Private & Public DCP
Defined Contribution QDROs Explained
A defined contribution plan is a plan generally governed by ERISA and/or the IRC that provides for contributions to be deposited directly to individual account(s) that are established and maintained for each plan participant. The contributions to the plan may be made by the employee or the employer, or some combination of both. Generally, the form of payment for a defined contribution plan is a single lump sum payment of the account balance. The account balance is made up of the contributions made to the plan along with the investment earnings and/or losses on those contributions. Investment choices are elected by the participant, and/or the employer in certain cases (i.e. profit sharing plan). Payment can be made to the employee, when they retire, or otherwise terminate employment with the employing company.
Both private and public employers offer employees defined contribution plans. Defined contribution plans for private employers are often referred to as 401(k) plans, profit sharing plans, thrift plans, retirement savings plan, money purchase pension plans, employee stock ownership plans (ESOPs) , or deferred compensation plans. Defined contribution plans for public employers and nonprofits are often referred to as a 401(k), savings plans, 401(a) plans, 457 or 457(b) plans, 403(b) plans, tax sheltered annuities, thrift plans, or deferred compensation plans.
Division Options
QDROCounsel provides the following different drafting options to divide a defined contribution plan:
Division method: % as of a specific date, plus investment earnings and/or losses thereon
Language: The following language or similar language is in most (Q)DROs:
This Order assigns to Alternate Payee [50]% of the Participant’s total vested account balance accumulated under the Plan effective as of the Plan valuation date closest to [insert applicable marital division date based on state law, court order or parties’ agreement] (“Date of Division”).
Explanation: The most common award (Default Option) is 50% of the Participant’s total vested account balance as of the valuation date closest to the applicable marital division date based on state law, court order or parties’ agreement (Date of Division), plus investment earnings and/or losses thereon. The Default Option also excludes any loans before Date of Division which in effect divides any loans at Date of Division equally between the parties. For a more detailed explanation regarding loans, see below. Use the Default Option if there is no separate property interest before the Date of Division and any loans at Date of Division are to be divided equally between the parties.
Select Option 1 (and not the Default Option) if one of the following applies:
- The PERCENTAGE being award to Alternate Payee is NOT 50%.
- The division date is NOT the applicable marital division date based on your state’s law, court order or the parties’ agreement (Date of Division).
- The Alternate Payee’s share should NOT be reduced for the value of any loan balance at Date of Division and therefore the value of any loan should be INCLUDED at Date of Division.
- There is an equalization and offset or separate property interest in the Plan before the Date of Division.
If there is a separate property interest in the Plan before Date of Division, for most states, in order to determine the marital property interest, the Plan will need to be valued from date of marriage through the applicable marital division date based on your state’s law (Date of Division) taking into account any separate property interest plus accruals thereon. Our Calculation Suite will calculate the marital property interest when there is separate property in a defined contribution plan.
Note for a few states, the marital property interest includes all investment earnings and/or losses on the separate property interest. In that situation, the marital property interest is the marital property interest at the Date of Division less the separate property interest. If you are not sure if your state’s law includes accruals on separate property, contact QDROCounsel Support.
Note that the valuation date is the date closest to “Date of Division.” Defined contribution plans value daily, monthly, quarterly and yearly depending on the plans. Most small employer profit sharing plans will ONLY value yearly. If a plan values yearly, the parties may want to consider conducting their valuation of the awarded amount to the date closest to the plan’s yearly valuation date. See below for further explanations regarding profit sharing plans.
Vesting signifies ownership. If an employee is 100% vested in their defined contribution retirement plan, then the employee owns the entire balance and it cannot be taken away by the employer. If the entire account balance is not vested, then the unvested portion of the account will vest at a future date assuming the employee satisfies the vesting requirements. The employee will not own the unvested portion until it is vested. If the employee leaves employment before fully vested, any unvested portion will be forfeited.
Most participants in a defined contribution plan are fully vested in the employee contributions immediately and the employer contributions typically vest soon after a participant begins their participation in the plan. If not, participants are likely fully vested by the time the (Q)DRO is implemented. The issue of the participant not being fully vested is more common in the division of profit sharing plans and ESOPs. It also can be an issue when a company’s matching contributions have not yet fully vested at date of divorce although the participant’s contributions are 100% vested. The vesting requirements are plan specific and can be found in the Plan’s Summary Plan Description.
To check if a participant is fully vested, you will need a copy of the participant’s current plan statement. The statement should indicate any portion of the total account balance that is unvested.
