Discovery and Retirement Plans
By Mark Cherniak
Introduction
A married couple’s vested retirement plans earned during the marriage, are clearly assets subject to property division of a divorce or legal separation, as codified in MCL 552.18,1 and addressed in common law.2 Not infrequently, significant discovery is necessary, to adequately identify these retirement plans, its benefits, and terms, in order to properly draft and submit to the plan administrator a Domestic Relations Order (DRO) that adequately protects the parties.3 After all, the parties’ retirement plans may very well be their most valuable items of property.
In addressing property division, retirement plans should not be glossed over by simply stating in the divorce or separation judgment “that any and all” retirement plans earned during the marriage are to be equally divided, without finding out what these plans and its specifics are. This can make the actual process of plan division via the subsequent DRO very frustrating and difficult, when the divorce is final and discovery is closed, one or both parties have relocated, changed employment, or even worse, retired.
Basic Division
As some general definitions, a DRO is a special court order dividing retirement plans, for the benefit of a qualified beneficiary: A spouse, former spouse, minor child, or other qualified dependant. It has to meet the requirements of applicable law, such as but not always ERISA (e.g., local government pensions fall under state statute), and legitimate plan terms. It is prepared as a separate document to the judgment, although a judgment otherwise satisfying federal guidelines for plan division, may be accepted by the federal plan administrator (Office of Personnel Management). As a certain general rule, however, the client should never be left with the impression, the retirement plan division is taken care of, because the division is addressed in the judgment. After all, the retirement plan was not a party to the divorce and in most cases, does not see the judgment.4
There are two basic genres of retirement plans: Qualified (for tax deferred purposes) defined benefit and defined contribution plans. The former are usually annuities, most often paid at retirement on a monthly basis, and are primarily pensions. The latter can be in the form of an annuity as well, but most often are tax deferred retirement savings plans, such as a 401(k), 403(b), or 457 plan. A defined contribution plan includes employee contributions, with or without some degree of employer matching, depending on the plan. As will be discussed, because a defined contribution plan is an asset with a set monetary value as of a given valuation time (like a regular savings plan), these plans are usually easier to divide with a DRO than a pension; normally they also have less features, and thus pitfalls for the practitioner.
The DRO Frustration
It would be a wonderful thing if even after prolonged suffering and frustration, once counsel struck nirvana by having a DRO accepted by the ever vigilant and circumspect plan administrator, any subsequent orders for other plans would be a piece of cake. Alas, that is the exception and not the rule.
As just some examples, and why discovery can be essential, are as follows. For a DRO to be qualified, the Plan name should be precisely identified in the order, and can be rejected for one missing word.5 Many plans, as will be discussed further, have sample orders they prefer to be followed, although the order should not be rejected if meeting the legal and plan terms, regardless of the sample.
Some plans are easier to identify than others. Ford Motor has four plans; a pension and savings plan for salaried employees, and a differently named pension and savings plan for hourly employees. Thus, if the practitioner is aware what pay status the employee has, and whether the employee is a participant in a savings plan, the plan(s) can be identified without significant further effort. Moreover, Fidelity Investments handles the DROs for all four plans. But, just as there appears to be some comfort coming, be on guard that Visteon will not accept the Ford sample to divide its plans, despite being a wholly owned subsidiary of Ford!
In comparison, TRW has 6 differently named plans. Daimler Chrysler has several plans. GM has four plans with a scheme similar to Ford, but GM spun off a number of its retirement plans in the latter 1990s to its subsidiary, Delphi, thus care is needed if that did occur in the case at issue. State of Michigan employees are covered by four separate defined benefit plans (judges, state troopers, teachers, and miscellaneous), separate contribution plans administered by a company called Citistreet, and the state requires a wholly different DRO for retired employees than for those still working.
Identifying the Plan Administrator can be even more of a task, particularly for defined contribution (or savings) plans, despite the earlier claim the plan itself is usually easier to divide. The Plan Administrator can be the entity where the funds are invested (e.g., Schwab, Fidelity, etc.), the employer, an independent company not holding the funds (e.g. QDRO Consultants), the employee’s union, counsel for any of those listed, or to make it even more daunting, a combination of those listed among different plans, even with the same employer.
