[As published in the Michigan Family Law Journal, Quick Reference Guide, Special Edition 2005. This article is included as originally written and published with some changes or updates, in particular the one noted under "The Wrath of Roth". It should used for general information purposes only, but not as an up to date version of the matters expressed. Thank you.]
Dealing with QDROS or EDROs in a divorce can be akin to visiting the in-laws; one rarely wants to, but usually must, and the dreaded journey is made. The purpose of this article is not to provide a comprehensive discourse on the subject, to which treatises have been devoted. Rather, the focus will be to cover some basic concepts and potential pitfalls, of which every family lawyer should be aware, even if the QDRO or EDRO is referred by the attorney to a “specialist” for its preparation. Simply stated, QDROs and EDROs are court orders that divide a party’s retirement plan or deferred compensation in a divorce or legal separation. First, it must be recognized, that the actual preparation of the instrument is only part, and then a latter part of the process, rather than the process itself. The division actually starts with discovery, when the existence, specifics, and terms of a party’s retirement plan(s) must be pursued, any division of which is then negotiated as part of the marital property settlement or decided through trial or arbitration, and then the specifics of the plan division are set forth in the judgment of divorce or separation. Only at that point can the QDRO or EDRO be prepared, submitted, and the division actually made.
Basic Terms Any attorney involved in a divorce or separation representation should be familiar with some basic terms involved with a QDRO or EDRO, regardless if that attorney will be preparing the instrument.
QDRO- abbreviation for Qualified Domestic Relations Order, which divides a party’s pension or other deferred compensation account in a divorce or legal separation. QDROs are used for private employer accounts.
EDRO- abbreviation for Eligible Domestic Relations Order, which operates similarly to a QDRO, but required for plans with state and local government employers (e.g., police officers, teachers, etc.) (footnote 1)
Defined Benefit Plan- a deferred compensation plan, which pays the retired employee a specific monetary benefit, usually monthly, the most common example being the standard pension. It is an annuity.
Defined Contribution Plan- a deferred compensation plan to which the employee contributed, with or without some degree of employer matching. Common examples would be a 401(k), 457, 403(b) and profit sharing plans.
Participant- the term commonly used or even required to specify the beneficiary or owner of the plan- the employee.
Alternate Payee- the term used to specify the beneficiary of the QDRO or EDRO dividing the plan, that being the ex-spouse, spouse (in a legal separation), child, or other dependant of the participant.
Surviving Spouse Benefit- a very important benefit that should be addressed in the divorce judgment, which if designated, pays the surviving ex-spouse a portion of the participant’s pension for the spouse’s lifetime, upon the participant’s death. This designation, however, reduces the former employee’s or participant’s monthly benefit, as it is now calculated over two lifetimes, rather than one. This benefit will be addressed in greater detail.
Social Security Benefits- as a federal benefit, a party’s social security benefits are not subject to QDROs or EDROs. This does not preclude an argument, that the parties’ respective social security benefits are disparate, and should be addressed through other property division.
Discovery Discovery is essential in a divorce or legal separation to meaningfully address dividing a retirement plan. After all, this could be the parties’ most valuable asset. Sometimes, a client will tell the attorney he or she knows there is nothing to divide, or they do not wish to pursue the asset. In that case, it is highly advisable the attorney prepares a letter documenting this, and as applicable, carefully explains the client’s rights to this asset, the client’s decision in this regard, and has the client sign the letter. It is also prudent to cover the subject on the court record and in the judgment itself. Otherwise, preparation of the QDRO or EDRO will require some basic but essential information to be obtained through the divorce, and then likely supplemented with information specific to the plan being divided. It can be very frustrating and time consuming, to gather this data after the divorce judgment is entered. After all, discovery is closed in general or as specifically stated in the judgment, and the plan participant may have limited motivation to cooperate in providing information to give away part of their assets. Almost every QDRO or EDRO will require this basic information: Both parties’ names, current addresses, dates of birth, and social security numbers; the applicable valuation dates of division- usually the date of marriage to the date of divorce; the employer’s specific name and plan to be divided (footnote 2). Technically, social security numbers and/or dates of birth may be required for dividing local government plans, but not QDROs for private plans. Most plans will nonetheless expect the parties' respective SSN and DOB for identification purposes. Given privacy laws, most if not all plans will accept this information separately from the QDRO/EDRO by an attachment submitted with the Order