Most (Q)DRO awards MUST BE from the total vested account balance. Most plans will require that the alternate payee’s award in the (Q)DRO be a percentage or amount of the participant’s “total vested account balance” to ensure adequate funds are payable at the Date of Division. For that reason, our (Q)DRO forms award the alternate payee’s share from the total vested account balance.
In most jurisdictions, the alternate payee should receive the marital interest in any unvested balance upon vesting. Most states include both vested and unvested account balances as marital property. If the alternate payee should receive alternate payee’s community interest in the unvested balance once vested, then the following are possible ways parties resolve the “vesting” issue :
- If the parties agree that participant will likely vest in the unvested portion, the Calculation Suite can determine the amount to award alternate payee in the (Q)DRO based on participant’s total account balance (including the unvested portion) and then the (Q)DRO can be drafted with a set amount from the total vested account balance provided that the award does not exceed the vested balance. As a result, upon vesting, the participant will be allocated 100% of the unvested portion as participant’s separate property.
- The parties can reserve jurisdiction over the remaining unvested portion until such time as it does vest. And then a supplemental (Q)DRO can be prepared at that time with a set amount award of the then vested portion.
- Delete in the (Q)DRO the word “vested” from the phrase “total vested account balance” and add the following paragraph after the award to the alternate payee: “The Alternate Payee will be vested in the portion of the total account balance assigned to Alternate Payee to the extent the Participant is vested in the account and will vest in the unvested portion, if any, if and to the extent the Participant vests in Participant’s account.” This paragraph will order the plan to allocate the vested portion now to the alternate payee and allocate the unvested portion to the alternate payee once the participant becomes vested in that unvested portion. Except for small profit sharing plans and ESOPs, most defined contribution plans will NOT accept this language.
If the alternate payee should only be awarded the total vested account balance in the (Q)DRO, then there is no issue and any unvested balance will remain the participant’s separate property.
Language: The following language or similar language is in most (Q)DROs:
Alternate Payee’s Share shall also be entitled to any interest and investment earnings and/or losses attributable to Alternate Payee’s Share for periods subsequent to the Date of Division until the date of account segregation.
Explanation: In most cases, the plan will calculate investment earnings and/or losses on the alternate payee’s marital interest from the Date of Division until the date of distribution to the alternate payee, so any separate property accrued after Date of Division will remain the separate property of the participant. On some occasions, the plan will calculate earnings and/or losses only from a date after the Date of Division. We see this occur when the plan changes custodians, or perhaps the plan was involved in a corporate merger. In most cases, you will NOT know if there is an issue with whether the plan can calculate investment earnings and/or losses until you send a proposed (Q)DRO dividing as of the Date of Division to the plan for preapproval. For this reason, we strongly advise you to seek preapproval of the (Q)DRO before filing. The plan will tell you if there is an issue and provide the earliest valuation date it will calculate investment earnings and/or losses. You can then use the Calculation Suite to determine the alternate payee’s marital interest as of the date the plan will calculate investment earnings and/or losses if warranted and revise the proposed (Q)DRO.
Almost all states find that alternate payee’s marital interest includes any investment earnings and/or losses on the percentage awarded to alternate payee after Date of Division. The funds invested are a moving target. If the account balance has risen after Date of Division, both parties should benefit from that gain. Likewise, should the account balance fall after Date of Division, both parties suffer that loss. QDROCounsel forms in Option 1 default to include any investment earnings and/or losses from Date of Division to date of distribution to the alternate payee. If you want to award a percentage or set amount as of date of account segregation, select Option 2 or Option 4.
There may be issues with the small private employer profit sharing plans calculating investment earnings and/or losses. See the discussion below.
The pro-rata award does not apply to any self-directed brokerage accounts (also referred to as brokerage window). A brokerage account allows participants to transfer money within their 401(k) plan to specific investments not considered “core” investments previously selected by employer’s fiduciary. Investments held within a brokerage account must be liquidated and transferred into the core investments to the extent required to satisfy alternate payee’s award. The alternate payee’s share will be paid pro rata from the participant’s accounts that are not self-directed brokerage accounts.
Most plans will calculate the total vested account balance awarded to an alternate payee and investment earnings and/or losses thereon from the plan valuation date closest to a specific date in the (Q)DRO (Date of Division). For most plans, the closest plan valuation date to the Date of Division will be that actual date in the (Q)DRO or the closest month end or quarter end date.
