QDRO Corner: Titling Court Orders to Divide Retirement Interests

ERISA (Employee Retirement Income Security Act) provides the protections for retirement interests for employees of private companies. The terms and regulations in ERISA are commonly used language in this area of law. Most notably the terms “domestic relations order” and “qualified domestic relations order” come from ERISA; however, these terms only apply to plans governed by ERISA.

Federal, state, and local government plans are specifically exempt from ERISA. This exemption means that plans provided by federal, state, and local governments can be non-divisible and non-transferrable, even by court order. If you are representing a spouse of a government employee, be sure to review the plan documents to understand whether the plan can be divided, and if so, what type of order the plan will accept.

Since government plans are not subject to ERISA, they do not use the term “qualified domestic relations order” and certain plans will reject the order on those grounds alone. Popular terms used for government plans in the Washington D.C. Metro area include Court Order Acceptable for Processing (federal government for Federal Employees’ Retirement System and Civil Service Retirement System), Qualifying Court Order federal government for the Thrift Savings Plan); and Eligible Domestic Relations Order (Maryland State Pension System).

The plan document or summary plan document should include the preferred term for any plan as well as any information regarding limitations on divisibility or transferability of interest. Be sure to request these documents early in your representation of a client to best negotiate on their behalf, or to ask the Court for proper relief.

If you have any QDRO questions, please reach out to Veronica Dulin at vdulin@markhamlegal.com.

QDRO Corner: Beware of Model Orders

Many plans provide model or sample orders for QDRO attorneys to use in the preparation of the Order for their clients. These are extremely useful tools to determine a plan’s preferred terms and mandatory provisions. However, these can also be misleading, or omit terms or provisions that may be beneficial to your client.

For example, most pension plans governed by ERISA provide for both a shared and a separate interest payment option. However, if the plan prefers one division method to another, then it may provide only the preferred model to you or try to dissuade you from using the other division method.

Non-mandatory QDRO terms may include how to reconcile if the plan pays one party’s share to the other by accident. Omitting this term may lead to litigation over who had the burden to recognize and fix the mistake, the plan or either party. An easy way to avoid the potential litigation is to state the protocol here, such as reimbursing the plan, or the other party.

Another non-mandatory term that is quite useful is for the court to retain jurisdiction in the event an amended QDRO is needed. Amended QDROs are sometimes necessary due to no fault of the parties, such as a merger with another plan resulting in changed rules, and it is best to know that the Court will always have jurisdiction to enter the new order if needed.

Think carefully about your client’s particular needs with respect to their QDRO and if you have a model order, treat it as a great first step in drafting the order.

QDRO Corner: Defined Contribution Plan Loans

Loans from defined contribution plans are easy to overlook when reviewing a statement for the current balance. However, if there is an outstanding loan, whether the outstanding loan balance is included or excluded from the account balance can dramatically alter the amount a spouse receives when dividing the account.

If the outstanding loan balance is “included” or “taken into account” then the loan balance will reduce the account balance before account is divided. For example, say the parties to a settlement decide that the defined contribution account shall be divided equally, the account has a total value of $20,000, and there’s an outstanding loan balance of $5,000 that shall be taken into account. The math to divide the account is as follows:

$20,000 (total account value)
- $5,000 (outstanding loan balance)
$15,000 (account balance to be divided between the parties)

$15,000 (account balance to be divided between the parties)
÷ 2 (for equal division between the parties)
$7,500 (total funds to be transferred to spouse)

If, however, the outstanding loan balance is to be “disregarded” or “excluded,” the spouse receives a different amount. Using the same numbers as above, if disregarding the loan balance, the math is as follows:

$20,000 (total account value)
÷ 2 (for equal division between the parties)
$10,000 (total funds to be transferred to spouse)

If you are unsure whether a plan participant has taken out loan, let the person preparing the QDRO know so she can investigate and make sure the division will be as the parties intended.

QDRO Corner: Cash Balance Plans

A cash balance plan is a hybrid plan between a defined benefit and a defined contribution plan, offered by some private employers.

A statement for a cash balance plan will look very similar to a statement for a 401(k) account, in that the statement will show a specific dollar amount in what appears to be an account for the participant as of a date certain. However, this is not a separate account for the participant with that specific amount of funds in it. Instead, this is the actuarial value of the plan based on the participant’s life.