to the plan, that is not filed with the court, where it becomes a public record. Some common obstacles to anticipate include the following. Simply stating that a party’s pension with the employer should be divided could be inadequate- there could be a different pension for hourly versus salaried employees. Similarly, stating only that a city or other municipal pension is to be divided may not be sufficient- a police officer’s pension could be very different than a clerical worker’s. Frequently, having these basics is not enough, and specific discovery must be deployed to properly divide a retirement plan. Many employers, particularly larger ones, will have a general package describing its pension, including a Summary Plan Description, a sample QDRO or EDRO, documentation specifying a particular employee’s status in the pension, such as when vested, estimated monthly benefit if retired at present, and even a current total present value. This is of course very helpful information and should be pursued by subpoena or other discovery. The current total present value can be particularly enlightening by providing a value comparison, if the alternate payee is considering to accept a different asset (e.g., the marital home), and waive the claim to the pension. Regardless of an asset trade, some judges will insist the parties have the pension valuated as to present value, particularly if the matter goes to trial. If the pension administrator does not provide this information, an actuary may have to be engaged to make this determination. Other useful pension information available from the employer can be the type of benefits available. As will be discussed again, many pensions provide features in addition to the straight monthly benefit itself, like surviving spouse benefits, cost of living increases, early or post retirement increases, and a number of means by which the alternate payee may receive their share of the benefits. Defined contribution plans are generally simpler to both valuate and divide. Since these plans are usually nothing more than retirement savings accounts on which taxes are deferred, usually a simple division is involved, without the extra features described for pensions. Important discovery would include determining what plans exist, and obtaining copies of the most recent statements setting forth the value. The statements, if not retained by the participant employee, may be available by subpoena from the investment company with which the plan is invested. Many also have sample QDROs. Considerable general QDRO or EDRO information can also be secured on-line, by mail or telephone. General Motors’ web site for pension division is: www.pension-administration.com. Fidelity Investments currently administers a number of plans, and provides a comprehensive package for QDROs, by calling (800) 643-9361.
Basic QDRO/EDRO Components & Pitfalls The basic components of most QDROs/EDROs include: Identifying the parties, identifying the plan to be divided, the alternate payee’s share, how and for what period that share is to be paid, i.e., the payees’ options of collecting, any special features like increases, employer mandated language, and statutory language for the instrument to qualify as a QDRO or EDRO. To the party being divorced or separated, the most important is their share, and likely second, how and when the money can be received. Plans vary on options for receipt, including the standard monthly payment based on either the participant’s or alternate payee’s lifetime, if there is a surviving spouse designation, , and occasionally, even a lump sum payout. An attorney representing the employee- participant must be wary, and take the position only the marital portion of the plan should be considered a marital asset, and generally, that portion of the plan earned or owned prior to the marriage does not merge, like some assets, into the marital estate (footnote 3). While the participant in a pension may not have been vested or fully vested for a number of his or her initial years with the employer, those years do contribute to what eventually becomes the employee’s monthly benefit. In other words, the participant’s attorney should not assume those early years are insignificant in negotiating the plan division. The widely accepted division is for the alternate payee to be awarded one half of the marital share of the plan at issue. In other words, if the couple was married for ten years, but the participant employed for twenty (ten years prior to the marriage), the alternate payee would receive one half of one half (a quarter) of the plan. Of course like property division in general, this is not a hard and fast rule. The appellate courts have upheld unequal division of retirement benefits, where indicated by “equity”, as well as dividing pensions earned before and after the marriage (footnote 4). Another potential pitfall is dividing a defined contribution plan by dollar amount rather than a share that reflects gains and losses from the intended date of division to the date the division is actually made. Again, most defined contribution plans are simply tax deferred savings plans. Normally, the plan is intended to be divided as of the divorce date, but for a number of reasons, a QDRO may not be submitted to the plan until months, or even years later. If the account balance was, for example, $50,000 as of the divorce date, the attorneys should avoid the judgment stating, the alternate payee is awarded $25,000, if awarding one half was the intent. By the time a