Retirement Accounts, QDROs, and Divorce in Arizona
There are three broad types of retirement plans; specifically, Defined Contribution Plans (both private and governmental), Private Defined Benefit Plans, and Government Defined Benefit Plans Many employers have multiple plans.
For example, it is quite common for a publicly owned corporation to have both a traditionally defined benefit plan and a defined contribution plan.
Many corporations will also have separate plans for hourly and salaried employees. Employees who went from one classification to another may have benefits in both plans – i.e., separate plans for hourly (non-union), union and salaried employees.
Benefits in one plan may be coordinated with benefits accrued in the other. It is critical that you correctly identify the retirement plans involved, and understand the different types of plans you are dealing with, or you may not get your client everything they are entitled to.
In addition, in most cases, it is necessary to enter a separate order directed specifically to the Retirement Plan to divide the retirement plan assets.
Understand Retirement Plan Differences When Dividing Retirement Benefits
When dividing retirement benefits in a divorce, it is critical to understand the features of each retirement benefit, so that you get your client their fair share of this important community asset. The first step is to identify the type of retirement plans involved.
It is critical that you correctly identify the plans involved, and understand the different types of plans you are dealing with, or you may not get your client everything they are entitled to. awarded their community share of the plan is not sufficient.
This article refers to all such separate orders generically as QDROs (Qualified Domestic Relations Orders), though technically the orders directed at governmental plans are not “Qualified” under ERISA (the Employee Retirement Income Security Act) and the Tax Code.
This article summarizes the differences in the three main plan types, and the issues practitioners need to consider in dividing benefits into these plan types.
Defined Contribution Plans
In a defined contribution plan, the employer contributes an amount to the plan each year for the participant. The contribution can be determined by the participant (as an elective deferral), fixed by the plan, discretionary with the employer (either as a matching contribution or as a non-elective contribution), or some combination of the foregoing.
The trustee invests the funds and maintains an individual account for each participant. Earnings are periodically credited to the account balance, sometimes daily, but sometimes only once a year.
The participant’s benefit is the account balance. When you divide the benefit, you are dividing the account balance, including any earnings and losses attributable to the account as of the date of division.
Issues to Consider When Dividing Defined Contribution Plan Benefits
If there is pre-marriage money in the plan, how should the QDRO account for it? The problem is that most plans will not calculate the present value of a pre-marital account balance (i.e. what the account balance on the date of marriage is worth years later).
Therefore, either the parties need to negotiate this, or the court needs to decide the issue.
This is the most intractable problem with dividing defined contribution plan accounts that we deal with on a day-to-day basis. Simply stating that the alternate payee is awarded their community share of the 401(k) plan fails to answer the question.
You will need to determine how much premarital money there was, and how to adjust that amount for earnings (or losses) through the division date.
How should the QDRO account for a loan that is outstanding on the date of division?
Plans will not actually allocate any of the loan balance to an alternate payee, but it may be necessary to include the loan balance when dividing the account.
For example, if the participant takes out a loan shortly before the dissolution case is filed, and uses the proceeds for non-community purposes, it may be equitable to include the loan balance when dividing the plan account 50-50.
On the other hand, where a loan was taken out before the case was filed and used for community purposes, the loan should ordinarily be excluded when calculating the alternate payee’s 50% share.
When will the alternate payee receive their award?
Most (but not all) defined contribution plans will make a distribution to the alternate payee as soon as the plan can process the order.
However, some plans make no distributions until there is a triggering event, such as the participant’s separation from service, or reaching the earliest retirement age under the Plan.
Even if the plan permits a current distribution, it may take several months for the plan to process the QDRO and the request for a distribution. Therefore, if your alternate payee is counting on receiving a distribution of the award and putting the money to some other use (such as paying off debt or buying a house), you need to know when the award will actually be distributed, or your alternate payee might be in for an unpleasant surprise.
What is the effective date of the award?
In most cases, the award will be made as of the date the marital community terminated (i.e. the date of service). The Plan will account for any earnings (and losses) on the award from the designated date until the award is actually distributed to the alternate payee.
However, this can present problems in some cases. If the QDRO is not entered until many years after the division date, the Plan may not have records going back to the date of division, and therefore may not be able to calculate earnings (and losses) on the award. This causes much the same problem as accounting for pre-marital money.
In many small plans, the plan only posts allocations and investment returns once a year, usually as of the last day of the plan year. A midyear division date would therefore not include a portion of the contribution for that year.
In addition, if both the division and the distribution are made in the same year, the alternate payee could lose out on any earnings (or losses) on their award.
Employee Stock Option Plans (ESOPS) present similar challenges. ESOPS are valued annually, and the annual allocations are often not made until several months after the end of the year.
In addition, ESOPs invariably have delayed distribution provisions, so if the Alternate Payee is looking for a cash distribution, they will usually not find it from an ESOP.
