Drafting the appropriate provisions for dividing retirement plans within the Separation Agreement is a critical task that will avoid any post-decree issues relating the terms of the retirement plan division and will enable the subsequent Qualified Domestic Relations Order (“QDRO”) or other division order to be properly prepared within the terms of the parties’ agreement. Given that there are many different types of retirement plans with unique characteristics, benefit options, survivorship considerations and distribution choices, understanding the type of retirement plan you may be dealing with, and fully articulating the division within the Separation Agreement is essential.
Perhaps the most common type of retirement plan encountered is the Defined Contribution Plan. These types of plans include 401(k), IRA, 403(b), 401(a) Profit Sharing Plans and 457 Deferred Compensation Plans. These plans will have daily values that can fluctuate greatly due to stock market movements and may have loans against the account which can diminish the divisible value.
Below is a checklist for the specifics you should address when drafting Separation Agreement provisions for a Defined Contribution Plan:
· Valuation Date. This is the date the Plan will be directed to value the retirement account for the purposes of division and to exclude any employee and employer contributions made to the Plan subsequent to that date, and should be specifically referenced within the Separation Agreement. Most cases will call for the valuation date to be the date of the decree, but it could be a prior date that the parties have agreed to or a date that multiple retirement plans would be offset against each other or could be a future date if trying to award a flat dollar amount for the Former Spouse/Alternate Payee (i.e. $10,000 valued as of the date of account segregation by the QDRO)
· Pre-Marital Account Balances. Any reductions to the Plan to account for any pre-martial account balance should be listed in the Separation Agreement. A vast majority of Defined Contribution Plans will not accept a QDRO that directs the Plan to deduct an account balance as of a specific historical date, such as the day prior to the marriage. This could be 20 years in the past and the Plan may not even have records going back that far or may have switched Plan record keepers which would make obtaining this value impossible. Therefore, if there are any pre-martial amounts that need to be taken off the QDRO award, this specific dollar amount should be obtained by the Plan Participant and put in the Separation Agreement. That way the QDRO can be properly drafted to direct the Plan to take the total account balance, reduce it by the specific dollar amount representing the pre-martial portion, and then divide the account 50/50 or otherwise.
· Investment Experience. Will the assigned amount be adjusted from the valuation date for earnings, interest, gains and losses until it is transferred into the Former Spouse’s name? When dividing a retirement plan for martial property purposes, the assigned amount would typically be adjusted for investment experience. When assigning an amount for martial debt payoffs, exchange of other items of martial property (i.e. home equity) or for a lump sum spousal support payment, the assigned amount should typically be a flat dollar award and thus should not be adjusted for investment experience and should be valued as of the date of account segregation.
· Loan Treatment. Is there an outstanding loan on the account and how should it be accounted for? Loans will reduce the divisible value of the Defined Contribution Plan and can cause problems when attempting to assign a specific dollar amount or when awarding 100% of an account to a Former Spouse. If the original loan was used for marital purposes, it may be proper to have the total account balance reduced by the amount of the loan, so that both parties share in the “cost” of the loan, and then to have the “net” account balance divided. Conversely, if the loan was for an individual purpose for the account holder, it wouldn’t be fair to “penalize” the Former Spouse for this and therefore the loan balance should be added back to the total account balance when calculating the Former Spouse’s share of the Plan.
· Correct Name of the Plan. The Separation Agreement should contain the full name of the Plan for identification purposes. Merely referencing a “401(k) Plan” can be vague, especially if there are multiple retirement plans that are sponsored by one employer. Lockheed Martin, Ball Corporation and other large employers may sponsor 3 or 4 or more different 401(k) Plans depending of the employee’s status within the company. The employer’s name and full Plan title should be listed. (i.e. Ball Corporation Salary Conversion and Employee Stock Ownership Plan)
· Survivorship. There should be a provision that states the death of the account holder shall not affect the Former Spouse’s assigned amount. (i.e. In the event the Plan Participant predeceases the former spouse, such Participant’s death shall not affect the assigned benefits to the Former Spouse under this Agreement and the subsequent QDRO. To the extent required to secure the Former Spouse’s interest in the Plan, the Former Spouse shall be considered as the Surviving Spouse of the Participant under the Plan to the extent of their assigned interest as agreed to herein.)
· Actions by the Plan Participant. The Participant can thwart the division process by engaging in withdrawals, rollovers, loans and other actions that can diminish the value of the account and/or complicate the QDRO process from the time the Separation Agreement is signed through the time that the account is actually divided by a QDRO. Having a protective provision within the Agreement that bars any such actions and makes the Plan Participant accountable for any such actions is advisable.
· Waiver of Interest in Plan and Change of Beneficiary. In the event a retirement plan is not being divided and is being retained by the Plan Participant as their sole and separate property, a provision requiring the Plan Participant to change beneficiary designations shortly after the divorce is advisable in light of the recent Supreme Court decision regarding the DuPont Profit Sharing Plan. (i.e. The Participant shall have 10 days from the date of the decree to contact his/her retirement plan administrator and change their beneficiary designations under the Plan on the proper form as provided by the Plan.)
Thomas H. Toxby