Materials Provided by Jeffrey S. Royer So It s Just a 401(k)? Dividing Defined Contribution Plans! Where to get plan information - from the plan administrator or a third party administrator, from the client, FreeERISA (FreeERISA.com), BrightScope (Brightscope.com), the company website " Some plans make it freely accessible, some make it exceedingly difficult " What are your rights to information? - Participants and beneficiaries are entitled to certain information # Plan documents, benefit statements, Summary Plan Description, annual financial statement # A spouse may not be considered a beneficiary unless named by the participant # An Alternate Payee is considered a beneficiary after a DRO is qualified " So how do you get this information? - Authorization of the participant - Order from the court ordering the participant to sign an authorization - Subpoena - Submit a court-signed QDRO to the plan administrator! Reading an account statement - the account statement provides valuable information - see the attached sample at the end of these materials " Plan name, vested balance, loans, valuation date, asset allocation! Problems with division dates when the recordkeeper changes " There is no statutory requirement for a recordkeeper to maintain records or transfer records, thus even if a plan was transferred only a month ago, they won t have information from a prior date " So what do you do when the dissolution was two years ago and the recordkeeper changed six months ago? - Hope that the participant kept statements - Hope that the prior recordkeeper maintained records - Hope that the decree states an account balance near the date of dissolution! Plans that don't do daily valuations - you may have to rely on the nearest valuation date (before or after?) " Or you can prorate account balances between two statement dates! Determining the marital portion of the account " Some plans won t calculate the marital portion of defined contribution plans - They will only do a fixed percentage or fixed dollar amount as of 1 Q--1
the valuation date " You will need to choose between the time rule formula vs. account balance method vs. asset tracing method " Time rule formula - months of marriage divided by total months of participation in the plan - You will usually use this as a last resort if you don t have records to prove the non-marital balance - It can have a tendency to dilute the spouse s interest, especially if the participant didn t begin participating until later in his employment or the contributions were lower in the early, premarital years # e.g. - 15 year marriage, P has been employed 20 years, but didn t begin participating until the day before the marriage # Using the time rule, all of those non-contributing premarital years get averaged in with the marital years - You can always rely on the statutory presumption that all property is marital unless proven to be non-marital " Account balance method - Account balance on date of dissolution minus balance on date of marriage - This is more accurate than the time rule method - This calculation will necessarily include gains on the pre-marital interest - There can also be problems with pre-marital loans, which will be discussed later " Asset tracing method - this is the most accurate method, but it is time consuming and expensive. - It requires all records from beginning to end! Should you divide the non-vested portion of a defined contribution plan? " Example - P has a $20,000 account balance, but only $15,000 is vested - Should spouse be entitled to non-vested portion? - What if spouse gets her share of the total account balance, but then P doesn t vest? Or vice versa? " If the plan won t divide a portion of the total account balance, you may need to convert it to a fixed dollar amount! Gains and losses - are they included? " There are two time periods concerning gains and losses - from the valuation date (usually the date of judgment) to the date the funds are segregated into an account for the spouse - from the date of segregation until the spouse withdraws the funds " Even if the Decree does not explicitly award gains and losses, the spouse is entitled to them. Bradley v. Bradley, 194 S.W.3d 902 (Mo.App. 2006); Riener v. Riener, 926 S.W.2d 6 (Mo.App. 1996) " When are gains and losses determined? Date of judgment vs. date of order vs. date of segregation? 2 Q--2
- Ordinarily, it would be from the date of judgment, or a date specified in the judgment - In rare cases, it could be from the date of the QDRO or the date the QDRO was deemed qualified by the plan administrator - Even if the parties agree there are to be no gains or losses, the plan administrator is required under ERISA to apply gains or losses once the spouse s funds are segregated into her own account " If the Decree is silent, could P insist on a gains or losses provision if it results in a loss to the spouse? " If your QDRO is silent as to gains or losses, some plans will by default include gains and losses, some will by default exclude them, so you must address them " There are rare plans which will not do gains and losses, but under ERISA they must after segregation of the funds! Fixed dollar awards - determined as of when? " Ordinarily, it would be as of the date of judgment " Does a fixed dollar award include gains and losses? - The spouse would be entitled to it as discussed previously " You may choose not do gains or losses if the parties agreed that the award was to be used for a specific purpose, such as to pay marital debt, or if it was to offset an award of other property - What is the intent? " What about when there is a delay in entering the QDRO? - Should the spouse suffer if the account increased in value, but the QDRO wasn t entered for two years? See Bradley v. Bradley, supra. - Should the participant suffer if the account decreased in value while waiting for a QDRO?! Post dissolution contributions which are attributable to the marital period - the amounts could be significant " Under some plans, it could be a whole year s worth of contributions " Many plans won t calculate these contributions - If the plan won t calculate them, you may need a later, second QDRO to capture them - The difficulty is in knowing if there are any and how much! Do you include a loan balance in the calculation of the division? " Remember that a loan is usually treated by the plan as an asset of the participant " Be sure to determine whether the loan balance is included in the statement s overall account balance - some do and some don t " Whether the loan should be included depends on what it purchased, who gets the asset and who pays the loan - Example - H takes out a $20,000 loan to pay his dissolution 3 Q--3
