Qualified Domestic Relations Order

A belated qualified domestic relations order (QDRO) is not barred by the contract Statute of Limitations. It may also be used to collect arrears in the ex-spouse’s share of pension payments paid to the retiring employee before the post-retirement QDRO first goes into effect. Moreover, while the employee’s post-divorce loan against the pension will be charged only against the employee’s share, the reduction in monthly benefits attributable to the employee electing after the divorce joint and survivor benefits with the next spouse is to be shared with the first spouse.

So held the Appellate Division, Second Department, in last month’s decision in Krause v. Krause. In that decision the appellate court addressed for the first time the question of whether the submission for judicial approval of a proposed QDRO, instead of a motion made on notice, may be employed by a party to a matrimonial action to obtain pension arrears. The Second Department held that a QDRO may be used for such a purpose. [A QDRO is a court decree recognized by the Internal Revenue Service that allows the division of retirement plan benefits incident to a divorce, without triggering current income taxation or early withdrawal penalties.]

Carol and Richard Kraus were married in 1973. During a portion of the marriage, the wife was employed by the State of New York as a hospital nurse. The husband was employed by the Fire Department of the City of New York (the FDNY) as a firefighter from 1977 to 2008. As a firefighter, the husband was a member of a pension system for much of the parties’ marriage. The wife was also a member of a pension system as a State employee.

In 1993, the wife commenced a divorce action. On November 1, 1995, the parties reached a settlement, pursuant to which each spouse was entitled to a marital share of the other spouse’s pension in accordance with the formula set forth in Majauskas v Majauskas (61 N.Y.2d 481). The stipulation expressly provided that “[a] Qualified Domestic Relations Order shall be prepared in the course of any divorce and forwarded to the Court for signature and filed with the Husband’s employer.” A judgment of divorce was signed by the Supreme Court on February 21, 1996.

Continue Reading Oops! I Forgot To Submit A QDRO: Delays, Arrears, Loans and Options

1040 name-statusIt’s always nice to see a court cut through the red tape and do the right thing. It doesn’t always work out that way. Here it did.

In its April 29, 2015 decision in Dickson v. Dickson, the Appellate Division, Second Department, reversed Westchester County Supreme Court Justice John P. Colangelo to solve a practical problem resulting from a mistaken assumption in a couple’s divorce settlement agreement.

That agreement provided that the wife would receive one half of the husband’s Time Warner Deferred Compensation Plan benefits. The transfer of the wife’s interest was expressly to be effectuated pursuant to a Qualified Domestic Relations Order (hereinafter QDRO) or a Domestic Relations Order (hereinafter DRO).

What is a Domestic Relations Order? It is common for employers to provide retirement or deferred compensation benefits to their employees. With appropriate plans, there are no income taxes paid by the employee now at time of the employer’s current contributions. Indeed, the employee may also contribute to such plans using “pre-tax” dollars. Income taxes will not be paid on the employer’s or employee’s contributions, or the growth thereon, until the employee withdraws funds from the plan, usually upon retirement.

Incident to a divorce, a share of such plan benefits is often to be paid over, now, to the employee’s spouse. Were that to be accomplished by the employee withdrawing the spouse’s share and paying over the funds withdrawn to the spouse, such could constitute a current invasion of the plan, a withdrawal from the fund subjecting the employee, now, to income taxes, if not early withdrawal penalties, as well.

A Domestic Relations Order is a court decree recognized by the Internal Revenue Service that allows the division of retirement plan benefits incident to a divorce, without triggering current income taxation or early withdrawal penalties. Rather, the employee’s spouse will be subjected to income taxes only when the spouse accesses that share when, as and if withdrawals are made (or if the share is not properly rolled over into an appropriate tax-deferred account of the spouse).

That is precisely what the Dicksons contemplated here. The wife was to receive half of the husband’s Time Warner Deferred Compensation Plan. A Domestic Relations Order was to be used to prevent the transfer to the wife being a taxable event. Rather, the wife would pay income taxes on the amounts she received when, as and if she did so.

