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TOP 3 QDRO MISTAKES & HOW TO AVOID THEM

by Madeline Hill | Mar 5, 2014 | Defined Benefit Plans, Defined Contribution Plans, General QDRO Info

QDRO MISTAKE 1: WRONG METHOD OF DIVISION FOR RETIREMENT PLAN TYPE

The language in the settlement agreement and QDRO should be applicable to the type of retirement benefits being divided. There are two main types of retirement plans, namely 1) Defined Contribution Plans and 2) Defined Benefit Plans. 401(k), 403(b), and 457 deferred compensation plans are all types of “Defined Contribution Plans.” The benefits under defined contribution plans are based upon actual monetary contributions to the plan, and the investment performance of said contributions. Whereas, the benefits under defined benefit plans, commonly known as “traditional” pension plans, are paid as a monthly annuity based on a formula tied to the plan participant’s years of service credit, final salary, and age at retirement. Defined Benefit plan benefits are not solely based on monetary contributions.

The language dividing defined contribution plans should (and conversely, the language dividing defined benefit plans should not):

Refer to the plan participant’s total account balance
Express the former spouse’s (alternate payee’s) interest as either a dollar amount or percentage of the account, as of a particular valuation date (usually the parties’ date of separation)
Address whether the alternate payee’s share should or should not be adjusted for interest or investment earnings
Provide for a new account to be created in the Alternate Payee’s name
Provide the option of an immediate distribution or rollover of Alternate Payee’s share

The language dividing defined contribution plans should not (and conversely, the language dividing defined benefit plans should):

Reference the Time Rule Formula or coverture formula
Reference the participant’s “accrued benefit”
Provide for a “monthly” benefit
Reference COLAs or early retirement subsidies
Address survivor benefits
Delay the alternate payee’s benefit commencement until the participant is eligible for retirement or actually retires

QDRO MISTAKE 2: QDRO PREPARATION TIMING

Ideally, the QDRO should be prepared as soon as the parties have reached a basic settlement regarding the division of the retirement asset. This will allow the QDRO to be filed concurrently with the Judgment of Dissolution, or even be incorporated into the Judgment. Otherwise, the QDRO should be prepared as soon to the time of divorce as possible. If a QDRO is not filed and any of the following events happen, the alternate payee may entirely lose his/her benefits:

Participant terminates employment and takes a full plan distribution under a defined contribution plan
Participant retires and begins commencement of benefits without notifying the alternate payee
Participant dies without a QDRO in place securing survivor benefits for the alternate payee
Participant takes a loan out which significantly reduces the account balance available for division pursuant to a QDRO

For more consequences related to QDRO timing, click here.

Another problem that is becoming more and more common when parties wait to draft the QDRO is that plans sometimes undergo a change in plan administrator. When a new plan administrator takes over, they will usually not perform any calculations regarding benefits accrued prior to their plan administration date. For example, if the parties’ date of separation was in 2005, but the plan administrator changed in 2007, the plan administrator will reject a QDRO with a valuation date in 2005 because they do not have records prior to 2007. This can present significant problems if the parties do not have their own plan statements for the time period from the date of marriage to date of separation; and will increase the expense involved in the QDRO as the parties may need to retain an actuary or accountant to perform a calculation to determine the community property interest in the benefits.

QDRO MISTAKE 3: BLINDLY TRUSTING THE MODEL QDRO

Some parties, or family law attorneys, will draft a QDRO by taking the plan’s “model” or “sample” QDRO and inserting the parties’ names with little or no other revisions. This should never be done unless the parties and/or attorneys clearly understand every single provision within the model QDRO, and are aware of the possible alternate provisions, based on the plan’s terms and the California law regarding marital property rights.

