In 1974 Congress passed the Employees Retirement Income Security Act (ERISA). This act defined, clarified, standardized, and protected employees’ rights to pension benefits. It also stated that pension benefits were “non-assignable,” thereby shielding these pension benefits from all creditors. Realizing that there was an inequity concerning the marital property rights of spouses and former spouses, in 1984 Congress passed the Retirement Equity Act (REA). The REA defined the rights of spouses, former spouses, and dependents, and stated that pension benefits could be assigned pursuant to a Qualified Domestic Relations Order (QDRO). As defined under the REA, a QDRO means a Domestic Relations Order (DRO) which “creates or recognizes the existence of an alternate payee`s right to, or assigns to an alternate payee, the right to receive all or a portion of the benefits payable with respect to a participant under the plan.”

Lexington Pension Consultants, Inc. has been providing assistance in the preparation of Qualified Domestic Relations Orders (Q/DROs) since 1986. We have prepared tens of thousands of QDROs for our clients. It is important to note that we are a full-service firm. We can assist you from the beginning of the process by providing you with consultation services and/or with plan-specific stipulation language. We prepare the DRO based upon the specifics of the parties’ agreement and send it to the requesting attorney(s) for review and approval. Upon confirmation from the requesting attorney(s) that the DRO accurately reflects the terms of the parties’ agreement, we then forward the draft DRO to the appropriate pension/retirement plan to obtain pre-approval of the DRO. This is a somewhat time-consuming but important step in the process. It has been our experience that if there is the slightest inconsistency in conforming to the plan’s rules, the plan will not qualify the Order. We will work with you until your DRO is pre-approved by the plan and ready for the Court’s certification.

Occasionally, the final terms of the property settlement are decided by the judge, but in the vast majority of cases, the Qualified Domestic Relations Order (QDRO) will be based upon the terms specified in the parties’ Stipulation of Settlement or Marital Settlement Agreement. Therefore, it is vitally important to include specific pension distribution terms in the agreement. This is especially true with governmental plans. Based upon our extensive experience, Lexington Pension Consultants, Inc. can provide attorneys and their clients with specific information that will enable them to structure a settlement that will ensure that all pension/retirement assets are adequately addressed and that the terms of the agreement will conform to the rules of the particular retirement plans. Our website contains sample stipulation language for some of the larger pension/retirement plans. Click here for a list of plan-specific stipulation language available for purchase.

We are here to help you through the entire process, providing advice and consulting from the beginning of the process (how to best structure your settlement agreement), to the end of the process (pre-approved DRO, ready for the judge’s signature). We are available for consultation services in order to ensure a successful start and a properly drafted stipulation. Below are the steps typically involved in the process:

• Parties agree to the division of the future pension benefit and/or the immediate division of defined contribution plans (we can assist by providing stipulation language specific to the plan).
• We draft DRO(s) based on the terms of the parties’ agreement and send it to the attorney(s)/client(s) for review. 
• Once we receive the attorney(s)/client(s) approval of the DRO, we submit it to the plan administrator for review and pre-approval.
• Plan administrator sends us either approval of the draft DRO or comments, questions, and suggested revisions.
• Once the DRO is acceptable to the Plan Administrator, we send the DRO and the plan’s pre-approval letter to the attorney(s)/client(s). At this point, the case is closed in our office.
• The attorney(s)/client(s) submit the DRO to the Court for the Judge’s signature and, once signed, the attorney(s)/client(s) then send the Court-certified DRO to the Plan for qualification/acceptance.

The spouse, former spouse, or dependent of the plan participant is known as the alternate payee. Under the Retirement Equity Act, the alternate payee is entitled to certain benefits, some of which are as follows: a) under Defined Benefit plans the alternate payee would be entitled to a portion of the accrued pension benefit for his/her lifetime, beginning at the participant`s normal retirement date or earliest retirement date (usually with an actuarial reduction), whether or not the participant had actually retired; b) the payments would be made as a life annuity to the alternate payee and he/she would be entitled to choose a payment option which would provide death benefit payment to a beneficiary of the Alternate Payee’s choice (other than a joint & survivor annuity with a new spouse); and c) should the participant die prior to attaining retirement eligibility, the alternate payee retains a pro-rata share of any pre-retirement survivorship rights, if agreed to by the parties.