However, in this instance the Time Warner Deferred Compensation Plan was not the type of benefit plan that could be made the subject of a Domestic Relations Order. Instead, for the husband to pay over to the wife her 50% share, such would be treated as a current invasion. The husband would, now, be subjected to income taxes on the amount withdrawn and paid over to the wife.

Continue Reading Divorce Agreement Reformed Where DRO Not Available To Divide Deferred Compensation Plan

In his February 26, 2013 decision in J.K.C. v T.W.C., Monroe County Supreme Court Justice Richard A. Dollinger held that an attorney could not have a charging lien under Section 475 of the Judiciary Law against the IRA received by his former client (the wife) as her marital share of the husband’s IRA. IRAs, generally, are exempt from creditor’s claims pursuant to CPLR §5205(c)(2).
The attorney had represented the wife in a divorce action. In the retainer agreement, the attorney noted that if fees were due and owing at the time of his discharge, the attorney had the right to seek a charging lien which the agreement described as “a lien upon the property that was awarded to you as a result of equitable distribution in the final order or judgment in the case.” The client also signed a “statement of client’s rights and responsibilities” which stated that a court could give the attorney a charging lien which “entitled your attorney to payment for services already rendered at the end of the case out of the proceeds of the final order or judgment.”

Justice Dollinger recognized several facts as pertinent to his analysis:

  • There was no evidence that the wife ever contested her attorney’s charges until after the judgment of divorce;
  • There was no allegation before the court that the wife ever agreed to pay the attorney’s fees specifically from the IRA account;
  • There was no evidence that the wife possesses any other assets, distributed under the divorce judgment, available to satisfy the charging lien; and
  • There was no allegation that the client, in the divorce judgment, engaged in any collusive or other improper behavior to thwart the attorney’s recovery of his fees.

Holding that a charging lien could not be asserted against an IRA, Justice Dolinger also considered:

  • The federal tax consequences on any withdrawal;
  • The penalty imposed when an unqualified withdrawals is made;
  • The actual ownership of the trust funds by the trustee;
  • The “anti-alienation” provisions of ERISA;
  • The wife’s never having “available cash proceeds” during the trustee-to-trustee transfer of the funds from the husband’s IRA to her own;
  • The broad language protecting IRA roll-overs from the reach of creditors in CPLR §5205;
  • The lack of express direction in Section 475 in the Judiciary Law to permit a charging lien against retirement funds; and
  • The lack of any provisions relating to a charging lien for attorneys fees under New York’s Domestic Relations Law.

Continue Reading Collecting Counsel Fees in Divorce Actions: Charging Lien Against IRA Denied

Retirement egg.jpg
Almost all ERISA-Qualified Defined Benefit Plans (commonly known as “pensions”) are required to offer annuities (a stream of monthly payments). Where there is no divorce, the annuity must be paid as a Qualified Joint and Survivor Annuity unless the Participant’s spouse consents in writing at the time of retirement to a different form of payment. Moreover, any plan that offers an annuity option must also provide a Qualified Pre-retirement Survivor Annuity that will pay the surviving spouse of a Participant an annuity for the spouse’s life if the Participant dies before actually retiring.
If a Participant and his spouse divorce, then the Participant’s (former) spouse may be designated as an Alternate Payee in a Qualified Domestic Relations Order (QDRO). This will enable the divorced spouse to be treated as the Participant’s “surviving spouse.” If such a QDRO is entered, the divorced spouse may insist that the Participant choose a Qualified Joint and Survivor Annuity with the divorced spouse and also insist that the divorced spouse be designated as the surviving spouse and beneficiary of a Qualified Pre-retirement Survivor Annuity.

By definition, joint and survivor payments potentially will continue longer than a payment continuing only for the life of the Participant. As a result, the monthly payments under a Qualified Joint and Survivor Annuity will always be less than the payments under a Single Life Annuity. The longer the projected duration, the lower the monthly payment level.

Because a Single Life Annuity by definition may have a shorter duration than Qualified Joint and Survivor Annuity, it will have a higher monthly payment for the same accrued benefit. The payment level for a joint annuity will depend on the ages of the two persons whose lives are being used to measure its duration.