Some plans are more liberal than others in providing general (as opposed to an individual’s plan specific information) to attorneys or their agents preparing the DRO, without a subpoena or the employee’s signed release. Others believe they are in charge of Fort Knox and will not provide even the most generic information. Discovery thus may be needed, a more cumbersome process when the divorce is already concluded.
Required and Recommended Information
Retirement plan discovery can vary depending on whether the attorney represents the plan participant employee, or the non employee with whom the plan is to be divided (e.g., alternate payee). Obviously, more plan specifics may be available to counsel for the employee, but even that may not be sufficient.
If not otherwise known, the required information needs to be obtained, and can be satisfied through interrogatories and requests for production to the party employee, but may also need to be accompanied with a subpoena to the employer and/or plan administrator. After all, the employee may legitimately respond they do not have all the information requested, and it is not that party’s obligation to obtain it for the other side.
Basic personal information required to draft most DROs include:
-
the parties’ full names, current addresses, dates of birth, and social security numbers;6
-
the date of marriage and date of divorce;
-
the exact name of the plan being divided (which may not be known to the employee, thus the mentioned potential need for a subpoena);
-
the employer’s name and address, whether the employee is hourly or salaried, still employed or already retired and collecting plan benefits;
-
any prior plans with previous employers’ earned during the marriage in whole or in part.
A. DEFINED BENEFIT PLANS
If not available from the employee, plan specific information to be pursued from the employer or plan administrator for defined benefit plans or pensions should include:
-
the name and address of the plan administrator or entity to which the the court entered DRO should be delivered (this should be requested of the employer when the administrator is not known);
-
a copy of the plan document and summary plan description;
-
a copy of the most recent annual or quarterly benefit statement;
-
the precise name of each retirement plan in which the employee is a participant;
-
if available, a vesting schedule;
-
any documentation within the plan addressing surviving spouse benefits;
-
a copy of any sample DROs recommended by the plan and/or DRO checklist.
The latter two items should be elaborated.
The surviving spouse benefit is a critical benefit which in the event of the employee’s death, while active or retired, pays the surviving spouse, depending on the plan, 50 to 100% of the retirement benefit earned. The surviving spouse benefit is a benefit required by law to be included in a defined benefit plan if the parties are married for at least a year, unless waived by the spouse in writing, or before an authorized plan representative.7
This changes in the event of a divorce, and with most plans, has to be protected by the DRO for the surviving ex-spouse to receive the benefit. Normally, the non employee is awarded or the property settlement should pursue an award, of the “marital share” of the surviving spouse benefit (this has become law with the passing of MCL 552.101, as will be discussed). Marital share, as it sounds, entitles the divorced spouse to the portion of surviving spouse benefits proportionate to the period of time awarded the spouse in the DRO for the pension in general.
Therefore, it is critical to know if the surviving spouse benefit was waived during the marriage, and if the plan terms allow the benefit to reinstated in the DRO (unlikely if the deceased employee was already collecting the pension, i.e., was in pay status).
Regardless of surviving spouse waiver, the amount of the benefit could affect how the spouse chooses to collect their share. While most plans pay a 50% survivor benefit, some, like the “Big Three”, pay more, and spouses of (MI) state employees, depending on the employee’s designation, can collect 50, 75, or 100% of the benefit.
Sample DROs are often criticized, some justly so, and those should not be blindly followed. They may omit reference to available benefits like plan increases, and if followed, may deprive the non employee spouse of their share of same. A common accusation (not necessarily made here), is the samples are designed primarily to make the plan reviewer’s task easier On the other hand, if available, sample DROs should definitely be obtained and followed as closely as possible without jeopardizing the client’s interests, making modifications or additions as necessary. This reduces the chances of the DRO being rejected.
Moreover, the samples often provide valuable information on plan features or benefits which may, or may not be available depending on a number of circumstances. For example, some plans will permit alternate payees to choose their form of payment8 when ready to receive the benefits (e.g., Ford Motor), while others require the selection to be already specified in the DRO. GM will not allow an alternate payee to receive a share of post-retirement increases if the chosen form of payment is for the alternate payee’s lifetime. TRW limits the form of payment to be based on the participant’s lifetime if the employee is already retired when the DRO is received.
B. PENSION PRESENT VALUE DETERMINATION
Probably every domestic relations attorney has been asked by a client, what’s his or her pension worth? We then scratch our heads and reply, we have no idea. Frankly, determining a pension’s present value is generally unnecessary if the pension is being divided by a DRO.9 In most cases it is needed if the parties are exploring an exchange of assets, e.g., “I’ll let you have the house if you leave my coveted pension alone.”
