Divorce Retirement Benefits

Qualified Domestic Relations Order

What is a Qualified Domestic Relations Order?
ERISA has a general policy of non- assignability of a participant’s retirement plan in order to ensure that  retirement plans serve their purpose of providing financial support to participants upon their retirement. Under the Qualified Domestic Relations Order (QDRO) exception, a domestic relations order may assign some or all of the participant’s retirement benefits to a spouse, former spouse, child or other dependent, if the order is a “qualified domestic relations order”.  A QDRO, therefore, is a way through which ERISA retirement plans can be divided.

A domestic relations order is a judgment, decree or order issued by a state authority, made pursuant to state domestic relations law that relates to the provision of alimony payments, child support or marital property rights for the benefit of a spouse or former spouse.

A qualified domestic order is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to receive some or all retirement benefits of a participant under the retirement plan. Alternate payees are statutorily defined parties including spouses, former spouses, children or other dependent of the participant.

Procedure for Obtaining a QDRO

  • Obtain a Domestic Relations Order from state authority.
    • Since there are certain requirements a domestic relations order must meet, potential alternate payees would have access to the plan and participant retirement benefit information prior to issuance of a domestic relations order.
      • To qualify as a QDRO, DRO must contain:
        • The name and last known mailing address of the participant and each alternate payee
        • The name of each plan to which the order applies
        • The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee, and
        • The number of payments or time period to which the order applies
      • To qualify as a QDRO, the DRO must NOT require:
        • a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan
        • a plan to provide for increased benefits (determined on the basis of actuarial value)
        • a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO
        • a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse
  • Once the DRO is issued, the administrator of the retirement plan decides whether it qualifies as a QDRO within a reasonable period of time and notifies the participant and the alternate payees.
    • Every retirement plan must contain procedures to determine whether DROs are QDROs and to administer distributions under QDROs.
  • The QDRO procedures must be
    • Reasonable
    • In writing
    • Provide that each person specified in DRO received by the plan as entitled to payment of benefits under the plan will be notified of the plan’s procedures for making QDRO determinations upon receipt of a domestic relations order.
    • Permit an alternate payee to designate a representative for receipt of copies of notices and plan information that are sent to the alternate payee with respect to a domestic relations order.
    • Should include clear explanations of the plan’s determination process.

If the retirement plan to which the QDRO applies is amended or merged into another plan the rights of the participants or beneficiaries are protected with respect to the benefits accrued as of the date of the event. If the plan is terminated, then the plan administrator should provide the alternate payee with the notification, consent, payment or other rights it would have provided to the participant with respect to his portion of the plan.

Types of Retirement Plans
Defined Benefit Plans is one that pays the participant a specific benefit upon retirement. It is generally based on a formula that is composed of factors such as the number of years the participant has worked for the employer and the salary of the participant. Defined benefits plans may be paid at various times, under specific circumstances or in alternative forms.

Defined Contribution Plans, on the other hand, provide for an individual account for each participant and are solely based on the amount that has been contributed to the participant’s account and any other amounts such as income, losses and gains of other participants that may be attributed to the participant’s account. A 401(k) plan that is a profit sharing plan would be an example of a defined contribution plan. This plan generally allows for the payment of the retirement benefits in the form of a lump sum payment from the participant’s account balance.

Different Ways of Dividing Retirement Benefits

There are two types of benefits that can be paid to an alternate payee: Retirement Benefits and Survivor Benefits.

1-Retirement Benefits
A QDRO can require some or all of the retirement benefits of a participant to be paid to an alternate payee. However, the QDRO cannot require any benefit that is more than what the plan already provided for.

“Shared Payment” Approach: Through this approach the actual benefit payments made with respect to a participant under the plan is split to give the alternate payee part of each payment. So the alternate payee does not receive anything unless the participant receives a payment.
“Separate Interest” Approach:  When dividing retirement benefits as part of marital property, this type of approach divides the participant’s retirement benefit into two separate portions in order to give the alternate payees a separate right to receive a portion of the benefit to be paid at a different time and form than what the participant chooses. A QDRO that incorporates this approach should specify the amount or percentage of the participant’s retirement benefits that is assigned to the alternate payee as well as the number of payments or periods to which it applies.

The law does not prefer one approach over the other and it is up to the drafters to determine how to divide the retirement benefits. Both of these approaches can be used for the two types of retirement plans explained above- defined benefit plans and defined compensation plans.

2- Survivor Benefits
Federal law requires that all retirement plans provide benefits which include survivor benefits for the participant’s spouse. The type of survivor benefit depends on the type of the retirement plan the participant has. It is important for alternate payees to be familiar with the participant’s specific plan in order to get a full picture of how the plan provides for survivor benefits.

Federal law generally requires that defined benefit plans and certain defined contribution plans pay retirement benefits to participants who were married on the participant’s annuity starting date, that is the first day of the first period for which an amount is payable to the participant, in a special form called a “qualified joint and survivor annuity” (QJSA), unless the participant elects otherwise with spousal consent. Through a QJSA, the participant receives a period payment (mostly monthly), which upon the participant’s death passes on to the spouse. Another requirement of federal law is that if a married participant has a non-forfeitable benefit under the retirement plan dies before the annuity starting date, then the plan must pay the surviving spouse a monthly surviving benefit, which is called a “qualified preretirement survivor annuity” (QPSA).

