems unlikely any such ruling would occur in Maryland or the District of Columbia any time soon. 

Certain Tax Considerations in Transferring Retirement Interests

Transferring retirement interests pursuant to a divorce can allow the parties to shift the tax burden of some payments from retirement funds from one party to the other. Whether this is something the parties want to do or is reasonable in their specific case is a matter for their individual attorney to analyze.

Payments from a Pension Plan

Payments from a pension plan can typically be divided at the gross or net levels. While some plans have a different definition for “gross” or “net”, for purposes here “gross” means the largest, unreduced payment from the plan, prior to any deductions, and “net” means the smallest, most reduced payment from the plan, after all deductions.

If divided at the gross level, that means each person will pay tax on the funds they receive. This division type is most common because it is as if each party earned their share of the pension, and are paying taxes based on their own income level.

If divided at the net level, then the participant is paying taxes at their income level for the entire benefit, and the payment made to the alternate payee/former spouse is free and clear of any tax implications. This type of division is exceedingly rare. While the participant is responsible for all of the taxes, the alternate payee/former spouse’s share is reduced also by any other deductions the participant may elect, such as a survivor benefit cost for a future spouse, or health insurance or life insurance premiums. Typically this type of division is used when both parties are retired and the income amounts are already known and they prefer to divide their retirement income based on the figures they know. The alternative is that the income to the alternate payee/former spouse may be different than intended based on the alternate payee/former spouse’s tax bracket.

Transfers from a Defined Contribution Account (Traditional accounts only)

When transferring from one retirement account to another, so long as the receiving account is eligible (check with the financial institution to see if the account is eligible to receive the funds) there will be no tax payment triggered by the transfer. However, the tax must still be paid on the funds at some time, so under this scheme, the tax will be paid by the person receiving the funds, but at the time the person takes the funds out of their retirement account. Typically, this is when the receiving party is retired and using their retirement accounts for income.

A retirement transfer may also take place to access funds when no other more-liquid funds are accessible. In this case, if the alternate payee/former spouse has a lower tax bracket, it may make financial sense to transfer the funds out of the retirement account and have the alternate payee/former spouse take the funds as cash. In this scenario, the alternate payee/former spouse would pay tax on the transferred funds immediately (and reconcile it when filing their taxes for that year). When a transfer is done for this purpose it may be ‘grossed up’ to account for the tax payment, meaning the tax payment is effectively shifted from the alternate payee/former spouse to the participant. This is most likely when the transfer is coming from retirement for a non-retirement asset, such as a home interest buy-out.

Why Transfer Instead of Withdrawal?

In the last scenario, the retirement funds in exchange for the home interest, it seems somewhat illogical to add the step of transferring the funds to the alternate payee/former spouse to take as cash rather than having the participant take the funds out as a withdrawal. For parties that are not yet at retirement age, there is the early withdrawal penalty to consider. If the participant is not of age and withdrawal the funds directly, the early withdrawal penalty is applied. However, the early withdrawal penalty is avoided if the alternate payee/former spouse receives the funds as cash through a QDRO transfer. Note, this is applicable for 401k and other similar type of accounts that are governed by ERISA. It is not the case for non-qualified plans or IRAs.

Disclaimer: This firm focuses on the practice of family law and the information provided herein related to tax considerations is legal information and is not tax advice. You may want to consult with a tax professional for any specific questions related to your case and circumstances.

Further, not all plan types follow the rules described above. The plans described and rules referenced herein are for the majority of plans. You should review the rules for the plan in your case carefully to determine how it interacts with the tax laws.

Contact our office at 240-396-4373 for QDRO related assistance.