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Retirement Benefits and Divorce

The Gitlin Law Firm, P.C., Woodstock, Illinois    © 2013
www.gitlinlawfirm.com



Q:I have a pension plan which started before my marriage.  Contributions were made to it during the marriage? Will my spouse be entitled to a portion of it?

A:Yes. But good legal advice is essential to assure that the premarital portion of the plan is addressed correctly so that your spouse is only entitled to a share of the portion of the benefits that accrued during the marriage.

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Q:What are the types of retirement benefits?

A:The general types of retirement benefits in the private sector are defined benefit plans and defined contributions plans. Think of a defined benefit plan as an annuity. An annuity is a monthly stream of payments. In a defined benefit plan these monthly payments often start at the plan participant's normal retirement age. Under the normal form of benefits the payments are usually paid for life. The other type of retirement benefit is a defined contribution plan. I generally refer to these plans as “what you see if what you get” type plans. By this, I mean that for most of these plans there are account statements available showing an account balance. Types of defined contribution plans are 401(k) plans, profit sharing plans, money purchase pensions plans, etc.  Of growing popularity are so called "hybrid plans."  Hybrid plan designs combine the features of both defined benefit and defined contribution plans.  In any case where there are substantial retirement benefits it is important to receive appropriate advice for a lawyer with experience in addressing retirement plans in divorce. 

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Q:What are the basic documents that a lawyer will need to get a handle on the value of my retirement benefits or how to distribute them in a divorce?

A:There are several critical documents: the most recent benefits statement and the summary plan description (often called the pension plan booklet). Another document that should be provided to your lawyer – especially if you have a defined benefit plan – is the plan document (the document on which the summary plan description is based).

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Q:OK, so now I know that my pension plan is actually a defined benefit plan since my account statement shows the monthly benefits payable at my normal retirement age. How is this valued?

A:It is possible to determine the present value of a defined benefit plan. The present value concept is based on the idea that a bird in the hand is worth two in the bush – that is, the time value of money. This present value is generally determined by an expert, although an estimate of the present valuation can often be completed quickly by a lawyer. In this way, it is possible to determine whether there is other property to “offset.”

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Q:How do these experts determine the present value?

A:There are two critical factors: 1) the expected lifetime of the pension holding spouse, and 2) the discount rate used. There are different benchmarks in determining both the life expectancy as well as the discount rate. Therefore, while values by experts who value defined benefits plans are often in the same general range, I have found that there can be a significant difference depending on the assumptions used.

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Q:What is the cost for figuring out this present value?

A:Generally, the cost of the valuation will not be less than $100 nor more than $350 per plan.

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Q:What do you mean by offsetting property?

A:Assume, for example, that the husband has a pension plan (a defined benefit plan) and the parties own a house. If they have the same value, in a divorce the wife could be awarded the house and as an “offsetting award” the husband could be awarded the pension.

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Q:What if this approach will not work? What if there is not enough property to offset?

A:The court will then enter an order dividing the pension plan. This is done through an order called a Qualified Domestic Relations Order. You will often see the term Qualified Domestic Relations Order abbreviated (QDRO). Phonetically, most lawyers pronounce this term “QUADRO” although it should never be spelled this way. While this term sounds complicated it is quite simple. The term “domestic relations order” means nothing more than an order of a divorce court. The term “qualified” is what makes these orders special. The order must be approved by a person called the “plan administrator.” In part, it is this approval process that makes the entry of the order more complicated.

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Q:I have a defined benefit plan and my spouse and I have agreed a QDRO will be entered. Isn't there a standard form QDRO that should be used? Why does this step seem so expensive?

A:Some plans will provide their “form” QDRO although a plan cannot not require the use of their form.  A plan can only charge more for review of a "non-standard" QDRO..  Occasionally, I have found some form QDROs are drafted in a relatively neutral manner. Usually, I have found that the form QDROs provided by the plan administrator will favor the spouse who owns the pension. In short, only occasionally have I found “model QDROs” to be drafted in a manner which is fair.

Therefore, if one of the assets of the marital estate is a defined benefit plan, it is important to hire a lawyer who has experience in drafting QDROs and understands the critical issues. These issues include properly addressing survivorship rights and a host of other issues. There are lawyers whose entire practice consists of handling issues relating to QDROs. A lawyer from Chicago with whom I have previously lectured is Elizabeth M. Wells, 980 N. Wells Street, Chicago, IL.

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Q:Can't I just address this issue after the divorce using such language in the divorce decree such as, “Wife will receive 50% of the Husband's retirement benefits pursuant to a QDRO?”

A:No. This would be a mistake. Whenever I lecture on the subject of QDROs, I always recommend that the attorneys have the QDRO entered at the time of the entry of the divorce decree. There are practical and legal reasons for this advice. A practical reason is that before the parties are divorced, they often are more reasonable in trying to work out their differences in order to get the divorce behind them. After the divorce, I have seen parties who spend significant attorney's fees in battling over language to be included in a Qualified Domestic Relations Order. Since there is generally no one standard order, leaving the negotiation for after the entry of a divorce decree is likely to significantly increase the cost of this process.

As a legal reason, there is a malpractice trap as to what would occur if a QDRO is not entered and the spouse who owns the pension dies. It is likely that the other spouse can then never receive any benefits. Generally, there can be no survivorship rights unless a QDRO is entered. This is one of the legal reasons why I recommend that all lawyers try to ensure the entry of a QDRO at the time of the divorce or as quickly thereafter as is possible.

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Q:My wife is an Illinois teacher. Can I have a QDRO entered affecting her pension plan?

A:No. Assuming a spouse contributes to Teacher's Retirement System, you cannot have a QDRO entered dividing her pension plan. There is an order which is somewhat similar to a QDRO. It is called a Qualified Illinois Domestic Relations Order (QILDRO). Such orders can be entered for plans which are provided for in the Illinois Pension Code including:

It is important to understand that Illinois law has many complications in drafting QILDROs because the process involved many steps including a Consent Order, the QILDRO Order, itself, and ultimately a QILDRO Calculation Court Order. Perhaps the most significant limitation that remains is the general inability to provide survivorship benefits. For links addressing QILDROs, see the Gitlin Law Firm's Links page regarding QDROs and QILDROs.

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Q:Since I only have a 401(k) plan, aren't things a lot more straight-forward?

A:Yes. Since such plans have a plan statement, it is not necessary to have them valued. There are still critical issues to be addressed.

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Q:What are these issues?

A:The values of such defined contribution plans vary. If a QDRO will be entered, one issue is how to address investment gains or losses. Another issue is whether the funds will be rolled-over into a new individual retirement account. While this is a relatively normal method of distribution, it is not required. Other options include a cash distribution. If there is to be a cash distribution, it is important to understand that this distribution will be subject to a mandatory 20% income tax withholding but that the amount of taxes to be paid on the distribution may be more than this amount (or occasionally less).

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Q:Based on all I've read, it seems like retirement issues are a complicated issue to be address in a divorce.

A:Yes.

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The Gitlin Law Firm, P.C., provides the above information as a service to potential and current clients. A person's accessing the information contained in this web site, is not considered as retaining The Gitlin Law Firm for any case nor is it considered as providing legal advice. The Gitlin Law Firm cannot guarantee the outcome of any case.

The Gitlin Law Firm, P.C.
Practice Limited to Family Law
663 East Calhoun Street
Woodstock, IL 60098
815/338-9401

www.gitlinlawfirm.com

Gitlin Law Firm, P.C.

Updated:  April 23, 2013


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