Pension present values are determined based on a number of factors, including the employee’s age, the plan benefits, projected retirement age, tax consequences, anticipated plan increases, etc. There are a number of sources to make this determination, including computer software, PBGC tables10, or expert analysis by an actuary or accountant. In going this route, the parties need to realize present value determinations are estimates, hopefully educated, and should proceed with caution.
In the more common case where the pension is divided by submitting a DRO, the non-employee receives an agreed to or adjudicated share of the monthly pension benefit once it becomes payable.11 As such, the present value is not of significant consequence; it is what it is.
C. DEFINED CONTRIBUTION PLANS
As to defined contribution or “savings” plans, if not available from the employee, information to be pursued from the employer or plan administrator should include:
-
the name and address of the plan administrator or entity to which the the court entered DRO should be delivered (as mentioned earlier, this can vary even within the same employer for different plans);
-
a copy of the most recent plan statement, usually provided quarterly (and possibly older statements as will be discussed) ;
-
while usually contained within the statement, any documentation of loans taken against the plan;
-
the precise name of each retirement plan in which the employee is a participant;
-
any documentation within the plan addressing possible death benefits;
-
a copy of any sample DROs recommended by the plan and/or DRO checklist.
The listed information for either a defined benefit or contribution plan can be obtained by either subpoena or letter, the letter accompanied by a written, signed, and notarized release from the employee. Employers, as they should, can be very protective of their employees’ plan specific information. Thus, while the desired items should be itemized in the request, it is not a bad idea to include a statement to the employer, that the information is for preparation of a DRO. This can lower the wall of secrecy.
As mentioned previously, contribution plans are generally easier to divide than benefit plans. A division date is agreed on, e.g., the date of separation, filing, or divorce, and a dollar or percentage amount is designated in the DRO to be assigned to the alternate payee. Once the alternate payee’s separate account is established or distributed to a plan of their choice, it has to be subject to investment gains and losses. The parties also must address, however, if the amount divided will be subject to gains and losses from the valuation date to the segregation or distribution date. That is really up to the parties’ intent and preference. For example, the plan participant may be concerned he or she does not solely bear any investment losses, particularly if there is a significant delay between the valuation and distribution dates. The alternate payee may stress receiving a certain sum. Absent extenuating circumstances within the usual property division factors12, if an agreement cannot be reached, most courts would probably rule the safer way, that gains and losses be shared.
Having said “generally”, there is of course a caveat to be addressed. If there are pre-marital assets in the defined contribution plan, the participant will likely insist only the marital portion should be divided. As with pensions, the DRO may direct that only the assets accumulated during the marriage be divided, e.g., between the date of marriage and date of divorce. Some plans will reject such a DRO on the basis the plan will not honor a two date division. This can be as a matter of plan policy or reality. In the latter case, the funds may have been transferred between two or more unrelated investment funds, and the current fund takes the legitimate position it has no knowledge as to the funds in a different plan a number of years ago when the parties were married.
Addressing this dilemma may require some creativity and discovery. If not already available, statements from the plan at the time of marriage may have to be subpoenaed to determine the pre-marital share and then compute the marital share to be divided. It is then better to compute the marital share as a percentage of the entire asset rather than dollar amount, to avoid the gains/losses predicament.
Contribution Plan Loans
Many contribution or “savings” plans permit loans to be taken against the assets in the plan. This is a somewhat like a home equity loan, as the plan participants-employees borrow against their asset. As with other loans, it has to be repaid with interest, but the interest is paid into the participant’s own plan; they pay themselves interest. Plan loans may pose a number of issues in a domestic relations property division.
If there is a loan against the plan, the DRO must address whether the loan is, or is not included in the plan division. Including the loan in the plan division means the plan net asset balance and the loan are to be divided. For example, if the plan pre loan had $50,000, and the employee took a $10,000 loan against it leaving a $40,000 net balance, the non-employee in an equal divorce division would receive $25,000, leaving the employee’s plan net balance at $15,000. If the DRO directed not to include the loan in the plan division, each party would receive $20,000 in their respective plans, the agreed to half of the plan net asset balance.
