by
Timothy C. Voit & Regina Milam, Esq.
When considering 457 Deferred Compensation plans as marital assets in divorce, one must understand that although 457 plans appear to be similar to 401(k) plans, found in the private sector, most do not accept Qualified Domestic Relations Orders (QDRO's). That is most 457 plans, which apply to government employees, cannot effectively apply a QDRO to award a portion of the participant spouse's 457 account to a former spouse. The 457 deferred compensation plan can often be found associated with municipal employees, such as firefighter, police officers, or general employees of municipalities, in addition to their defined benefit pension plan, which is design primarily to pay out a monthly retirement benefit. Much is written on the problems associated with these plans with little in the way of solutions. One possible solution is presented here which, in the realm of 457 plans, may be one of the only solutions available at this time.
Some important issues need to be addressed that differentiate 457 deferred compensation plans from traditional 401(k) plans before delving too much into possible settlement options. One issue, as touched on in the opening paragraph, is that most 457 plans do not accept QDRO's, leaving only a small minority of 457 plans willing to segregate the account(s) with an Order similar to a QDRO. Two of the primary reasons is that first, the participant does not actually own the account, or money in the account, until they either terminate employment, die, become disabled, or retire, and second, 457 plans are exempt from those provisions in the Internal Revenue Code (IRC) and the Retirement Equity Act which are intended for QDRO's. For tax purposes, the sponsoring firm maintains control of the account until such qualifying event at which time the funds would be paid out.
Often times in a divorce situation, the attorney sometimes makes two critically wrong assumptions. First, they assume that because the plan has an account balance, an immediate lump-sum distribution is a sure thing. This erroneous assumption is often made with 401(k) plans as well, not to mention that if an immediate distribution could be made, "immediate" to the plan administrator may mean within the next year during a particular cash out period. It would be safer to assume that the 457 plan in question does not even accept QDRO's and therefore a distribution option is non-existent, unless of course the participant spouse has terminated their employment or retired. The second critically wrong assumption would be to assume that the 457 plan can be divided by way of QDRO, when it may not be. It should be pointed out that although the employer maintains control, the participant spouse may have various investment selections, i.e. mutual funds, making the 457 plan similar to a 401(k) plan. Yet another troubling issue, is adjustments for the non-participant spouse's "alternate payee's" for market value gains or losses, interest, earnings, dividends and alike.
Given that most 457 plans do not accept QDRO's, and with the non-participant former spouse having no protection under a QDRO until they receive their share, what are the attorney's, or their client's, options when confronted with this scenario? The first option, which seems too simple to even mention, would be for the non-participant to receive other assets in lieu of their share of the 457 plan. By not doing so places the non-participant share of the account balance at a tremendous risk.
Assuming a property offset is not possible, and it is necessary to divide, or award, a portion to the former spouse when a QDRO is unacceptable, the Court may wish to order the participant spouse, and the non-participant spouse, to select two or three funds available under the plan whereby the participant is then ordered to allocate the former spouse's share to the funds selected. Often times the 457 plan will have several mutual funds to select from, ICMA for example, with many of them overlapping in terms of investment types. For instance, the plan may have several equity funds to choose from, such as Twentieth Century and Fidelity, having similar investment objectives, or the alternate payee spouse may wish to invest more conservatively in U.S. Treasury funds. Regardless, once the funds are selected, the Participant should not be allowed to allocate any of their post-divorce contributions to the funds selected by the former spouse. In effect, these few funds are earmarked for the former spouse. This also addresses the issue of earnings, interest, or gains and/or losses on the former spouse's share, not to mention avoiding unnecessary calculations of the former spouse's share when the time arises that distributions are allowed; Again upon a qualifying event such as termination or retirement. The former spouse should then be made the beneficiary to the amount allocated to the funds selected.
Tim Voit is a Financial Analyst and founder of Voit Econometrics Corporation. As an analyst, as well as being retained in malpractice cases, Tim Voit and his firm have aided attorneys and law firms in the drafting of Qualified Domestic Relations Orders (QDRO's) and other Orders relating to private, governmental, and Military plans. Questions, or general inquiries can be made by contacting Tim Voit at (239) 596-7711.
© Voit Econometrics Group, Inc.
Please Note: Material in this article is dated (Aug. 2000) and may have been affected by recent federal legislation. Please consult our office, an experienced attorney, or other qualified professional before acting on the information presented here.