The division of pension benefits by way of Qualified Domestic Relations Order or QDRO is growing in popularity when it comes to divorce, and is nearly commonplace when 1) the lump-sum present value is too large to adequately offset the value of the pension against other assets of the marriage, or 2) when the parties to the divorce cannot agree as to the present value of the pension in question. A QDRO is a court order ordering a pension plan to award a portion of a participant's accrued pension benefits, or account balances, to a former spouse or dependent pursuant to a divorce.

The Internal Revenue Service has taken an important step in creating uniformity in the drafting of QDRO's by releasing their latest Internal Revenue Bulletin (IRB), cite: 96 TNT 253-11 Notice 97-11, which provides sample language for QDRO's. Uniformity in the sense that there is a myriad of pension plan administrators with a myriad of interpretations of the law. Each pension plan having their preferences as to the language used within a QDRO. Part I of the IRB consists of issues that should be considered in drafting a QDRO and Part II provides sample language that "could" be included in the QDRO. However, the attorney needs to understand that this IRS sample language is general in content and does not address the specifics of every pension in existence.

More and more pension plans are now offering model language of their own, or model orders specific to their plan where the attorney simply fills in the blanks. Clearly, the attorney should not simply "fill in the blanks", but rather gain an understanding of the options and benefits available so as to include, or address, the issues discussed here. There is no question that most of the model orders provided by the pension plans themselves have a bias toward their own interest first, the employee/participant second, and lastly the non-participant spouse. While the participant spouse in a pension plan already has the benefits of the pension, it is the non-participant spouse's, or their attorney's, responsibility to make certain they request any and all benefits rightfully entitled to the alternate payee since the court often orders an equitable distribution. Regardless, the attorney should not feel that they are permitted only to use the model language offered by the plan nor be limited to the language offered by the IRS bulletin. Many of the models include language stating that the plan will not be held liable for any misinterpretations, etc. The attorney, therefore, is not "off the hook" in terms of liability simply because they choose to use a model order.

It is important to note at this juncture that the model language the IRS offers only applies to non-governmental, ERISA qualified plans. In other words, QDRO's and QDRO model language do not apply to any city, county, state, federal, military, or railroad retirement plans. These plans are exempt from the ERISA and the Retirement Equity of 1984 (REA) under Sections 1003(b)(1) and 1051 of Title 29, United States Code since these plans are defined as "governmental plans" in Section 1001(23) of Title 29, Unites States Code. If the attorney is not aware, this presents several problems when attempting to negotiate an equitable settlement. The government, military and railroad plans do not afford the same rights or benefits to an alternate payee as in a QDRO and will generally not accept any court order titled "Qualified Domestic Relations Order". There is an exception where some "state" plans will accept the title QDRO but not the options or provisions of a traditional QDRO. The attorney has to be aware that federal government retirement plans, such as Civil Service Retirement System or Federal Employees Retirement System require a Qualified Court Order (QCO), that military plans require a Military Order (MO), and railroad plans require Railroad Orders (RO). Some municipal and county plans will not accept any type of court order to divide retirement benefits other than a Withholding Order, otherwise referred to as a wage assignment, upon commencement of benefits.

For every retirement plan that needs to be divided pursuant to a divorce, a separate QDRO is required. There are very few plan administrators that will allow you to address two or more plans with one QDRO. In addition, a court order to divide retirement benefits is not a QDRO until it is qualified by the plan, or the plan administrator. It is not qualified by the court. Until the order is qualified by the plan it remains a domestic relations order and unexecuted. The Internal Revenue Bulletin has a clear explanation of this, and other related issues, in Part I of the appendix. The Internal Revenue Bulletin (IRB) contains much of the statutory requirements, or required language, needed in drafting any QDRO and can be used as a source for this basic language. This article attempts to address some very important issues not addressed in the IRB, which may be included in your QDRO, or more importantly, in the Marital Settlement Agreement. With regard to marital settlement agreement language as it pertains to pension benefits, much confusion can be avoided, not to mention liability, if the issues are addressed before the divorce.

First and foremost, the attorney needs to determine what type of plan is being divided. Basically, there are two types of plans worth mentioning here. A plan that is expected to pay a monthly benefit at a certain retirement age is considered a defined benefit plan. That is, the monthly payment is derived primarily from the years of service and the average annual earnings of the participant. Generally, these plans are 100% employer funded where the employee does not make any contributions and no account balance exists.

A plan that defines a contribution to be made at present, i.e. percentage of earnings, leaves the future value of the benefits uncertain and is regarded as a defined contribution plan. Plans that have the terms "Savings Plan", "Retirement Savings Plan", "Incentive", "Profit Sharing" or "ESOP" in the plan name are considered defined contribution plans, where the account balance at any given time is the present value. The defined contribution plan generally has an individual account balance which is valued at least once each year on the "valuation date". Therefore, most defined contribution type QDRO's cannot divide an account balance as of the date of divorce, but rather the "closest valuation date" to the date of division.