QDRO is actually implemented by the plan, the value could have either increased or decreased significantly. If increased, the alternate payee is deprived of his or her share of the increase, and if decreased, the participant absorbs all of the loss. Preferred language would be, for example: The alternate payee is awarded one half of the Plan value as of the date of divorce, or the closest valuation date available to the date of divorce, with the division to reflect equally between the parties, any gains or losses in the Plan, from the divorce date to date of actual division per this Order. The plan administrator should not have difficulty with this division- the division would likely be implemented by division of shares, for example, with any dividend shares since the divorce also divided, and contributions to the plan post division date excluded. Surviving Spouse Benefits A very important feature or option that is available, and should be addressed in a divorce or separation, are surviving spouse benefits. Most defined benefit plans or pensions, provide for surviving spouse benefits, while most defined contribution plans do not; one exception could be an annuity type investment, where the participant could designate a beneficiary in the event of their death. In a standard pension, the employee or participant can designate their spouse to continue receiving benefits after the participant’s death, at a reduced rate, usually half the monthly benefit of what the couple received together. After all, only one of them is left. Designating the surviving spouse benefit normally reduces the monthly rate for both as well, due to the higher cost of amortizing the pension over two lifespans. Once the surviving spouse designation is made, it can only be removed or changed by the employee with the written consent of the spouse. Under federal law (ERISA), private pensions must provide a surviving spouse benefit of at least 50% of the entire pension benefit payable for married couple. It applies automatically if the employee predeceases the spouse while still employed, as well as upon retiring, unless waived by the spouse as stated. Some plans provide optional survivng spouse benefits greater than 50%, at a greater reduction of the total benefit to fund it. This changes in the event of a divorce or separation. Even if the spouse remains designated as the surviving spouse under the plan, and even if the kind-hearted employee had every intention of the ex-spouse collecting, they may not, unless the judgment and QDRO provide for surviving spouse benefits for the ex-spouse. Without a QDRO protecting this benefit, the former partner is a surviving ex-spouse, and not a surviving spouse. There are no designations under the plan itself for surviving ex-spouses, and the pension benefits will terminate with the employee’s death. Some plans do provide that the ex-spouse remains designated as the survivng spouse beneficiary if the divorce occurs after the employee retires, unless signed off by the spouse, or the designation is removed by court order. It may still be advisable to enter a QDRO confirming this designation rather than rely on the Plan term to that effect. After all, it is too significant of a benefit to leave to a possible misunderstanding, given that the cost of the QDRO could be less than one month's benefit. It is thus imperative for the practitioner to consider this when negotiating a property settlement, be mindful of the Roth and Quade decisions (discussed next), and include language in the judgment which addresses any surviving spouse issues. This can then be incorporated into the QDRO. Conversely, if the spouse has already been designated under the surviving spouse benefit, and waives the rights to the benefits (e.g., received other property to compensate), the judgment and QDRO must include specific language removing this designation or so stating. To receive the full monthly surviving spouse benefit as if the couple was still married, the judgment would have to award the alternate payee full surviving spouse benefits. This is not the norm, as the participant’s attorney should take the position this awards the ex-spouse pension benefits earned subsequent to the divorce or separation, and the participant may remarry, and rightfully claim the right to designate the next spouse for post divorce pension benefits earned. An exception could be made if the pension is already in pay status at the time of divorce. Normally, if the pension provides for surviving spouse benefits, the alternate payee should take the position he or she is entitled to be designated or maintained as the participant’s surviving spouse for their share of the pension, under the plan’s qualified survivor annuity providing for same. If the participant has not yet retired, this is referred to as the pre-retirement survivor annuity, and if already retired, it is the post-retirement survivor annuity. These provisions enable the ex-spouse to still collect their share of the benefits in the event of the participant’s death. A pitfall to avoid is the assumption that choosing an annuity for the alternate payee’s own life as an option of collecting pension benefits, obviates the need to address surviving spouse benefits in the judgment or QDRO. That is not always true, unless the alternate payee is already collecting the benefits. Some plans still require a survivng spouse designation, even if the alternate payee chose an annuity for his or her own life, in order to collect benefits after the participant's death.