ERISA plans can be divided under two forms, a “Separate Interest” or a “Shared Interest” benefit. The above paragraph describes a separate interest division of benefits. Under a Separate Interest form of distribution, the alternate payee may commence benefits at any time after the participant becomes eligible for the benefit, even if the participant continues in employment. The alternate payee effectively becomes a participant in the plan at the time he/she chooses to commence benefits. The alternate payee is even allowed to designate a beneficiary for the portion of the benefit awarded to him/her. Any necessary actuarial adjustments, as determined by the plan, will be made to the alternate payee’s portion. The participant retains his/her remaining portion and is free to receive his/her portion in any form available under the plan. Under the Shared Interest form of distribution, the alternate payee must wait until the participant actually retires before commencing his/her portion of the benefit, the benefit is payable only for the life of the participant, and the alternate payee does not have the opportunity to designate a beneficiary. If the alternate payee is to be considered the surviving spouse of the participant for the purpose of the qualified pre-retirement survivor annuity and/or qualified joint and survivor annuity, specific language must be inserted in the agreement and in the QDRO. If the participant is already retired when the QDRO is prepared, then the Shared Interest is the only form of distribution allowed. This is because the form of benefit was chosen at the time of retirement and cannot be modified.

ERISA was established to regulate employer-sponsored, private-sector retirement plans, but specifically excluded “governmental plans” which include all municipal, state, and federal plans (including railroad plans). Consequently, former spouses do not enjoy the same rights or benefits under these plans. The only form of benefit available to alternate payees under governmental plans is a Shared Interest benefit. Therefore, there are two significant differences between ERISA and governmental plans. The first is that, under a governmental plan, the alternate payee cannot begin collection of his/her portion of the benefits until the participant actually retires. The second is that payments to the alternate payee will be made only for the lifetime of the participant. If the intent is to provide lifetime protection to the alternate payee, the participant must name the alternate payee as the beneficiary of a portion of the pre-retirement death benefit and/or choose a death benefit option that would provide such protection in the event of the participant’s death after retirement. Remaining silent on this issue would allow the participant to name another beneficiary(ies) for the pre-retirement death benefit and/or choose an option at retirement that would cause all benefit payments to cease upon the participant`s death, or worse, to provide a benefit to another beneficiary while reducing the monthly benefit to the alternate payee during the participant`s lifetime. It is important to include specific provisions regarding beneficiary designations in the initial agreement. Spouses of federal employees enjoy slightly more protection than municipal and state employees in that they are covered under the Civil Service Retirement Spouse Equity Act of 1984 and the Federal Employees Benefits Improvement Act of 1986.

The Uniformed Services Former Spouse Protection Act (USFSPA) gave state courts the authority to divide Military Retired Pay. However, there are many issues and potential problem areas that may be encountered. Congress passed the USFSPA in 1982 in response to the U. S. Supreme Court’s 1981 decision in McCarty v. McCarty. The McCarty decision prohibited state courts from dividing military retired pay as an asset of the marriage. The USFSPA preempts the Court`s decision and gives state courts the authority to treat military retired pay as marital property and divide it between the Spouses. A change to the law that occurred in 2017 affected the manner in which court orders submitted to the Defense Finance and Accounting Service (DFAS) as part of an application for division of military retired pay, pursuant to the Uniformed Services Former Spouses’ Protection Act (USFSPA), must be formatted. This change does not apply to retired members who are divorced after the date of retirement. This change applies to cases where the Former Spouse and Member were divorced after December 23, 2016, when the court awards the Former Spouse a division of property, and the Member has not yet retired (or in the case of a reservist, not yet receiving a benefit). In such cases, the military Member’s disposable income is now limited to the amount of retired pay to which the Member would have been entitled using the Member’s retired base pay and years of service on the date of the decree of divorce, dissolution, annulment, or legal separation and increased by the cost-of-living amounts granted to military retirees from the time of the divorce to the date the Member retires.

PROS

• Assets are distributed or offset immediately, no need for further involvement of parties, settlement is achieved quickly, and the parties can get on with their lives.
• If a lump-sum offset is made, the receiving spouse can purchase a lifetime annuity with the money.
• Should the receiving spouse die, his/her estate receives the full value of the asset.
• In most cases the distribution is not immediately taxable.
• One party might receive an unreduced pension or s/he may choose any option s/he wishes, e.g., if s/he remarries s/he can provide full survivor benefits to his/her new spouse.