Generally, where a Participant’s annuity is not yet in pay status, there are four ways in which that annuity may be divided between him and an Alternate Payee who is his spouse or former spouse.

A. Shared Single Life Annuity on Life of Participant: Payments will begin when the Participant chooses to retire and will end on the Participant’s death. A divorce court can divide this payment stream for the life of the Participant between the Participant and the divorced spouse.

B. Shared Qualified Joint and Survivor Annuity on the Lives of the Participant and Alternate Payee (the divorced spouse): Payments will begin when the Participant chooses to retire and will continue until the death of the last to die of the Participant and the Alternate Payee (divorced spouse). Within this option, it may be possible to choose either:
a 100% joint and survivor option, where after the first death, the full monthly benefit is paid to the survivor for the life of the survivor (until the first death, the monthly benefit is split between the Participant and the divorced spouse); or
a 50% joint and survivor option, where after the first death, half of the full monthly benefit is paid to the survivor for the life of the survivor (until the first death, the monthly benefit is split between the Participant and the divorced spouse).
C. Shared Qualified Joint and Survivor Annuity on the Lives of Participant and the Participant’s New Spouse: If the Participant has remarried, the Participant may choose or be forced to choose (if his current spouse will not sign a waiver) a Qualified Joint and Survivor Annuity with the Participant’s new spouse. Payments under such an annuity may still be divided between the Participant and the divorced spouse, and such payments would continue until either the death the death of the last to die of the Participant or the Participant’s new spouse.
D. Separate Interest Approach: Single Life Annuity on Life of Alternate Payee: This is the choice most divorced spouses prefer. It gives the Alternate Payee complete control over the timing of the commencement of the annuity payments, and the payments will not terminate until the divorced spouse’s death.
The Second Department in McVeigh held that a 50% Shared Qualified Joint and Survivor Annuity on the Lives of the Participant and Alternate Payee (the divorced spouse) was to be chosen, unless the Participant (here the husband) elected to insure his wife’s continuing benefit in the event the husband predeceased the wife.
The appellate court was careful to point out that any Qualified Domestic Relations Order must specify that the wife is to receive no more than her 50% share of the marital portion of the husband’s pension. That marital portion is the wife’s awarded equitable share (here 50%) of a fraction of the pension benefit determined by dividing the total months prior to the commencement of the divorce action that the participant was in the pension plan and the parties were married by the total number of months the participant is in the plan prior to retirement. This formula was adopted by the Court of Appeals in Majauskas v. Majauskas, 61 N.Y.2d 481, 474 N.Y.S.2d 699 (1984).
The 50% Joint and Survivor Option does, as the Second Department noted in McVeigh (and as the Third Department noted in Erickson v. Erickson, 281 A.D.2d 862, 723 N.Y.S.2d 521 [2001]), come closer to continue the spouse’s benefit in the event the participant predeceases the spouse.
However, why should the Participant, alone, bear the cost of insuring out of this option. As each spouse will benefit by the increased monthly payment incident to electing the Single Life Annuity, why should not the spouse bear the Majauskas share of the cost of a life insurance policy to provide the equivalent of continuing payments to the spouse if the spouse survives the participant. Doing so gives both parties the incentive to choose the option that is right for them.

Absent other agreement between the parties, a divorce court must require a pension plan participant to elect the 50% joint and survivor option (if) offered by the participant’s pension fund. Alternatively, the participant may provide life insurance for the benefit of the spouse sufficient to pay the spouse’s share of the participant’s pension in the event the participant pre-deceases the spouse. So held the Appellate Division, Second Department, in its October 24, 2012 decision in McVeigh v. Curry. In doing so, the Second Department modified the decision of Rockland County Supreme Court Justice Linda S. Jamieson to require the participant’s election of the 100% joint and survivor option (or provide suitable life insurance).

 

By way of background, almost all ERISA-Qualified Defined Benefit Plans (commonly known as “pensions”) are required to offer annuities (a stream of monthly payments). Where there is no divorce, the annuity must be paid as a Qualified Joint and Survivor Annuity unless the Participant’s spouse consents in writing at the time of retirement to a different form of payment. Moreover, any plan that offers an annuity option must also provide a Qualified Pre-retirement Survivor Annuity that will pay the surviving spouse of a Participant an annuity for the spouse’s life if the Participant dies before actually retiring.