The Wrath of Roth [Author's Note: The body of case law discussed in this section was effectively overruled when the Legislature amended MCL 552.101 for divorces filed with the court (not finalized) on or after 9-1-2006. Now, the spouse is entitled by law to a "proportionate share" of plan components like surviving spouse benefits and plan increases, unless specifically excluded in the divorce judgment. This section may still be informative for a historical perspective, and for older cases, i.e., filed prior to 9-1-2006.] In Roth v. Roth, 201 Mich. App. 563 (1993), the plaintiff ex-wife sought to amend her 1983 divorce judgment, to provide her with surviving spouse benefits, and enter a QDRO accordingly. After twenty-three years of marriage, the divorce judgment awarded her half of her ex-husband’s union pension, but was silent on surviving spouse benefits. The ex-husband died before retiring, and no pension benefits were paid to either of the Roths. The appellate court upheld the trial court’s denial of plaintiff’s motion, ruling that the Retirement Equity Act (REA) of 1984 (footnote 5) could not be applied retroactively, and because the divorce judgment did not provide for surviving spouse benefits. Although Roth could perhaps be argued as distinguished from subsequent cases, in that Mrs. Roth sought to secure a benefit which did not exist at the time of her 1983 divorce, it appears to remain legal precedent, that a QDRO cannot provide benefits not awarded in the divorce judgment. In Quade v. Quade, 238 Mich. App. 222 (1999), the court, relying on the Roth decision, affirmed the trial court’s refusal to include early retirement benefits in the QDRO, because the benefits were not provided to the plaintiff in the divorce judgment. Because property settlements are typically considered as final, (footnote 6) courts have also been reluctant to accept the position that an “intended” benefit omitted in the judgment was a mere oversight that should be corrected. As recently as April, 2004, the Court of Appeals in an unpublished decision (footnote 7) relying on both Roth and Quade, ruled plaintiff was not entitled to either early retirement or survivorship benefits, because the benefits were not included in the divorce judgment. Like the plaintiff in Roth, this was a long term marriage (28 years), and the alternate payee would receive nothing upon the participant’s death, unless she was already collecting on an annuity for her own life. The divorce or separation judgment/agreement should therefore specify, not only any agreement on surviving spouse benefits, but other pension features as well: Any share the alternate payee receives of the pension’s early or post retirement supplements, cost of living increases, and other adjustments. Normally, the alternate payee should take the position they are entitled to these increases, as to their pro rata share of the pension itself. It can be helpful, to include “catch-all” language in the judgment, that it is the parties’ intent that the alternate payee receive the same or substantially similar benefits as the participant to the extent permitted by the plan, and that the judgment and QDRO/EDRO can be amended if necessary to do so.
Miscellaneous The parties to a divorce or separation should address in the judgment, whom bears the cost of preparing the QDRO/EDRO, as well as any administrative cost assessed of implementing the division. Frequently, it is specified these costs are shared equally or commensurately with the plan division itself. The author has seen at least one EDRO, which provided a “statute of limitations” on submitting the Order; it would only be honored if submitted within one year of the intended date of division. It is unclear if this limitation is enforceable, but this not an issue most practitioners would be eager to appeal. The client should be told the QDRO or EDRO should be completed and submitted promptly.
Summary QDROs and EDROs are really not that complicated nor ominous, once the practitioner becomes familiar with the basic terms and concepts. They are court orders that identify the parties, the benefits to be divided, how divided and to be paid, plan mandated language, and statutory language for the order to satisfy IRS requirements and qualify under ERISA and REA. There is nothing wrong with recommending a client to have their QDRO or EDRO prepared by a specialist, particularly if that attorney does not feel comfortable in the area; in fact, it is commendable. Nonetheless, hopefully this article has been of some assistance in clarifying some of the issues that must be addressed in the divorce or separation process itself, as it may be too late when the ink on the judgment has dried. __________________________________________________________________________
Footnotes (1) The federal government does not recognize either a QDRO or EDRO per se, but will accept a general court order dividing a pension or its defined contribution plan (TSP), meeting the federal requirements. There are also specific court orders to divide a military pension. (2) Divorce judgments addressing the parties’ minor children or “DMs” will normally have this information, but not where minor children were not at issue or “DOs”. (3) MCL 552.18 codifies that retirement benefits are marital property. (4) Pension benefits accrued prior to the marriage may be the subject of property division. Booth v. Booth, 194 Mich. App. 284, 291 (1992). Pension benefits accrued before or after the marriage may be subject to property division. Boonstra v. Boonstra, 209 Mich App. 558, 563 (1995). (5) The REA in 1984 provided an exception for surviving spouse benefits, to the general "anti-alienation” provision of pensions. (6) Zeer v. Zeer, 179 Mich. App. 622, 624 (1989). (7) Lee v. Lee, No. 246183, Unpublished, April 8, 2004.