Most cash balance plans can only be divided in the same manner as a defined benefit plan, wherein the alternate payee receives a share of the monthly payment to the participant, or receives their own share in which the monthly payment amount is actuarily determined based on the alternate payee’s life.

Some cash balance plans may be divided like a defined contribution plan, wherein the alternate payee receives a lump sum. This is the small minority of cash balance plans.

Before finalizing a separation agreement that includes the division of a cash balance plan, it is best to have the QDRO prepared and communicate with the plan to ensure that the division upon which the parties are agreeing will be accommodated by the plan.

QDRO Corner: The Importance of Addressing Earnings, Gains, and Losses

Earnings, gains, and losses is the phrase used to describe the investment experience of the funds within a defined contribution account (401k, 403b, 457, TSP, etc.). In dividing a defined contribution account, the parties have the option of including earnings, gains, and losses on the amount to be transferred, or not. One must select a valuation date from which to apply the earnings gains and losses.

Division of the earnings, gains, and losses protects against surprises in the market.

Let’s say Spouse A is to receive 50% of Spouse B’s old 401k as of December 31, 2019, with earnings, gains, and losses applied thereon (Spouse B and the employer are no longer contributing to the 401k). At the time, $100,000 was in the account. Due to market fluctuations, at the time the account was to be divided, only $80,000 was in the account. Therefore, each party received $40,000 upon division.

Assume the same facts as above, but this time with no earnings, gains, and losses applied. Spouse A will receive $50,000 and Spouse B will retain $30,000.

Continue to assume the same facts, but this time due to market fluctuations only $40,000 remained in the account at the time it was to be divided. Without earnings, gains, and losses Spouse A would receive all $40,000 (even though Spouse A should have received $50,000), Spouse B would be left with $0, and the plan would consider its obligation satisfied.

Earnings, gains, and losses in an account can be quite substantial in certain circumstances. If you are uncertain how to discuss this issue with your client give us a call.

QDRO Corner: A FERS Annuity Doesn't Have to Revert to the Employee

When parties divorce and the FERS annuity is divided pursuant to a COAP and then the former spouse dies, the default is for the former spouse’s share to revert back to the employee.

I’m often asked whether the former spouse’s share of the FERS monthly annuity can be transferred to someone else in this scenario, rather than having the share revert back to the employee.

OPM (the administrator of the FERS plan) will only transfer the former spouse’s share to a specifically named third party as a part of the COAP if that third party is the child of both parties. If the former spouse’s share is to be paid to any other third party, the COAP must designate either a central location such as a specific bank account, or the former spouse’s estate. If, however, the estate is elected, then keep in mind that the funds will be taxed for going through probate (according to each state’s laws) and then the estate must remain open until the death of the employee, which will cause delay and maybe an administrative headache. Additionally, note that if the former spouse was to receive a survivor annuity, the survivor annuity does not transfer to anyone. Only the former spouse’s share of the monthly annuity during the life of the employee can continue to be paid beyond the death of the former spouse.

Similarly, I’ve also been asked the opposite question recently: the parties designate that the former spouse’s share goes to the parties’ child upon the death of the former spouse if predeceasing the employee. The former spouse dies, and the parties’ adult child is now receiving the former spouse’s share, whereas the employee could really use those funds. As the former spouse is now unable to sign a new COAP, the only way for the employee to recoup those funds is to ask the adult child for them, and hope their child voluntarily pays it over, post-tax.

Changes to Maryland Child Support Rules

Shared Physical Custody – SB 579

Last month, the Maryland legislature passed a law that changes the way child support is calculated in certain shared custody situations. Under the child support guidelines, child support is calculated depending on the number of overnights the child spends with the non-custodial parent. Currently, when a child spends more than 128 nights, or 35 percent of the year, with the non-custodial parent, a shared physical custody calculation is used. If the child spends fewer than 128 overnights with the non-custodial parent, then a sole physical custody calculation is used.

But what about situations where the child spends 127 overnights with the non-custodial parent? This is called the “cliff” model because of the drastic difference in child support calculation between 127 and 128 overnights. The new legislation lowers the “cliff” so that the shared physical custody guidelines are more readily applied and is now accompanied by a “slope” to ease into the shared physical custody guideline calculation.

First, the legislation alters the definition of shared physical custody, so it now applies when a non-custodial parent has the child for at least 92 overnights, or 25 percent of the year. Second, when the child spends between 92 and 109 overnights with the non-custodial parent, or 25 to 30 percent of the year, a shared physical custody adjustment calculation will be used to determine child support. This adjustment acts like a slope to ease child support calculations into shared physical custody. The sole physical custody calculation will be used in cases where the child stays with the non-custodial parent under 25 percent of the time and the shared physical custody calculation will be used where the child stays with the non-custodial parent more than 30 percent of the time.