For the small private employer profit sharing plans, the plan valuation date is often yearly (every “Plan Year”). This may be an issue for both parties depending on the facts of the case. For example, if the Date of Division in the QDRO is 06/30/2017 and the Plan Year is every 12/31, the closest valuation date is 12/31/2016. The alternate payee’s share would include contributions allocated for Plan Year 2016 but would not include any contributions made for Plan Year 2017. However, if the Date of Division in the QDRO is 07/01/2017, the alternate payee’s share would include all contributions made for Plan Year 2017. For a small profit sharing plan, you should contact that plan’s third party administrator (person that files the IRC 5500 forms) to determine whether the plan will ONLY value an alternate payee’s interest on a yearly basis. If an issue, you should contact QDROCounsel Support for assistance in determining Alternate Payee’s share through the closest Plan Year date following the Date of Division in the QDRO.
Language: The following language or similar language is in most (Q)DROs:
In the event that any contributions were made to the Participant’s account(s) after the Date of Division, but that are attributable to periods before the Date of Division, then Participant’s total vested account balance shall further include such contributed amounts.
Explanation: This paragraph is included so that in the event that any contributions were made to the participant’s account after the Date of Division, but that are attributable to periods before the Date of Division, then the total vested account balance will include such contributed amounts.
Benefits paid post Date of Division attributable to periods before Date of Division are generally considered marital property to the extent, but only to the extent, a right to them accrued during the marriage and prior to Date of Division. While there may be disagreement as to what “accrued” means in various contexts, it does not have anything to do with the source or timing of contributions necessary to fund the plan’s corresponding obligations. Contributions are frequently made after the close of the plan year in which the benefits being funded were accrued, sometimes even years after.
Accordingly, unless agreed to by the parties or otherwise ordered by the court, we include this paragraph to include post Date of Division contributions attributable to periods before Date of Division as part of alternate payee’s award. This issue comes up with profit sharing plans which may be funded after Date of Division for the period before Date of Division.
Language: The following language or similar language is in most (Q)DROs:
The Alternate Payee’s Share of the benefits shall be withdrawn from each of the Participant’s investment funds on a pro rata basis, and invested in the same fund(s) in the Alternate Payee’s account.
Explanation: Almost all plans interpret ERISA that the division of alternate payee’s share shall be withdrawn from each of the participant’s investment funds on a pro rata or proportionate basis, and invested in the same fund(s) in the alternate payee’s segregated account. Most profit sharing plans will divide pro rata as well unless their plan rules state otherwise. Note some plans require a pro rata award to alternate payee and will not allow specific investment sources to be excluded.
Note: The pro-rata award does not apply to any self-directed brokerage accounts (also referred to as brokerage window). A brokerage account allows participants to transfer money within their 401(k) plan to specific investments not considered “core” investments previously selected by employer’s fiduciary. Investments held within a brokerage account must be liquidated and transferred into the core investments to the extent required to satisfy alternate payee’s award. The alternate payee’s share will be paid pro rata from the participant’s accounts that are not self-directed brokerage accounts.
Language: The following language or similar language is in most (Q)DROs:
Alternate Payee’s Share shall be segregated and separately maintained in an Account(s) established on Alternate Payee’s behalf and shall be credited with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to Alternate Payee.
Explanation: Under ERISA, a plan has an obligation, if possible, to separately maintain alternate payee’s share in a separate account established on alternate payee’s behalf and crediting the alternate payee’s share with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to alternate payee.
For small employer profit sharing plans, the funds are held in a pooled account which cannot be separately segregated for an alternate payee so no separate account is established. Funds for a profit sharing plan are held in a pooled trust account (“Trust Account”). Some profit sharing plans want specific language in the QDRO to reflect certain plan terms regarding “pooled accounts.” If you are dividing a small private employer profit sharing plan, be sure to send to the Third Party Administrator (person that files the IRC 5500 forms) for preapproval. It may be that the plan will want modifications to the QDRO to reflect certain plan terms regarding “pooled accounts.” If that is the case, contact QDROCounsel Support for additional assistance.
Language: The following language or similar language is in most (Q)DROs:
Should Participant’s accounts include any outstanding loans to Participant at the Date of Division, the value of the loan balance at Date of Division will be excluded for purposes of calculating the account balance to be divided.
Explanation: Regardless of whether there was a loan balance against the plan at the applicable marital division date based on your state’s law (Date of Division), there must be a paragraph regarding how to handle any possible loans in the (Q)DRO when a percentage is awarded.
