Dividing Retirement Benefits in Divorce
Qualified Domestic Relations Order: Retirement Benefits in Divorce
Many couples, anxious to complete the divorce process sometimes overlooked how retirement benefits will be divided as part of the divorce settlement. There are different processes for dividing retirement benefits depending on the type of retirement plan. Lots of acronyms and abbreviations are used when dividing retirement benefits during the divorce process. In this article I will go through some of the terminology and discuss various issues related to retirement plans and the divorce process.
Private pension plans are governed by federal law. A private pension plan is a plan offered by a private employer. ERISA is the Employee Retirement Income Security Act of 1974. ERISA sets minimum standards for private pension plans in private industry and companies. ERISA does not require private employers to set up pension plans for their employees. But for those who do set up pension plans, they must follow the provisions of ERISA.
DEFINED BENEFIT PLANS
In a broad sense, there are two types of pension plans. The first is defined benefit plans. A defined benefit plan promises employees a specific benefit at retirement. The benefit might be a dollar amount or it may be based on a computation based on salary and years of service. These days, defined benefit plans represent about 10% of plans in which private sector employees are enrolled. This is down from about 60% in the 1980s. Industries with strong unions (such as the automobile and airline sectors) have tended to have the greater number of defined benefit plans. (CNN Money)
DEFINED CONTRIBUTION PLANS
The second type of plan is a defined contribution plan. The defined contribution plan does not promise a specific amount at retirement. Employers and employees may contribute to the plan. Those contributions are invested on behalf of the employee. Defined contribution plans rise and fall based on the performance of the investments made in the plan. There are other types of private pension plans, but these two are the most common. There are times when employers offer hybrid plans or both plans to employees.
When going through a divorce, spouses will typically agree to and sign a property settlement. This property settlement becomes a domestic relations order (DRO) when the court issues a judgment, decree or order that formally approves the property settlement. When spouses divorce and one is enrolled in a private pension plan, the non-enrolled spouse can use a qualified domestic relations order (QDRO) to establish a legal right to retirement plan proceeds. Even though divorce proceedings take place in state court and are governed by state law, ERISA sets in place the requirements of a QDRO. If the QDRO meets all of the requirements, the plan must honor the order and award retirement benefits to the former spouse.
Government sponsored retirement plans such as the Federal Employees Retirement System (FERS) or the Arizona State Retirement System are handled using a different process. FERS was enacted in 1986 and replaced the Civil Service Retirement System. QDROs are specifically for private ERISA plans. For FERS plans, Civil Service Retirement System plans and Thrift Savings Plans, a Court Order Acceptable for Processing (COAP) is used to establish the legal right to retirement funds for the former spouse of an enrolled employee. We draft your Decree of Dissolution of Marriage with the specific language required by these plans so that a QDRO is not required.
Another common retirement plan in Arizona public sector employees is the Arizona State Retirement System (ASRS). According to the ASRS handbook, “(i)f you are married during any time that you are an actively contributing member of the ASRS, your spouse may be entitled to a portion of your account or retirement benefit if you divorce. Because Arizona is a community property state, property acquired during a marriage belongs to the “community” of the marriage, not to an individual as that person’s separate property. All or a portion of your ASRS account or benefits may be a community property asset.”
Community property is defined in the Arizona Revised Statutes. It states, “(a)ll property acquired by either husband or wife during the marriage is the community property of the husband and wife except for property that is
1. Acquired by gift, devise or descent.
2. Acquired after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.
Separate property is defined as well. Arizona law states that a “spouse’s real and personal property that is owned by that spouse before marriage and that is acquired by that spouse during the marriage by gift, devise or descent, and the increase, rents, issues and profits of that property, is the separate property of that spouse.”
THE ARIZONA STATE RETIREMENT SYSTEM IS A DEFINED BENEFIT PLAN
The Arizona State Retirement System is also governed by Arizona law. ASRS is a defined benefit plan. The monthly pension at retirement is calculated by multiplying the total years of service with ASRS-covered employment by the average monthly compensation and by a multiplier factor. The plan is overseen by a Board of Trustees. When the plan receives a domestic relations order for an employee who is part of the plan, the board reviews the DRO to determine if it is acceptable. If it is deemed acceptable, the board notifies the member and the former spouse (or whoever is the alternative payee that it has accepted the DRO.
Arizona law as it applies to the Arizona State Retirement System defines a domestic relations order as any judgment, decree, order or approval of a property settlement agreement entered in a court of competent jurisdiction that:
1. Relates to marital property rights of a spouse or former spouse.
2. Creates or recognizes in the spouse or former spouse the existence of an alternate payee’s right to severance, survivor or retirement benefits.
3. Assigns the spouse or former spouse as alternate payee the right to receive all or part of the severance, survivor or retirement benefits payable to the member
A relative of the divorced member’s former spouse is defined as a person who is related to the divorced member’s former spouse by blood, adoption or affinity and who, after the divorce or annulment, is not related to the divorced member by blood, adoption or affinity.
An acceptable domestic relations order does not require the board to provide any type, form or time of payment of severance, survivor or retirement benefits or any severance, survivor or retirement benefit option that is not provided under the Arizona Revised Statutes. In order for a DRO to be deemed acceptable, it must include:
1. The name and last known mailing address of the member.
2. The name and last known mailing address of each alternate payee covered by the order.
3. The method of determining the amount of the member’s severance, survivor or retirement benefits to be paid by ASRS to each alternate payee covered by the order.
4. The number of payments or period to which the order applies.
The Divorce Guy can assist clients who are representing themselves prepare the paperwork needed for FERS, ASRS, and many other government retirement plans. Even though this process may seem complicated at first given all the requirements and abbreviations used, we have worked to provide excellent case management legal document preparation services to thousands of satisfied clients. For information about how we can help prepare your documents related to divorce and retirement plans, contact our office today. If you have a Private Pension Plan and require a QDRO be prepared, we will complete your divorce for you and refer you to a specialist who prepares QDRO’s exclusively. Once your QDRO is prepared we will file that with the Court for the judge’s signature. It’s that simple!