So, what does this mean for your upcoming child support case? Well, as the child spends more time with the non-custodial parent, between 92 and 109 overnights per year, a new, gradual calculation applies until the overnight amount reaches 110 overnights. At that point, the shared physical custody calculation is applied. For more information on how child support is calculated in Maryland, please check out our previous blog.

This legislation goes into effect on October 1, 2020. For existing child support orders, the passage of this bill does not mean that your child support obligation will change.

Child Support – SB 847 

Last month, the Maryland legislature also passed a law that changes child support obligations in certain circumstances, unrelated to timesharing. Effective on October 1, 2021, the child support guidelines will provide judges with more discretion to ensure that after child support is paid, the payor parent still has sufficient income to provide for him or herself and will require judges to make specific findings in cases where there are allegations of voluntary impoverishment.

First, this law gives the court authority to determine whether applying child support guidelines would be unjust or inappropriate by taking into consideration whether the support obligation would leave the payor below 110 percent of the 2019 federal poverty level. In cases where this is true, the court can decline to apply the child support guidelines.  If the court declines to apply the child support guidelines, the court must make specific findings that defend the support determination, including how it deviates from the guidelines and why it serves the best interest of the child.

Second, the law indicates circumstances where the court has the authority to decline to establish a child support order. These circumstances are where the payor parent is unemployed, is incarcerated, is permanently disabled, has no financial resources to pay child support, is institutionalized in a psychiatric care facility, or is unable to obtain or maintain employment.  

Further, the law establishes that a material change of circumstances exists to modify a current child support order if any of the circumstances outlined above (unemployment, permanent disability, etc.) apply to the payor parent. A “material change of circumstances” is the standard that must be met in order for any modification of child support to be considered in Maryland.

Lastly, where there are allegations that the payor parent is voluntarily impoverished to avoid paying child support, the law requires the court determine the validity of these allegations based on the totality of the circumstances. If the Court determines that there is voluntary impoverishment, then the Court must decide if potential income should be imputed to the payor parent and if so, how much. The Court makes this decision by considering several factors, such as the parent’s age, education, special skills, employment history, etc.… However, if the parent is unable to work due to a physical or mental disability, or is caring for both parties’ young child (under two years of age), then the court may not make a potential income determination for the purposes of child support.

The passage of this bill will not directly affect a child support order that is in effect prior to October 1, 2021. And, the adoption of new legislation does not constitute a basis for a modification of child support.

Child Custody and Relocation: What You Should Know Before Packing Your Bags

Are you thinking about moving, but worried how this might affect your custody agreement? 

For many parents, relocating to a new place presents new and exciting opportunities. Whether it would allow you to seek a better job, or the move would put you closer to extended family, your reasons for moving may be completely valid. However, when this move would create a conflict with your custody arrangement, there are important factors you must first consider. 

1. First things first – are you planning to move across the street or across the country? There is a big difference between moving somewhere in driving range versus somewhere that requires a plane ride to get there. This is because regardless of whether your custody arrangement was established through a separation agreement or by a custody order from the court, you must follow its terms. 

2. Modifying your agreement – But what happens if you want to move to a different state, or maybe even to a different country? When relocation would absolutely make your current agreement or order impossible to follow, you will have to have the arrangement modified. While this can be done through a consent agreement with the other parent, you may have to seek a court order regarding custody. 

3. In analyzing a relocation request, a court will consider many things, including whether the relocation establishes a material change in circumstances to trigger modification of custody, and whether relocation is in the best interest of the child. Courts use this high standard as a way to avoid unnecessary disruption for the child. As part of the best interest analysis, courts will generally consider the following: 

   • What are the reasons for the move? Are you moving to pursue an advanced degree or for employment reasons?

     • Do you have a plan for where you wish to move? Have you looked into neighborhoods, or schools for your child? 

     • If you are the relocating parent, are you able to meet your child’s needs on a day to day basis? 

     • What is your relationship with your child? And how does that compare to their relationship with the other parent?

     • How old is your child? 

     • Will relocation enhance the general quality of life for both you and your child? 