CONS

• Immediate distribution of assets may cause financial hardship for the pensioned spouse.
• The non-pensioned spouse may receive an immediate lump sum distribution or a portion of another marital asset but will not receive a monthly retirement annuity.

PROS

• The Alternate Payee receives a monthly annuity for her lifetime, beginning at the plan participant`s retirement eligibility date (or later as the Alternate Payee may choose).
• The Alternate Payee may begin to receive his/her portion of the benefit at any time after the plan participant`s earliest retirement date. S/he does not have to wait until the plan participant actually retires.
• Should the plan participant pre-decease the Alternate Payee, the Alternate Payee may be able to retain pre-retirement and sometimes, post-retirement survivorship rights to the Alternate Payee’s pro-rata share of the death benefit.
• The Alternate Payee may have the right to name beneficiaries for his/her separate interest share of the pension.

CONS

• The Alternate Payee may have to wait many years to collect.
• If the settlement is not structured correctly, the value of her benefit may be worth a lot less in terms of current value.
• The Alternate Payee`s benefit under a defined benefit plan can sometimes have limited survivorship rights.
• The Alternate Payee’s monthly benefit may be actuarially reduced.

PROS

• The Alternate Payee cannot commence receipt of pension benefits until the plan participant`s actual retirement date.
• The Alternate Payee receives a monthly annuity that is based on the plan participant`s lifetime.
• Should the plan participant pre-decease the Alternate Payee, in order for the Alternate Payee to receive an ongoing benefit, the parties would need to agree that the plan participant is to name the Alternate Payee as the beneficiary of a pre-and/or post-retirement death benefit and/or an option election at retirement. 

CONS

• Since governmental plans are not subject to ERISA, they will not comply with many “normal” guidelines and requests. Many uncertainties exist.
• The Alternate Payee cannot begin receiving a pension distribution until the plan participant actually decides to retire. If the plan participant chooses to work until a later age, the Alternate Payee must wait until the plan participant retires to begin collecting benefits. A plan participant could conceivably work until age 70.
• The Alternate Payee`s portion of the pension has no survivor benefits. If the Alternate Payee dies prior to the plan participant`s retirement, or any time after the commencement of benefits, the Alternate Payee beneficiaries and estate get nothing.
• The court cannot order the plan participant to retire.
• Under the Civil Service Retirement System and Federal Employees Retirement System, if the Alternate Payee remarries prior to a certain age, s/he receives no death benefits upon the plan participant`s death.

In matrimonial actions, the basic logic behind the need for determining the present value of an individual`s accrued pension benefit is to determine the replacement cost of that benefit. While the parties were married, there was an expectation that they would share in this benefit at retirement. Now, upon divorce, since marital assets must be distributed equitably between the parties, there is a need to determine the value of each of these assets, including the replacement cost of the pension benefit.

Once the values of all assets are determined, the parties can offset the values of these assets so that they are distributed equitably.

A traditional Defined Benefit pension plan is a plan under which there will be a monthly amount payable at retirement based upon a formula as described in the plan’s Summary Plan Description. An example of a typical defined benefit plan formula is as follows: a percentage (1.5%) multiplied by the years of credited service (25), multiplied by the final average salary ($65,000). Under this example, the annual accrued benefit would be $24,375.00 (1.5% x 25 x $65,000 = $24,375). When calculating the present value of pension benefits, many factors affect the ultimate determination of this value. In general, if a person is young, has many years of deferral until the commencement of pension benefits and the payments begin at a later age, such as age 65, these factors will result in a lower present value.

Conversely, if the person is close to retirement age and can begin collection of benefits at a relatively young age (such as a 40-year-old police officer with 18 years of service and a 20-year retirement), the value would tend to be higher because the payments commence earlier and continue for many more years.

Occasionally, the final terms of the property settlement are decided by the judge, but in the vast majority of cases, the Qualified Domestic Relations Order (QDRO) will be based upon the terms specified in the parties’ Stipulation of Settlement or Marital Settlement Agreement. Therefore, it is vitally important to include specific pension distribution terms in the agreement. This is especially true with governmental plans. Based upon our extensive experience, Lexington Pension Consultants, Inc. can provide attorneys and their clients with specific information that will enable them to structure a settlement that will ensure that all pension/retirement assets are adequately addressed and that the terms of the agreement will conform to the rules of the particular retirement plans. Our website contains sample stipulation language for some of the larger pension/retirement plans. Click here for a list of plan-specific stipulation language available for purchase.