Most model QDROs are drafted to favor the plan participant; they are not drafted to divide the benefits as equally as possible. Model orders can heavily favor the participant with regard to issues like investment earnings and losses, and survivor benefits. Further, the model QDRO may have been drafted in a different state than where the divorce took place, which can have a huge effect on the division of benefits. For example, in California, the community property interest stops accruing on the parties’ date of separation; however, other states utilize other dates, such as the date of divorce filing, or the date of the entry of Judgment of Dissolution, both which may be years after the parties’ date of separation. Utilizing a model QDRO from another jurisdiction could have the effect of awarding the alternate payee far more benefits than he/she would legally be entitled to in California. Further, many individuals who draft their own QDROs are not able to format the QDRO correctly to be accepted by the court that handled their divorce. In California, QDROs must be signed by both parties and the judge; however, many model QDROs only leave space for the judge’s signature.

DO YOU NEED HELP WITH A QDRO?

If you have questions about the division of retirement benefits due to your California divorce or legal separation, or if you would like to get started on your Qualified Domestic Relations Order today, please call QDRO Helper at (619) 786-QDRO / (619) 786-7376. You can also request a new client package by sending an email to info@qdrohelper.com or by visiting the Get Started page. We proudly assist clients throughout the United States as long as the divorce or legal separation took place in California.

DISCLAIMER: ADVERTISEMENT. Any legal information on this blog has been prepared by QDRO Helper for informational purposes only and is not legal advice and does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter. The information provided is intended to comply with Rule 1-400 of the California Rules of Professional Conduct. Any links in this website are included only to help you locate other internet resources that may be of interest to you; QDRO Helper is not associated with any such links. The transmission and receipt of information contained on this website via the Internet or e-mail or in any other manner does not constitute or create an attorney-client relationship, and you should not act on the information contained herein without obtaining legal counsel. QDRO Helper has a strict policy of entering into attorney-client relationships with its clients only though the execution of a written fee agreement acknowledged by QDRO Helper. As such, you should not send QDRO Helper any confidential information in response to this web page until such a relationship is established and expressly acknowledged by QDRO Helper.

LACERS Benefits & Divorce: Los Angeles City Employees Retirement System

by Madeline Hill | Oct 31, 2012 | General QDRO Info, Public Employee Plans

If a member earns Los Angeles City Employees Retirement System (LACERS) benefits during marriage, those benefits are community property and are subject to division due to divorce, legal separation, or dissolution of a registered domestic partnership.

JOINDER REQUIREMENT

If the dissolution or separation matter is filed in a California court, then LACERS must be joined. Joinder is a legal process that names a third-party claimant to a divorce case. The joinder will put LACERS on notice of the pending dissolution action and forthcoming DRO, and will give the court jurisdiction over LACERS. If needed, QDRO Helper can file the necessary LACERS joinder documents for you for an additional fee.

NONMEMBER SPOUSE NOTICE OF INTEREST

In addition to the Joinder, the nonmember should also notify LACERS in writing that he/she is claiming his/her community property interest if the member’s benefits. The letter should include the parties’ date of marriage and date of separation, as well as the member’s name and social security number. This letter can be mailed to LACERS at 360 East Second Street, 2nd Floor, Los Angeles, CA 90012-4207. However, please note that the nonmember spouse will not be able to receive benefits until a domestic relations order is drafted, signed by the parties, filed at court, and sent to LACERS for implementation.

HOW BENEFITS ARE DIVIDED: IN-KIND DIVISION OR SEPARATE ACCOUNT

In-Kind Division:

For the “in-kind” division, the nonmember spouse is typically awarded one half of the community interest in the LACERS benefits. The community property interest is determined by the “time rule formula” – i.e. a fractional interest where the member’s service from the date of marriage through the date of separation (or “marital service”) is divided by the member’s total service. The Order may also specify that any service time purchased during the marriage be considered marital service. Although dividing the community interest 50/50 is the most common method of division, the nonmember could receive any percentage of the benefits awarded in the parties’ separation agreement or divorce judgment.

The nonmember may take his/her distribution “in-kind” which means that the nonmember will be paid a portion of the member’s pension for the member’s lifetime (and, if applicable, for the lifetime of the member’s surviving spouse). If the nonmember outlives the member (and the member’s surviving spouse) the payments to nonmember will cease. If the nonmember dies before the member (and the member’s surviving spouse), depending on the domestic relations order, the share would pass either to the nonmember’s beneficiary or heirs, or could revert to the member.