It is important to note however that while a court may find that relocating your child is not in their best interest, they cannot restrict you from moving alone. Rather, the court can amend the custody order so that your child remains in-state with the non-relocating parent.  If you have questions, we can help. Call our office at 240-396-4373.

COVID and the Modification of Child Support

Lost Your Job? Modifying Child Support May Help to Lessen the Blow

 As if dealing with the stress of a global pandemic wasn’t enough, people are now forced to face the unfortunate financial consequences of COVID-19. For many this means unemployment (including furlough, permanent lays offs, or underemployment) and if you are also a parent paying child support, this could mean significant challenges in meeting your monthly obligation. That being said, a modification in your child support order might be your next step. Here is what you should know. 

1)    A modification of child support may be appropriate if circumstances have changed substantially since the last order was entered.  Losing a job is a common reason for a reduction in child support, but other reasons could include a reduction in hours or pay rate. Given the uncertainty surrounding when this virus will end, courts may also consider factors which they normally would not. 

2)    A modification of child support is only valid through a court order or formal agreement.  For these reasons, you should never unilaterally lower or stop paying your obligations. 

3)    Child support payments can be deducted automatically from your unemployment benefits. If you cannot find another job, you may want to consider filing for unemployment as a way to ensure you do not default on your payments. 

 4)    If you cannot pay your child support, you should either immediately consult with an attorney and/or immediately file a pro se motion to modify. If you do not, a court can find that you are in arrears of payment and accordingly order you to pay anything owed pursuant to the last order.   Even with court closures, you can still file a motion which will toll the accrual of your arrears.

If you have questions,, we are open and available to help!

Retirement Implications of the CARES Act

On March 27, 2020 the CARES Act was signed into law. The major headlines of the law are the small business loans, checks to income-qualifying individuals, and student loan payment implications. However, the headlines are omitting another major section of the CARES Act – the section that loosens access to funds in retirement plans for qualifying individuals, so that funds in retirement plans can be used to help pay for expenses during this time. Note, the loosened restrictions for access to retirement funds is for 2020 only.

Who is Eligible to Take Advantage of the Loosened Restrictions?

Before getting into the details of how the access to funds in retirement plans have been expanded, who is eligible to take advantage of this temporary change? A ‘qualifying individual’ is someone who is, or whose spouse or dependent is, diagnosed with COVID-19, or who experiences financial hardships due to furlough, quarantine, layoff, hours reduction, inability to work due to lack of childcare or business closing, or any other factors as determined by the Secretary of the Treasury as the situation changes. 

Ok, so a person is eligible, how do they use take advantage of being eligible? Retirement plan administrators/sponsors are not required to verify a plan participant’s claim of eligibility – the plan administrator/sponsor can rely on the plan participant’s certification of eligibility. 

What Exactly Could People Be Eligible For? 

1. Higher Loan Limit. The loan limit for all qualified plans is now $100,000 or 100% of the participant’s vested balance, whichever is lower. This is increased from $50,000 or 50% of the participant’s vested balance. This total loan balance is to include any loans currently outstanding by a plan participant. Payments otherwise due between March 27, 2020 through December 31, 2020 will be delayed for one year, and no interest shall accrue during the delay period. 

2. Tax-Free* and Penalty-Free Coronavirus-related Distribution. Individuals can take a Coronavirus-related distribution of up to $100,000 in 2020. The distribution will not be subject to the 10% early withdrawal fee. The distribution will be included in the recipient’s taxable income across three years, unless the recipient prefers to have it all taxed in a single year. *However, if the recipient repays the distribution or any amount thereof, within three years of receiving the distribution the amount repaid will be treated as a rollover to an eligible retirement account and will not be taxed. As a practical matter, for people repaying the distribution in a year other than the year in which it is received (2020), the person will have to amend the tax returns for that year to change the tax treatment of the distribution.

3. No Required Minimum Distributions in 2020. Persons with a certain 457(b), or an IRA, 403(a), or a 403(b) from which they are required to take a minimum distribution each year are not required to take such a distribution this year. The purpose of this is to help people preserve their investments and leave their funds in the retirement account if they do not need to take the distribution. There is no guidance for persons who have already taken their required minimum distributions before this law was passed, so as of now, required minimum distributions that have already been taken cannot be re-deposited or otherwise ‘undone.’ 

If a party to a divorce is adversely impacted by COVID-19, or is otherwise in need of funds during this crisis, these options may be worth exploring. Consult with a financial planner or tax advisor before making any important financial decisions like these!