This may raise the issue what the loan was used for. If the parties agree the plan loan was for joint marital purposes and should be equally repaid, a DRO requiring the non-employee to contribute towards the loan payments will be rejected. Only the employee can borrow from the plan, and thus only can be compelled to repay the plan. If the parties agree only the employee benefited from the loan should not pose a problem, since only the employee is required to repay it.
Discovery may be needed to pursue what the loan was used for and which party received the asset(s) acquired by the loan in the other property division, to determine how and whom should repay the loan. For example, if the loan was solely to buy a vehicle awarded the non-employee, the divorce judgment itself may require that party to repay the employee directly, as quasi alimony or otherwise. In a situation where the money was spent jointly on miscellaneous items, counsel for the non-employee needs to be wary about agreeing to a direct contribution, since the employee will be repaying himself or herself, not a third party like a bank, and the employee likely will get a windfall. Perhaps the only practical answer in the jointly spent situation is, to not include the loan in the division; the employee took the loan and has to repay it. He or she may object they are solely incurring a debt used for the parties’ mutual benefit, but again, they are paying themselves.
MCL 552.101
Practitioners should be aware of a significant amendment to MCL 552.101, effective for divorces or actions for separate maintenance filed on or after September 1, 2006. Simply restated, the amendment overruled the Roth, Quade and Lee cases, which required certain retirement components as plan increases and surviving spouse benefits to be awarded the alternate payee in the judgment, to be included in the DRO. The amendment now provides that if the judgment divides a retirement plan, these and other components are included, unless specifically excluded.
There is a potential pitfall. Court orders dividing federal employee pensions (COAPs) require surviving spouse benefits to be awarded in the judgment, to be included in the COAP (like Michigan’s prior law). A certified copy of the judgment has to be included with the COAP to verify this. Federal law of course preempts state law, and it is unlikely the federal plan administrator (OPM) will make an exception for Michigan cases.
Conclusion
Perhaps the foregoing appears daunting as to all the additional work being recommended. Many attorneys refer their retirement plan division to experts which is a commendable practice. But even in those cases, it must be kept in mind, that as with other property division, exploring the parties’ retirement plans needs to start during the divorce and is determined by the divorce or separation judgment. No practitioner would enter a judgment without knowing if there is a marital home or how many vehicles the parties have; as another valuable asset, retirement plans should not be treated differently.
1 MCL 552.18 distinguishes vested from unvested retirement benefits; vested “shall be considered part of the marital estate”, unvested “may be considered part of the marital estate”.
2 There is legal precedent for a division of retirement assets even earned prior to the marriage given extenuating circumstances, such as a lack of other assets to adequately compensate a spouse in a long term marriage. Booth v. Booth, 194 Mich. App. 284, 486 NW2d 116 (1992).
3 Reference to a Domestic Relations Order or DRO, intends to collectively reference most orders dividing retirement plans, including QDROs for private plans, EDROs for local government plans, and orders dividing federal retirement plans (government CSRS/FERS employees, military personnel, and railroad employees).
4 Some plans upon receiving only the divorce judgment, will place a restriction on disbursing the retirement funds to the employee, but will still require a DRO to actually divide the plan per the judgment terms.
5 This is somewhat of an overstatement, as under ERISA, a DRO “should not” be disqualified for a missing term or minor misnomer, if the Plan can reasonably figure out the intent of the order. That does not occur too often.
6 It is now common and recommended by many plans, for identity theft prevention, to provide this personal information, other than the parties’ names, in a separate attachment which is not filed with the court and thus made a public record. Filing the SSN as a public record, could arguably also violate MCL 445.83, which prohibits the “public display” of an individual’s SSN.
7 29 U.S.C. 1055
8 Form of payment refers to whether based on the employee’s lifetime, alternate payee’s lifetime and the commencement date if optional.
9 Some judges may require a pension present value determination if the case is to be tried, but that should be circumvented if the parties agree to resolve the pension issue by entering a DRO, making it a non-issue.
10 PBGC is an acronym for Pension Benefit Guaranty Corporation, a federal program that assumes payment for certain under funded pensions that cannot meet its obligations, at a reduced benefit to the unfortunate employee.
11 Some plans will pay out lump sum in cases when the non-employee’s present value share is fairly nominal, e.g., $5,000 or less.
12 Sparks v. Sparks, 440 Mich. 141 (1992)