In some instances a participant may not be fully vested in the contributions made to the plan by their employer, however, the participant is always 100% vested in their own contributions. What the IRB does not explain is that a QDRO can still be drafted on this type of plan regardless of vesting. In fact, a QDRO can be drafted to zero-in on certain sub-accounts, such as employee contributions only.

Attorneys sometimes erroneously assume that an immediate distribution can be made from a defined contribution plan since it has an account balance. This is not always true. Nor should the divorce be contingent upon an immediate distribution being made to an alternate payee unless it is known with certainty that, in fact, the plan will make such a distribution.

Without delving too much into the statutory requirements, all QDRO's must include, and the IRB makes mention of this, a designated alternate payee defined as spouse, former spouse, child or other dependent of the participant pursuant to Internal Revenue Code Section 414(p)(1)(A)(i). The order must specify other important information such as the amount or percentage of the participant's benefit which are to be paid to the alternate payee, the manner in which the amount is to be determined, and the period to which the order applies. The order must specify each plan to which the order applies, i.e. the specific name of the plan, along with the full names, last known mailing addresses of the participant and the alternate payee, social security numbers, dates of birth, and date of divorce or division.

There are generally two approaches to drafting a QDRO which, for the most part, apply to defined benefit plans. They are the Separate Interest Approach, or independent interest, and a simple division with, or without, survivor benefits attached sometimes referred to as a "shared" interest. The Internal Revenue Bulletin refers to both of these approaches.

A Separate Interest Approach adjusts the amount awarded to be paid over the lifetime of the alternate payee rather than the participant's lifetime. This is often referred to as "actuarially equivalent" language. That is, the awarded benefit will be converted to a payment based on the age and gender of the alternate payee as opposed to that of the participant. Keep in mind, that some defined benefit plans will not afford an independent interest to an alternate payee.

Primarily with defined benefit plans, the benefit itself may be divided, or awarded, in terms of a percentage, a flat dollar amount, or by a fractional method. Each method of division will result in distinctly different amounts being awarded. Consideration should be given to either fixing the benefit as of the date of divorce or pro-rating the final retirement benefit by way of the fractional method that may allow for some growth in the alternate payee's share.

In addition, under a QDRO, the alternate payee can commence benefits at the participant's earliest retirement age, regardless of whether it is a defined contribution plan or a defined benefit plan and regardless of whether or not the participant retires. Under a defined benefit plan, the normal retirement benefit will be reduced to reflect the earlier commencement of benefits. This is not possible with governmental plans. Under a court order dividing retirement benefits, other than a QDRO, the alternate payee must wait until the participant commences their retirement benefits. The participant controls under these circumstances.

Upon the death of the alternate payee, benefits cease and are generally forfeited to the plan, unless otherwise specified in the QDRO. This means that the benefits otherwise payable to the alternate payee can be made to revert to the participant or to "contingent" alternate payees. With some plans, it is possible to name the children of the marriage as contingent alternate payees. However, certain restrictions apply when naming a dependent as an alternate payee, other than a former spouse, specifically in terms of how long the benefit is paid to them. In addition, some plans will not allow for the benefit to revert to a participant should an independent interest be granted to the alternate payee.

Other issues to consider include awarding the alternate payee any possible subsidized benefits, cost-of-living-adjustments and/or post-retirement increases. Subsidized benefits are usually in the form of early retirement incentives or enhancements to the monthly benefit to encourage early retirement. If not mentioned in the QDRO, the alternate payee will not receive these benefits and therefore the result may not be an equitable distribution. The same is true for cost-of-living-adjustments or post-retirement increases. If not mentioned, they too may not be awarded to the alternate payee. Traditionally, the lump-sum present value of a participant's benefits should be determined first to give both parties an idea of what this asset is worth. Although subjective, a relatively accurate present value can be determined based on the facts of the case and a few assumptions using reliable statistics. Unfortunately, the appropriate methods for valuing pensions, or appropriate methods for extracting the marital portion, cannot be fully explored in this article. Tim Voit is a Financial Analyst and Managing Partner of Voit Econometrics Group, Inc. Tim Voit has been involved in researching pension plans for valuation or QDRO purposes in addition to assisting law firms in dividing retirement benefits on private, military, and governmental plans. Tim Voit is also a court admitted expert on pension related issues along with being retained as an expert in malpractice cases on behalf of the insured to analyze and "fix" poorly drafted QDRO's. A sample questionnaire/authorization directed to pension plans, asking many of the questions addressed here, can be obtain by writing to Tim Voit at 12700 W. Bluemound Road, Elm Grove, Wisconsin (Milwaukee) 53122, or by calling (262) 784-2937, Toll-Free: (800) 557-8648. or by e-mail: askvoit@vecon.com