If the participant gets divorced before the participant’s annuity starting day, then the former spouse loses all right to the survivor benefit protection required by federal law. If the participant remarries, then the new spouse may acquire a right to the survivor benefits mandated federally. However, a QDRO may change this: Since a QDRO requires a former spouse to be treated as the participant’s surviving spouse for any part of the survivor benefits payable after the death of the participant, the new spouse of the participant cannot be treated as the surviving spouse. In other words, a QDRO may award all of the survivor benefit rights to a former spouse, and take that right away from the new spouse of a participant.

It is important to note that some retirement plans do not consider the parties married if the spouse has been married to the participant for less than a year. In this case, a QDRO cannot treat the alternate payee as a surviving spouse.

There may be retirement plans that provide for more survivor benefits for the surviving spouse than those prescribed federally. However, the common way of establishing a former spouse’s rights to survivor benefits such as QPSA or QJSA is through a QDRO, which has the power to provide that part or all of the survivor benefits be paid to an alternate payee rather than the person entitled to the same benefits under the plan.

Federal Employees Retirement System

What is FERS?
Federal Employees Retirement System (FERS), enacted in June 6, 1986 is the current retirement system for employees within the U.S. federal civilian employees. The system consists of three major components: FERS annuity, which is a defined benefit plan; mandatory participation in Social Security; and the Thrift Savings Plan, a defined contribution plan discussed fully below.

FERS in Divorce Proceedings
Courts have the power to issue awards to former spouses under FERS. The administration of these plans is done by the Office of Personnel Management (OPA).  Unlike a private retirement plan, under these two federal retirement plans, the division of benefits is not done by a QDRO since FERS is exempt from ERISA.  A FERS order is called a “Court Order Acceptable for Processing” (COAP).  Through these orders, former spouses are able to benefit from these plans by receiving annuity payments and survivor benefits in divorce proceedings.

How to Divide the Retirement Benefits?
Even though former spouses can be entitled to FERS benefits through court issued orders, the participant of the plan still has some power over it: The participant maintains complete control of the benefit commencement data and benefit pay-out options whereas the non-participant spouse has no control over the timing of the payment of benefits or the type of the benefit payment. The former spouse cannot start receiving the benefits until the participant himself starts collecting his own benefits.  Pursuant to §831.641 of Title 5 of Code of Federal Regulations, the maximum combined total of all current and former spouse annuities based on the service of a participant equals 50% under FERS. Division of the benefits may be done using a percentage, a flat dollar amount or a pro-rata share. Pro-rata share is defined by §838.21 of Title 5 of the Code of Federal Regulations as half of the fraction whose numerator is the number of months of Federal creditable civilian and military service that the employee performed during the marriage and whose denominator is the total number of the months of Federal Civilian and military service performed by the employee. In other words, a prorate share would award the former spouse half of the benefits accrued during the time the participant worked for the government when married to the former spouse. The amount reflected by the share of the former spouse cannot exceed the amount that is payable to the participant after tax and insurance deduced.

Types of Retirement Benefits
There are three different types of federal retirement benefits that are within the scope of the COAP: Employee annuities, refunds of employee contributions and survivor annuities. The former spouse has to exercise caution in deciding how to value the pension: If the former spouse chooses the pension to be valued based solely on employee refunds, or divides only the employee contributions, the former spouse would end up receiving no benefit if the participant chooses a monthly benefit as an annuity.

Survivor Annuity
There are three different survivor annuity options in FERS:  Full FERS Survivor Annuity, which grants 50% of the participant’s pension, Reduced FERS Survivor Annuity, which grants 25% of the participant’s pension and no survivor annuity at all. Generally, annuity payments to the former spouse terminates when the participant dies. In order to receive payments after the death of the participant, either the participant has to elect a survivor annuity or the court has to order one, which can only be done if the marriage lasted longer than nine months. The former spouse will be able to get survivor annuity only if it is along with a portion of the participant’s retirement annuity. The survivor annuity would end if the former spouse remarries before the age of 55, unless the participant and the former spouse were married for 30 years.  A participant is able to change the survivor beneficiary after the commencement of benefits, unless the participant is prohibited by doing so through the COAP. The Court will look at the original divorce decree or settlement agreement in order to name the former spouse as the survivor beneficiary. The cost of the survivor annuity is paid from the gross annuity that is the total annuity of the participant including the annuity of the former spouse and thus the former spouse and the participant pay for the cost essentially mutually.

Process to Get a COAP
In order to get the FERS pension of a participant, the former spouse of the participant must apply via an application letter to the Office of Personnel Management along with some other documents. If all the documents are in order, OPM will inform the participant that the former spouse applied for benefits that the COAP is in process, the date payment will commence, amount and the formula to be used.