Alternatively, after the court order is filed, the nonmember spouse may elect to convert his/her “in-kind” interest to a life annuity based on the nonmember’s lifetime. This election will alleviate the risk of losing all benefits if the member (and/or the member’s then-current spouse) predeceases the nonmember former spouse. Upon the nonmember’s death, all benefit payments from LACERS stop.

Separate Accounts

If the DRO provides for the establishment of separate accounts, the nonmember has two options for distribution: 1) the nonmember can receive a refund of contributions and will relinquish any right to monthly benefits in the future or 2) the nonmember can receive a separate account allowance, payable for his/her lifetime. Note, that if the nonmember elects option 2, the allowance will be calculated based upon a formula using the member’s compensation at the parties’ date of separation, not the time that the allowance becomes payable. Another important restriction on the Separate Account method is that if the member never becomes eligible for a service retirement (due to death or disability retirement), then the nonmember cannot receive a separate account allowance (i.e. monthly payments), instead the only form of payment will be a refund of contributions.

It should be noted that a “refund of contributions” is a refund only of the contributions that the member paid in from the member’s salary, plus the interest on those contributions. This may not reflect the true value of the member’s benefits since a refund of contributions does not include any compensation paid for by the City.

It should also be noted that if the separate account method is used and if the nonmember spouse takes a refund of contributions, then the member can repay LACERS to restore his/her service credit under the Plan.

How Do I Decide Which Method to Choose?

There are pros and cons to both methods of division, and the best option for you will depend on your unique circumstances. The separate account method uses the member’s compensation at the date of separation while the in-kind division is based on the member’s compensation at the time of retirement. Since the member’s compensation at retirement is likely to be more than at the time of separation, the amount of the monthly benefit the nonmember receives with the separate account order is usually less than what he/she would receive with a typical in-kind division. However, the nonmember must wait for the member to retire before the nonmember can receive benefits under the in-kind division. The separate account allowance is paid for the nonmember’s lifetime, and will not be affected by the member’s death, while the in-kind division may or may not be payable, in this manner, depending upon whether the nonmember elects to take a life annuity at retirement.

One distinct advantage of the separate account method is that if the member is eligible to retire but is still working, the nonmember can start to get benefits before the member retires, assuming that all service retirement eligibility requirements have been met. This can be advantageous when the nonmember is significantly older than the member. If the nonmember can claim the separate account allowance now, the final compensation payable to the nonmember spouse over his/her lifetime may be similar what an in-kind order would provide. However, a distinct drawback to the separate account is that if the member never becomes eligible for a service retirement, due to death or disability, the nonmember can only receive a refund of contributions and interest paid in by the member, which would result in a loss of any employer contributions to the plan.

If you are unsure what option to choose, you should know that once a separate account is established by the Plan pursuant to the court order, the nonmember no longer has any right to an in-kind division. However, if an in-kind division is ordered by the court, and the court retains jurisdiction, then the order can be modified to establish a separate account in lieu of an in-kind division as long as the modification occurs prior to the member’s retirement.

The information provided here is only a basic summary. You should call LACERS at (213) 485-4917 if you have questions about your options.

NEED HELP WITH A LACERS COURT ORDER?

If you would like to get started on your LACERS DRO today, please call QDRO Helper at 619-786-QDRO (619-786-7376). Alternatively, you can click here to request a new client package for a LACERS court order. We proudly serve clients and attorneys throughout California – no in-office appointments are needed.

