Deferred compensation plans can come in many different types including pension benefits, annuities, 401(k), employee stock purchase plans, the list goes on and on. However, a QDRO can only be used to divide benefits in a “Qualified” plan, typically a defined benefit or defined contribution plan.
Defined Benefit Plan
A defined benefits plan is many times called a pension benefit. The plan uses a formula to determine the amount of the benefit, typically something like 3% @ 50. This means that the participant will receive 3% of their pay for each year worked and will be eligible for a normal retirement at 50 years old. These types of plans are typically divided pursuant to the “time rule” discussed below.
Although some employers in the private sector do offer these plans (such as grocery unions or contractor unions), many of these plans are only seen in public sector retirements such as KCERA, LACERA, CalPERS and CalSTRS.
Dividing these types of benefits can be problematic because some of these plans are covered under ERISA and some are covered under the California PERL (Public Employees Retirement Law). Most all retirement plans are covered under the REA (Retirement Equity and Security Act) to some extent.
To add to the frustration of dividing defined benefit plans, the plan retains no cash balance to be divided. This can lead to confusion because many participants are issued an annual statement which shows a “cash value” or “contribution value” amount. It depends on the specific type of plan as to whether or not the value of the plan or contributions can be taken out.
Attorneys and legal document services can create significant problems for their clients because the complex nature of defined benefit retirement plans can cause issues that will not be realized for decades; i.e. at retirement. Some of these issues include failure to provide for survivor benefits, beneficiary designations, qualified pre-retirement survivor annuities, and other benefits which may be available under the plan.
Defined Contribution Plan
A defined contribution plan is the one that carries a cash balance and, as such, these plans are sometimes referred to as ‘cash balance plans’. The employee, and sometimes the employer, contributes to the plan. Although there are others, many of us know these as a 401(k), 403(b) or 457(b) plan.
The ‘time rule’ explained above cannot be used to define the community interest in a cash balance plan because time is not a factor used to determine the amount of benefits. This type of plan uses real dollar figures and the gain or loss of the account to determine the amount of benefit.
Although these plans carry a cash balance which can be divided fairly easily in many cases, these plans are no less complex where the QDRO is concerned. If the attorney fails to take into account beneficiary designations, loan calculations, valuation date and how gains or losses are treated to name a few, the result can be a substantial loss of benefits.
Federal Retirement Benefits
Federal retirement benefits can be very complex to divide and are beyond the scope of this article. There are many different types of Federal benefits including Military benefits, tier 1 & tier 2 Railroad benefits (some of which are not divisible in a dissolution), FERS (Federal Employees Retirement System), CSRS (Civil Service Retirement System), TSP (Thrift Savings Plan) and several different hybrid types of plans that incorporate defined benefit and defined contribution components together in a single plan. Some plans even take prior military service into account in calculating the benefit. For that reason, it is important to hire an attorney who knows how to cover these issues in detail during the division of the plan so that issues do not come up later which cannot be undone.