Defined Benefit Plans
Both private and governmental defined benefit plans generally provide an annuity benefit to the participant (i.e. a monthly benefit payable over the life of the participant and their designated survivor).
The annuity benefit is determined according to a formula set forth in the plan. At retirement, participants can elect to receive benefits over their life (a single life annuity), or a reduced benefit over their life, plus a benefit for the life of a designated survivor (a Joint and Survivor Annuity).
If a participant is married when they commence their benefits, they are required to elect a Joint and Survivor form of benefit naming their spouse as the survivor, unless the spouse waives that right.
Issues to Consider When Dividing Defined Benefit Plan Benefits
The key issues to address when dealing with defined benefit plans are:
• Is the Participant already in pay status (post-retirement) or are we dividing the benefit pre-retirement?
• What to do about survivor benefits?
• Is this a private or a governmental plan?
When dividing benefits in a private defined benefit plan prior to retirement, the plan will provide each party with a separate benefit. This means that the plan will carve out a separate benefit for the alternate payee as of the date the marital community terminated and will treat the alternate payee as if they were a participant in their own right.
Usually, the alternate payee may elect a life annuity benefit beginning at the participant’s “earliest retirement age”, or a survivor form of benefit naming anyone other than a second spouse as a survivor annuitant.
The alternate payee’s benefit is not affected by the participant’s continued employment, their delayed retirement, or their death.
Thus, when dividing a private defined benefit plan benefit before retirement, the parties can go their separate ways.
In most cases, the award will be made as of the date the marital community terminated (i.e. the date of service).
Governmental defined benefit plans always employ a shared benefit approach, regardless of whether the participant is pre- or post-retirement. This means that an alternate payee can never get a separate benefit from a governmental defined benefit plan.
The alternate payee has to wait until the participant actually initiates their benefits in order to receive anything, and then they share in the benefits as and when they are paid to the participant.
This means that when dividing governmental plan benefits pre-retirement the division cannot be made as of the date the community interest terminates. Instead, the division has to be made as of the retirement date, which may be years in the future (and therefore will include post marital service and post-marital benefit increases).
This also raises the potential problem in Koelsch v. Koelsch, 148 Ariz. 176, 713 P.2d 1234 (1986), where the participant continues working past their normal retirement date and thereby delays the alternate payee’s receipt of their share of the benefit.
In a private defined benefit plan, where the benefit has already commenced, the participant’s form of benefit elected at retirement cannot be changed.
Private plans use a shared benefit approach in these circumstances. This means that the parties can divide the preexisting payment stream during the participant’s life, but understand retirement plan differences they cannot change the form of benefit elected at retirement, including survivor benefit elections (or lack thereof).
Therefore, in a private defined benefit plan division post-retirement, the alternate payee may well receive all of the survivor benefits, even if the participant had pre-marital service.
In a governmental defined benefit plan, where the benefit has already commenced, the participant’s previously elected form of benefit is usually converted to a single life annuity, with no survivor benefit for the ex-spouse, regardless of the form of benefit elected at retirement, unless the decree and the DRO specifically preserve survivor benefits for the ex-spouse.
Therefore, if you do not address survivor benefits for the alternate payee, you will lose them.
These are some of the most common issues that arise when dividing retirement benefits through a divorce. There are many other concerns not addressed in this article, which may arise depending on the particular circumstances of your case, or the specific plan involved.
For example, a recent amendment to the definition of “disposable retired pay” will impact most military divorces finalized after December 23, 2016.
If you are in doubt when you are assisting your clients with a division of their retirement accounts, you should contact a qualified ERISA attorney or QDRO professional for assistance, preferably before finalizing any settlement or decree language.
The attorneys at Hildebrand Law, PC would like to thank Erwin Kratz of Arizona’s QDRO Practice for submitting this informative article on the subject of Arizona divorce and the division of retirement accounts. You should contact Mr. Kratz at (520)577-5155 if you have questions about how to properly divide retirement accounts in an Arizona divorce.
If you have questions about division of retirement accounts in an Arizona divorce case, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have over 100 years of combined experience successfully representing clients in community property and family law cases.
Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.
Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your Arizona community property or family law case around today.
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Chris Hildebrand wrote the information on this page about retirement accounts, QDRO’s, and divorce in Arizona divorce to ensure everyone has access to information about family law in Arizona. Chris is a divorce and family law attorney at Hildebrand Law, PC. He has over 24 years of Arizona family law experience and has received multiple awards, including US News and World Report “Top Arizona Divorce Attorneys”, Phoenix Magazine “Top Divorce Law Firms”, and Arizona Foothills Magazine “Best of the Valley” award. He believes the policies and procedures he uses to get his clients through a divorce should all be guided by the principles of honesty, integrity, and, quite frankly, actually caring about what his clients are going through in a divorce or family law case. In short, his practice is defined by the success of his clients. He also manages all of the other attorneys at his firm to make sure the outcomes in their clients’ cases are successful as well.