DISCLAIMER: Any legal information on this blog has been prepared by QDRO Helper for informational purposes only and should not be construed as legal advice. The material posted on this website is not intended to create, and receipt of it does not constitute, an attorney-client relationship, and readers should not act upon it without seeking professional counsel. Note also that sending an e-mail to QDRO Helper does not create an attorney-client relationship, and none will be formed unless there is an express agreement between the firm and the individual

LACERA & Divorce: Dividing Los Angeles County Employees Retirement Association Benefits

by Madeline Hill | Oct 15, 2012 | Defined Benefit Plans, General QDRO Info, LACERA

Permanent employees of Los Angeles County or outside Districts who work three-quarter time or more are members of the Los Angeles County Employees Retirement Association (LACERA). Any LACERA pension benefits that are accumulated during marriage are subject to division due to dissolution of marriage or termination of a registered domestic partnership. Orders dividing retirement benefits are often called Qualified Domestic Relations Orders, or QDROs; however, LACERA is exempt from the provisions of the Employee Retirement Income Security Act (ERISA), and orders dividing LACERA benefits are called Domestic Relations Order or DROs.

REQUESTING INFORMATION ABOUT LACERA BENEFITS

LACERA is a defined benefit plan under which a member accumulates service credit. Each LACERA member receives an Annual Benefit Statement which details the member’s accumulated service credit, contributions, and credited interest. Members can also request information about their accounts by sending a written request to LACERA. A person other than the Member can request the Member’s account information by either 1) providing written authorization, signed and dated by the Member within the 30 days prior to the information request or which is specifically valid for a longer time period; or 2) submitting a subpoena and Notice to Consumer, along with a $15 check for witness fees to the LACERA.

JOINDER REQUIRED FOR LACERA

LACERA must be joined before a DRO can be implemented. Joinder is a legal process that names a third-party claimant to a divorce case; LACERA is a third-party claimant to any dissolution case which involves LACERA benefits. The joinder will put LACERA on notice of the pending dissolution action and forthcoming DRO, and will give the court jurisdiction over LACERA. A joinder will also place a hold on a active member’s account which will remain in place until the member retires. The hold will prevent payment of a member’s benefit or a refund of accumulated contributions and interest until a DRO is received. If needed, QDRO Helper can file the necessary joinder documents for you for an additional fee .

LACERA RETIREMENT OPTIONS / OPTIONAL RETIREMENT ALLOWANCES

Various alternatives to the Unmodified Retirement Allowance are available under the County Employees Retirement Law of 1937 (CERL). The different options allow for variations in determining how retirement and survivor benefits are paid, and who can be designated as a beneficiary. Options 1-4 are summarized below:

• Option 1 (Government Code § 31761): If the member dies prior to receiving the contributions he or she paid into the retirement fund, Option 1 provides a single lump-sum payment (remaining balance of member’s accumulated contributions) to any named beneficiary. It does not provide a monthly survivor allowance. (Not available to Plan E members.)

• Option 2 (Government Code § 31762): Provides one named beneficiary with 100 percent of the member’s benefit, calculated on the date of death.

• Option 3 (Government Code § 31763): Provides one named beneficiary with 50 percent of the member’s benefit, calculated on the date of death.

• Option 4 (Government Code § 31764): Provides a customized lifetime benefit to one or more named beneficiaries via either a set monthly income or a fixed percentage of the member’s monthly allowance. The cost of customizing a benefit under Option 4 may be shared between the retired member and the non-member or the court may require one party to bear the cost.

Many divorcing members opt for Option 4 because it allows a member to name multiple beneficiaries amongst whom survivor benefits can be distributed – this can allow for survivor benefits to be paid to both a current spouse and the member’s former spouse.

TIME RULE FORMULA FOR DIVIDING LACERA BENEFITS

The most common method of dividing LACERA benefits is known as the Time Rule Formula. This formula will provide that the non-member spouse’s share of the LACERA benefits is 50% times a fraction where the numerator is the number of months of LACERA service from the date of marriage to the date of separation, and the denominator is the total months of LACERA service accrued at the member’s retirement.

The Time Rule Formula will also apply if a member terminates employment and elects to receive a refund of accumulated contributions; providing the non-member spouse with a community property share of such refund of contributions.

QUESTIONS ABOUT DIVIDING LACERA BENEFITS?

If you have questions about dividing LACERA benefits or if you would like to get started on your DRO today, please call QDRO Helper at 619-786-QDRO (619-786-7376) or click here to request a new client package for a LACERA DRO. We are happy to assist clients throughout California – no in office appointments needed.