QDRO, INC.

Judges are generally very well versed in procedure and the substantive area of domestic relations, but no one is an expert in all subject areas of family law. The subject of retirement by Qualified Domestic Relations Order (QDRO) is often underappreciated, misunderstood or glossed over by many practitioners, including Judges.

It was recently suggested to me by a rightfully well-respected Judge that I put together a presentation of the most common things to be on the lookout for in QDRO and Qualified Illinois Domestic Relations (QILDRO) cases. I am writing this blog to organize my thoughts into what is hopefully a helpful bullet point list  on QDRO cases, and share it with a wider audience. I will write a companion blog on QILDRO cases separately
(update: you can read the QILDRO blog here).

General Point

A QDRO is an Order entered by a State Court Judge dividing a retirement plan based upon a property distribution or support order, typically a Judgment for Dissolution of Marriage (divorce decree), but in compliance with Federal law,  Employee Retirement Income Security Act of 1974 (ERISA). For those looking for more on ERISA, click here for the Department of Labor’s somewhat outdated, but still informative booklet on QDROs.

What to Consider Shortlist

Long prior to drafting a QDRO, there is a myriad of issues to consider when drafting the Judgment and Marital Settlement Agreement that directs that a QDRO be entered. What follows is truly an oversimplification, a bare minimum, and one to be applied by a practitioner (attorney or Judge), not layman, but anyone can benefit from reading it.

• Initial Question: is this a defined benefit or contribution plan.
  
  • Defined benefit: pays monthly for life, often called a pension
    plan. Tip: think of it as an annuity.
  • Defined contribution: employee and/or employer contribute and upon
    retirement, withdrawals are taxed (typically). Tip: think of it as a pile
    of money to draw from at will (with various tax consequences depending on
    when/how much is withdrawn) such as a 401(k).

We will address the more complicated scenario first:

1. Defined Benefit Plan
2. 
   

• Identify. Does the Judgment clearly identify which plan is to be divided?
• Division Method. Is the Judgment clear on which approach is being used? Only two options exist in Illinois (In re Marriage of Culp, 399 Ill. App. 3d 542):
  
  • Immediate Offset: how much is the spouse to receive for his/her share of the plan and when  (lump sum or payments). No QDRO.
  • Reserved Jurisdiction: no buy-out, must wait until retirement age is reached. QDRO needed.

We proceed assuming a QDRO is needed and look for clear language to be included.

• Amount or Percentage. Does the Judgment state an amount or percentage that the Alternate Payee (party being granted a share of the Participant’s plan or AP) will receive?
  
  • If amount, is it per month or something else
    
    • Per month:
      
      • starting when?
      • Does it include automatic increases/cost of living adjustments
        (COLA)?
    • Something else like total contributions or “balance:” unless this is included only as guidance, a sidenote, it may be an indication that the parties misunderstand what they are dividing and expect either an immediate pay-out, typically not possible from a defined benefit plan, or payments to be only made for a certain period of time. The latter would have to be explicit: for X number of months/years.
      
      • If percentage, percentage of what?
        
        • All/gross
        • Marital portion. Is the marital portion defined?
          
          • Is everything marital?
          • If less than everything is marital, is the marital portion determined by the Hunt formula (In re Marriage of Hunt, 78 Ill.App.3d 653) or only the time/credit/contributions during the marriage.
            
            • If only contributions during the marriage, this may require an actuary to determine what the AP would receive had the Participant only worked & contributed during the marriage. This determination necessitates having a date when AP will be eligible to start receiving the pension, which is often not known by the parties. Tip: this is the method that the parties think is being
              utilized almost regardless of what the provision in the Judgment actually says, as most are unaware of  Hunt.
            • Hunt gives the AP an increased benefit for  work/contributions after the marriage, so language that states “only from date of marriage until the
              date of divorce” is misleading. The formula divides what accrued during the marriage by the total credit accrued at retirement, so as the Participant continues to work after divorce, the marital formula seems to be getting smaller. However, the result is then multiplied by the benefit at retirement, which continually
              increases the longer the Participant works after divorce, in nearly all cases resulting in a larger marital portion. The policy reason is that the final pension would not be possible without the earlier, marital years. Tip: parties do not understand that this is the
              method being used, but AP’s readily adopt it when they learn of it (usually at retirement) because it benefits them, and Participants nearly universally want to challenge it at retirement.

• Shared or Separate. Is the Participant (former employee) retired & receiving his/her pension?
  
  • If yes: The AP can only receive using the shared approach: for the life of the Participant
  • If no: AP can (and should) have the option of using the separate interest approach: receiving the pension based upon his/her own lifespan (for for the rest of his/her life, not that of the Participant)

Many other considerations, such as qualified preretirement survivor annuity are not covered above, and so this is not a complete list of considerations.

2. Defined Contribution Plan

• Identify. Does the Judgment clearly identify which plan is to be divided?
• Amount or Percentage. Is AP’s interest stated as: 

• • An amount
    
    • As of what date
    • Is the amount subject to market fluctuations from that date until AP receives his/her share
  • A percentage
    
    • As of when?
      
      • As of a date (meaning no pre-marital portion)
      • Only what accrued during the marriage
        
        • Balance as of divorce minus balance as of marriage? Simple, but not very accurate method.
        • Investment as of date of marriage traced throughout the marriage to determine their current value to be subtracted from the balance as of the date of marriage. This is more complex and a plan may not be willing to run the numbers, in which case, an actuary may be need. If actuary needed:
          
          • Who pays for the actuary?
          • Is the actuary an impartial party or one party’s expert?
    • Is the amount calculated using this method subject to market fluctuations from that date until AP receives his/her share

General provisions that should be included regardless of plan type

• Cooperation. Everyone to fully cooperate in effectuating the division of the plan
• Retain jurisdiction
  
  • To modify all or
  • Just to amend QDRO to be acceptable by the plan under ERISA
• Enjoin. Do not do anything to the plan that might affect it’s value (no changing investments, etc.).
• Who is drafting the QDRO
  
  • Participant or AP, or
  • Neutral party, but if so, who pays?

A well drafted Judgment means the easiest part is reviewing the QDRO:

• Does it grant interest as granted by the Judgment?
  
  • Percentage or amount
  • As of what date or dates
  • If marital portion, is it defined as in the Judgment
• If there is anything different from, or in addition to, what is in the Judgment, is it agreed?
• Finally, has the QDRO been pre-approved by the plan administrator? Not all, but nearly all Plan Administrators provide pre-approvals. Why enter a QDRO without one?

Use this list to inform your attorney or check their
understanding or simply serve them as a reminder. Just like when seeing a
doctor, be an active and educated client.