Thrift Savings Plan

What is a Thrift Savings Plan?
A Thrift Savings Plan (TSP) is a defined contribution plan that offers the same types of savings and tax benefits that are similar to private corporations’ “401(k)” plans. Unless employee was hired before 1984 and did not switch to FERS, TSP is one part of a three-part retirement system that also includes Social Security and the Federal Employees’ Retirement System (FERS) Basic Annuity. The TSP maintains separate accounts for civilians, uniformed services and beneficiary participants, so if a participant has more than one account the court order must identify each account and the type of the account separately.

In Divorce
A court decree of divorce, annulment, or legal separation can make an award from a participant’s TSP account to someone other than the participant, such as the participant’s spouse or former spouse.  This requires a separate order by the court.  They are known as Retirement Benefits Court Orders (RBCO) and they will only be honored by the Federal Retirement Thrift Investment Board (Board) if they are issued in connection with a divorce, annulment or legal separation.  The Board will recognize preliminary court orders prior to decree in order to freeze the participant’s TSP account as well as amendatory court orders issued subsequent to the decree. A valid Retirement Benefits Court Order can be issued at any time in the divorce proceeding and be accepted by the Board to split the TSP. It can be made in any court decree of divorce, annulment, or legal separation or a court order or court-approved property settlement agreement incident to such a decree. The TSP account is usually split evenly 50/50 based on the amount accumulated in the account during the marriage; however, the RBCO can set out a specific amount or percentage that is agreed to by the parties

Requirements to Qualify as a Retirement Benefits Court Order
The Court Order must satisfy four basic requirements, as set out in 5 USC §§ 8435(c) and 8467 and 5 CFR 1653(a):

  • The order must be issued by a court in any of the 50 United States, DC, Puerto Rico, Guam, Northern Mariana Islands, or the Virgin Islands, or by any Indian court.
  • The RBCO must expressly relate to the TSP account of a participant, therefore the Order must specifically contain the name “Thrift Savings Plan”
    • Any descriptive language relating to the award should be written in terms of the individual participant’s “account” or “account balance” and not in terms of a “benefit,”
  • If the order requires a payment from a TSP, the amount of the payment must be clearly determinable.  This will be accomplished by either awarding a specific dollar amount to be paid from the participant’s account or gives a specific fraction/percentage/ or formula that shows the amount to be paid out of the account
    • The order should also include a date/event at which time the amount of the entitlement should be calculated
  • The order must require payment to a person other than the TSP participant.
    • Payments can be made only to the current or former spouse, the attorney for the current or former spouse, the participant’s dependent children or other dependents or their attorney.
    • Payment cannot be made jointly, such as to the children and the current spouse, nor can it be made payable to creditors of the parties to the divorce.

A QDRO is not required for the Board to qualify a Court Order as a Retirement Benefits Court Order; rather it must simply meet the requirements set out by the Board.  Therefore, if a QDRO does not meet the requirements set out by the Board it will not qualify as a RBCO and will not be accepted to disburse payments.

Steps after TSP receive Court Order
After the TSP Service Officer receives a court order which purports to award benefits from the TSP, the account is frozen so the participant cannot withdraw the account or receive a loan on the account. However, this will not stop the participant from making contributions, changing contribution allocation or investment choices. The TSP Service Officer will then determine whether the court order is complete.  If the order is not complete the service officer will request the parties to submit a complete copy of the order, and if that copy is not received within 30 days the account will be unfrozen. If the order is complete the TSP will freeze (or retain the freeze) on the participant’s account and will determine whether the order is a qualifying retirement benefits court order and if it qualifies, how the account should be divided. If the court order does not qualify as a retirement benefits court order than the account will remain frozen for 45days from the date on which the service officer informs the parities in writing that the order does not qualify – or the parties can agree and send in an agreement signed by both that allows for the freeze to be removed. The TSP service officer will write and mail a decision letter to the participant and provide a copy to all parties who have a legal interest in the action.

Disputing a Payment
A decision by the TSP regarding a court order is considered a final administrative action by the TSP and court-ordered payments that are already made cannot be reversed. In order to cancel or suspend a pending payment is to send a signed letter of dispute containing a current number and mailing address, which must be received within 25 days from the decision letter. The service officer will then hold the payment until the scheduled payment date and if a valid new or amended order has not been received the TSP will make the scheduled payment, which then cannot be reversed.

There are two ways to speed up the payment process from the TSP.  Using the form language in the court order, as mentioned above, and not raising any extraneous issues in the order would be one way. Moreover, including the payee’s Social Security number and mailing address will also speed up the process since payment will be made upon receipt of this information.

If the spouse is designated on the Form TSP-3 as a beneficiary, the TSP is required to pay out to that person even if the parties are separated or divorced or have remarried, or the former spouse has relinquished all rights to the account. It is important to fill out a a new Designation of Beneficiary form when going through a divorce, which would cancel or change the participant’s current beneficiary designation.

Garnishing a TSP Account for a Participant’s Alimony or Child Support Debt
A TSP account can be garnished with a writ, order, summons, or other similar document. In order to be reviewed, the “legal process” must be complete and meet the requirements set out at 5 USC § 8437(e) (3) and 5 CFR 1653(b). These requirements are the same as those set out for a qualifying RBCO, except they are orders to garnish the TSP account.

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