Defined Contribution Plans consist of any type of tax-deferred plan which has individual accounts for participants. Contributions to the account may come from the employer and/or employee. Investment risk is largely borne by the employee. The common types of defined contribution plans are profit-sharing, 401(k), 403(b), 457, employee stock ownership plans, profit-sharing plans, thrift/savings plans. The value of these plans is based on the current value of invested assets at any given point in time.

Establishing the value of a defined contribution plan is sometimes easy. Just read the statement. When examining these plans for equitable distribution purposes, the value is relatively easy to determine when the entirety of the account has been earned during the marriage. In this case, the parties may use the balance for the appropriate valuation date and decide how it is to be divided. However, a problem often arises when there was a balance in the account prior to the marriage. If a portion of the account was in existence prior to the marriage, the pre-marital portion vs. the marital portion has to be established.

There are several methods used to determine the marital and non-marital portions of an account. The Tracing Method is typically considered the most accurate and preferred method to determine the marital and non-marital portions. This method examines the actual investment experience of the account during the whole marital period and compares the pre-marital balance to the marital contributions and the proportionate share of the earnings or losses attributed to the account during the marriage. Unfortunately, the Tracing Method requires an analysis of all account statements from the date of marriage to the date of the action for divorce (or the date being used for valuation if different than the date of the action for divorce). Often these records are not available. Alternative methods of determining the marital portion of a defined contribution plan account are the Subtraction Method and the Coverture Fraction Method. The Subtraction Method is calculated by determining the account balance as of the Marital Asset Cutoff Date and subtracting from it, the account balance as of the Date of Marriage. The difference in the balances is the portion of the account that accumulated during the marriage. The Coverture Fraction Method is calculated by dividing the number of years married while participating in/contributing to the plan by the total years in the plan. This calculates a Coverture Fraction, which is then multiplied by the account balance on the valuation date. See below for an example of these calculations. 

A typical scenario illustrating the problem goes like this: The parties were married on December 31, 2008, and at the time of the marriage, the husband was a member of his company’s savings plan since December 31, 2000, with a balance of $50,000.00 as of the date of marriage. During the marriage, he continued to contribute marital money into the savings plan. On the date the action for divorce was commenced (December 31, 2020), the balance of the account was $200,000.00. The question becomes: How should be “marital portion” of the account be determined? See below for calculation options.

Subtraction Method calculation vs. the Coverture Fraction Method calculation vs. the Tracing Method Calculation:

Utilizing the Subtraction Method calculation yields a marital accumulation of $150,000.00 (i.e., $200,000.00 – $50,000.00 = $150,000.00). 

Utilizing the Coverture Fraction Method yields a marital percentage of 60% (i.e., the numerator of 12 years married while contributing to the plan, divided by a denominator of 20 years employed and contributing to the plan as of the date the action for divorce was commenced, equals 60%). 60% of $200,000.00 is $120,000.00.

Both of these methods might be considered inaccurate when being used for equitable distribution purposes. The Subtraction Method might be considered inaccurate because it fails to account for gains/losses on the pre-marital balance during the marital period. The Coverture Fraction Method might be considered inaccurate because the coverture fraction is determined by years of marriage and service, not the rate of contribution or earnings – in short, it simply reflects the percentage of time married as of the date the action for divorce was commenced. If the participant had been employed for a longer or shorter period of time, it would have affected the coverture fraction, having no direct relationship to the actual amounts accumulated/contributed during the marriage. Unfortunately, if comprehensive account statements are not available, either of these two methods may be the only viable alternative.

Utilizing the Tracing Method calculation is without a doubt the most accurate method to determine the marital and non-marital portions of defined contribution plan accounts. Since this method examines the actual investment experience of the account during the whole marital period, earnings and/or losses are determined on a proportionate basis from quarter to quarter beginning with the statement from the date of marriage and continuing up to the agreed upon marital asset cutoff date. This allows the account holder to account for not only the pre-marital funds but also the gains/losses on those pre-marital funds. Also, any loans or distributions which were made during the marital period can be properly accounted for.