attorney fees. Should W receive less in the division by excluding the loan? - Example - H takes out a loan to buy W a car. W gets the car in the dissolution. Should W get to keep the car and ½ of the loan balance which is represented by the car? " When implementing the QDRO, some plans will include the loan balance by default, and some will exclude it by default " You also need to be aware of when the loan was incurred - if it was prior to marriage, you may not want to include the loan - Example - On the date of marriage, H has a 401(k) with an $80,000 actual balance and a $20,000 loan, and the QDRO says to include any loan balances, thus there is a total of $100,000. During the marriage, H makes no further contributions to his plan, but pays back the loan in full. On the date of divorce, his total account balance is still $100,000. Thus, under the account balance method, W is awarded nothing, even though $20,000 in marital funds were used to pay back his premarital loan. " Rivers v. Rivers, 21 S.W.3d 117 (Mo.App. 2000) - the trial court must determine whether a 401(k) loan existed at the time of the property division and whether the loan was a marital debt to be divided according to RSMo. 435.330.1. " If the spouse is to receive 100% of the plan - Plans will usually not transfer the outstanding loan balance - The plan may require that part of the account be held to cover the loan - Therefore, 100% may actually be far less than your client anticipated! Beware of simply offsetting 401(k) plans " Example - H has a 401(k) worth $100,000 and W has a 401k worth $50,000. Both are all marital, thus the total marital estate is $150,000. In an equal property division, each party is to get half of $150,000, or $75,000 - Scenario 1 (offset, one QDRO) - W would get $25,000 from H s plan (as of the date of dissolution), plus her $50,000 for a total of $75; H gets $75 - Scenario 2 (no offset, two QDROs) - W would get $50 from H and H would get $25 from W (as of the date of dissolution); each still gets $75 - Months later, when the QDROs are finally drafted, H s account has earned 20% and W s has earned 10%, so now H s account is $120,000 and W s is $55,000, for a total of $175,000. # However, it is only important that the division be equal as of the date of dissolution # Gains and losses would only be considered with respect to any amounts to be transferred. 4 Q--4
! You usually can't specify which funds an award comes from (e.g. tax free funds); they are usually allocated pro rata from all funds " Some plans specify which funds the money comes from " Some plans have participant-directed sub-funds, and specify that money comes from the non-self-directed funds, but if those funds are not sufficient, then P must liquidate the self-directed funds to satisfy the award! Beware of the rare plans where no immediate distribution is available to the former spouse " Check your plan documents early, or this could be an unpleasant surprise for your client, especially the receiving spouse " Examples - TIAA-CREF, MoKan Iron Workers Annuity, National Electrical Annuity Plan! Tax consequences of distribution " If the spouse rolls her funds over into an IRA or other qualified plan, there is no tax or penalty at that time " If the spouse takes a cash distribution, she will pay ordinary state and federal income tax on the gross amount of the distribution, but there is no early distribution penalty - There will be a mandatory 20% withholding for federal taxes; state withholding is optional " If the spouse rolls over, and then cashes out, then she will pay ordinary income tax and the penalty, if under age 59-1/2 (this is the general rule, but there are exceptions) " Don't let the participant just take money from the plan to give the spouse - This will be taxed to him and he will not be happy " You can t change who gets taxed, either by agreement or court order! QDRO processing fees by the plan administrator " ERISA does not, in our view, preclude the allocation of reasonable expenses attendant to QDRO or QMCSO determinations to the account of the participant or beneficiary seeking the determination. Dept. of Labor Field Assistance Bulletin 2003-3 " This only applies to defined contribution plans - Defined benefit plans cannot assess a fee to the parties for processing a QDRO " Such fees must be disclosed in advance in the Summary Plan Description " Typical fees range from $300.00 to $1800.00 " Who pays the fee, especially when it s not mentioned in the judgment? - Some plans allow the parties to allocate the fee to one or both parties, but some specify which party bears the cost. " Some plans charge a fee from the time a draft is sent, even if is never qualified 5 Q--5
" Even if you can t determine if the plan charges a fee, you should address the possibility in the judgment to avoid disputes later! Consequences of delay in submitting a QDRO " Market changes, withdrawals upon termination, loans, investment changes, death of the participant or spouse! 457 plans - many will accept DROs, but are not required to do so! Church plans don't have to follow the normal QDRO rules " They may require their own model QDRO " They may have limits, such as no survivor benefits, no lump sum payments, etc.! Employee Stock Ownership Plans (ESOPs) " The valuations are frequently nearly two years old " They may require distribution out of a cash account first - The participant may prefer this to preserve his stock account " Some plans won t allow the former spouse to stay in the plan! IRAs are not simply a defined contribution plan " There are special requirements under the tax code to transfer an IRA pursuant to a divorce " A QDRO is not legally required - but some financial institutions still require one - or your situation may require one if you can t amend the Decree or do a Nunc Pro Tunc # Example - Your decree simply awards the spouse 50% of the marital portion; many institutions will not do this calculation, therefore you may need a QDRO to specify the amount # Example - the decree doesn't specify the account numbers from which the money is being transferred, so you must do a QDRO to provide that number " Unlike a qualified retirement plan pursuant to a QDRO, the receiving spouse cannot take an immediate distribution from an IRA without penalty (unless they are over age 59-1/2) - doing a QDRO for an IRA will not allow you to avoid the early distribution penalty 6 Q--6
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