 

Where there is a divorce, the Participant’s (former) spouse may be designated as an Alternate Payee in a Qualified Domestic Relations Order (QDRO). This will enable the divorced spouse to be treated as the Participant’s “surviving spouse.” If such a QDRO is entered, the divorced spouse may insist that the Participant choose a Qualified Joint and Survivor Annuity with the divorced spouse and also insist that the divorced spouse be designated as the surviving spouse and beneficiary of a Qualified Pre-retirement Survivor Annuity.

 

By definition, as joint and survivor payments will continue potentially longer than payments continuing only for the life of the Participant. As a result, the monthly payments under a Qualified Joint and Survivor Annuity will always be less than the payments under a Single Life Annuity. The longer the projected duration, the lower the monthly payment level.

 

Because a Single Life Annuity by definition may have a shorter duration than Qualified Joint and Survivor Annuity, it will have a higher monthly payment for the same accrued benefit. The payment level for a joint annuity will depend on the ages of the two persons whose lives are being used to measure its duration.

Continue Reading Mandating a Pension's 50% Joint and Survivor Option in a Divorce

Retirement Plan.jpgAfter 36 years of family law practice, I pride myself on having a good idea of what I don’t know.

The good news is that I can reach out for the help needed to make sure the bases are covered when drafting a divorce settlement agreement.  Matrimonial litigation has spawned a host of forensic specialities eager to offer proof on issues and to implement settlements and awards.  They’re also there to assist a settlement.

Consider pensions.  There are plans covered by the Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry. There are also private plans which are not covered by ERISA, military and other governmental plans, etc.

Generally, pension rights or benefits accumulated during a marriage are to be divided on divorce, whether or not the pension is in “pay status.”  However, unlike dividing a bank account, splitting one spouse’s retirement benefits is not as simple as writing a check.  A Domestic Relations Order (DRO) or a Qualified Domestic Relations Order (QDRO) is necessary to effectively transfer rights to the employee’s spouse.  Such an Order may also be used to divide I.R.A.s, 401(k)s, and other assets without triggering a taxable event.  Without such an Order, the “owner” might be exposed an income tax liability were the plan to be accessed to get the money to pay the spouse.

Pension plans carry benefits beyond the monthly payment after retirement.  There may be health and/or death benefits.  Elections may be allowed which significantly effect available benefits. May a spouse collect before the employee retires?  May a joint survivorship option be pursued? Keeping track of what those benefits may be for any particular plan and how to divide them is a specialty unto itself.

Consider the March 15, 2011 decision of the Second Department in Coulon v. Coulon. In that case, the parties’ settlement provided for the wife to receive a share of the husband’s pension. However, the stipulation was silent with regard to the plan’s death benefits.  The wife was not, by the settlement agreement, entitled to be designated as a surviving spouse under the pre-retirement and post-retirement survivor annuity provisions of the plan.  The court held the wife was not entitled to the any portion of the plan’s death benefits.

A Qualified Domestic Relations Order . . . entered pursuant to a stipulation of settlement ‘can convey only those rights to which the parties stipulated as a basis for the judgment’. . . . Thus, a court cannot issue a QDRO more expansive or ‘encompassing rights not provided in the underlying stipulation.’

When drafting settlement agreements, I often place a call to Bill Burns of Lexington Pension Consultants, Inc. Since I will probably use Lexington after the agreement is signed to draft the Plan and arrange for its approval by the Plan Administrator, on occasion I will call Lexington to make sure that I am made aware of the plan options in advance of drafting the settlement agreement.  I may have Lexington review my proposed agreement provision.  Lexington, itself, markets its service of providing the specific information needed to structure a settlement that addresses all pension/retirement assets, while assuring that the terms of the agreement will conform to the rules of the particular retirement plan.  There certainly are other specialists, but I have worked with Lexington for years; and if it ain’t broke, I won’t fix it.

Making use of the forensic specialists to craft the setllement agreement is cost efficient for the client and better assures that disputes will be avoided in the future.