When determining the division of assets, if the parties have agreed to a Pension Valuation, they typically then want to use the valuation to offset their retirement benefits against one another, or they want to offset the retirement assets against the value of other property, such as the marital residence. In many cases, both spouses are entitled to retirement benefits and have a mutual interest in the marital residence or other assets that may be held as individuals. Dividing these assets for equitable distribution purposes does not always result in an even distribution of assets. Often, when offsetting retirement plan benefits, one spouse may end up retaining the entirety of his/her retirement assets while also being entitled to a reduced portion of the benefit belonging to the other spouse after the offset. The purpose of this offset calculation is to determine the reduced percentage of the marital portion of the retirement plan benefit. For example, after an offset of pension benefits, Jane Smith might retain the entirety of her pension benefit, free of claim from Bill Smith, and she might then receive a reduced portion of Bill Smith’s pension (e.g., 27% of the marital portion of Bill Smith’s pension rather than 50% of the marital portion).

Click here to purchase Stipulation Language for common plans directly from our website.

When attorneys negotiate the terms of a Settlement Agreement, one of the most complex aspects of the Agreement is the equitable distribution of retirement assets. Several steps are required:

Step one – The pension/retirement assets under each party’s name must be established. Depending on the retirement asset, the parties may need to establish the marital portion of each spouse’s retirement benefits. This often requires a present value analysis or Tracing Method calculation.

Step two – The benefits may need to be offset against one another or other assets, such as the marital residence. In many instances, one spouse may be entitled to a reduced portion of the other spouse’s retirement benefits, after the offset calculation is performed. This benefit may be payable in the future via a Qualified Domestic Relations Order (QDRO).

Step three – When benefits are to be divided via a QDRO (whether or not there is a present value analysis or benefit offset, attorneys must be very specific in describing how these benefits are to be divided. Merely stating in a Settlement Agreement that the spouse is to receive an agreed upon percent of the marital portion of a retirement plan benefit or 401(k) type plan, is woefully inadequate. Several additional issues must be negotiated and included in the Agreement. For defined contribution plans, the parties need to consider the award amount or percentage as of a valuation date, gains/losses on the award amount from the valuation date to the date of segregation of funds, and the effect of loans that may be outstanding as of the valuation date. For defined benefit plans, the parties need to consider how the award is to be calculated and, depending on the plan, may also need to consider cost of living adjustments, benefit enhancements, death benefits, excess contributions, loans, early retirement subsidy, etc.

Step four – Once the above issues are resolved, if a QDRO is necessary, the terms of the Agreement as it relates to the retirement benefits, must be set forth in a QDRO that is acceptable to and can be “Qualified” by the retirement plan. Parties sometimes realize too late that they have agreed to provisions in a Settlement Agreement that the retirement plan is unwilling or unable to calculate. For example, some plans will not calculate the “marital portion” of an account, some plans will not accept asset division dates that go back more than a year, and some plans require a specific dollar amount rather than a percent or formula. Refusal by the plan to implement the terms of the Agreement may force the parties to renegotiate the settlement.

Lexington Pension Consultants, Inc. can help matrimonial practitioners avoid many of the pitfalls associated with distributing retirement assets. We have had decades of experience in assisting attorneys in negotiating settlements, calculating the marital value of benefits, offsetting assets and dealing with retirement plans. We have extensive knowledge of retirement plan rules and requirements.

Our Stipulation Language Assistance services help attorneys do it right the first time. Upon request, we can provide attorneys with Stipulation Language specific to the plan or plans being divided. Click here to view the language we have available online for immediate purchase on our website. We can also be retained to prepare customized language for plans that are not available through our website.

Our consultation services provide professional assistance with the understanding and drafting of plan-specific Settlement Agreement language, the division of specific retirement plans, stipulation/QDRO review, and/or the resolution of issues related to an existing stipulation/QDRO (we cannot provide legal or tax advice).

We require a $300 retainer fee (payable in advance) for the first hour of consultation. This hour includes the preparation time needed for us to review the available documents and the time spent consulting via phone or Zoom. If additional time is required beyond the first hour, an invoice will be sent upon the completion of consultation services billed at $150 per hour, pro-rated in 15-minute increments.

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