The presumption for most states, is that if there is a loan taken before the applicable marital division date (Date of Division), it is a marital debt and therefore the value of the loan should be excluded from the total account balance. Excluding the loan value at Date of Division divides any loans at Date of Division equally between the parties. For both parties to be responsible for any loan, select the option to exclude a loan when drafting the (Q)DRO. You should select this option even if you do not know if there is a loan balance at Date of Division, unless the parties agree or the court orders to include the value of the loan balance at Date of Division. The default in our (Q)DROs is to exclude the loan.
EXAMPLE: What does it mean to “exclude” versus “include” any loan balance at Date of Division?
To exclude a loan means that the Participant’s account balance on the date of division is reduced by the value of any outstanding loan prior to calculating Alternate Payee’s share of the benefits. For example, if the total account balance is $15,000 with a $5,000 loan, the loan value of $5,000 is “excluded” such that an alternate payee would receive the alternate payee’s percentage share of $10,000 as opposed to the alternate payee’s percentage share of $15,000. The obligation to repay any loan remains solely with the Participant.
To include a loan means that the Participant’s account balance on the Date of Division is not reduced by the value of any outstanding loan prior to calculating Alternate Payee’s share of the benefits. Parties are less likely to “include” the loan taken during the marriage because then it is NOT treated as marital debt. The Participant is responsible for the entire loan and the Alternate Payee receives his/her share as if no loan was ever taken. For example, if a participant’s total account balance is $15,000 with a $5,000 loan, the loan value of $5,000 is “included” such that an alternate payee would receive the alternate payee’s percentage share of $15,000 as opposed to the alternate payee’s percentage share of $10,000. The obligation to repay any loan remains solely with the Participant.
In the (Q)DRO, most plans will require language regarding how to handle loans when a percentage is awarded. This is true even if a loan does not exist. If a plan does not require a paragraph regarding loans, it is critical to include one regardless. If the loan allocation is not in the (Q)DRO, the default allocation by the plan may not be what the parties intend. Some plans will default to include the balance of the loan if not instructed otherwise. In such cases, if you are not specific as to how the loan should be addressed it can result in the alternate payee’s marital share not being reduced by alternate payee’s share of the loan obligation. If the participant took the loan before date of marriage, whether the loan should be treated as marital or separate property is based on your state’s law.
Division method: % as of a date of account segregation, plus investment earnings and/or losses thereon
Language: The following language or similar language is in most (Q)DROs:
This Order assigns to Alternate Payee 50% of the Participant’s total vested account balance accumulated under the Plan effective as of the date a separate account is established for Alternate Payee (“Date of Division”).
Explanation: Option 2 is used most often when contributions were only made to the plan between the Date of Marriage and after the applicable marital division date based on your state’s law, court order or the parties’ agreement (Date of Division) and (2) the participant did not rollover any separate property funds to the plan. Therefore 100% of the plan is community/marital property. Generally, the award should be 50% to the alternate payee and “exclude” any loan.
A division as of date of account segregation is easier for the plan to implement and for the parties to understand. But, you can also select the Option 1 or the Default Option (absent any loan issues) and end up with the same award as Option 2. See below for a detailed discussion regarding loan division.
WARNING: Do not select Option 2 if you believe that the participant moved or will move funds after the applicable marital division date based on your state’s law (Date of Division) but before the (Q)DRO is implemented. If that occurs, the alternate payee’s marital interest will be negatively impacted with the loss of those funds. If the foregoing situation may be an issue, you should select the Default Option or Option 1 in which you can input a PERCENTAGE of the participant’s vested total account balance as of a SPECIFIC DATE, plus investment earnings and/or losses thereon
Vesting signifies ownership. If an employee is 100% vested in their defined contribution retirement plan, then the employee owns the entire balance and it cannot be taken away by the employer. If the entire account balance is not vested, then the unvested portion of the account will vest at a future date assuming the employee satisfies the vesting requirements. The employee will not own the unvested portion until it is vested. If the employee leaves employment before fully vested, any unvested portion will be forfeited.
Most participants in a defined contribution plan are fully vested in the employee contributions immediately and the employer contributions typically vest soon after a participant begins their participation in the plan. If not, participants are likely fully vested by the time the (Q)DRO is implemented. The issue of the participant not being fully vested is more common in the division of profit sharing plans and ESOPs. It also can be an issue when a company’s matching contributions have not yet fully vested at date of divorce although the participant’s contributions are 100% vested. The vesting requirements are plan specific and can be found in the Plan’s Summary Plan Description.
To check if a participant is fully vested, you will need a copy of the participant’s current plan statement. The statement should indicate any portion of the total account balance that is unvested.
Most (Q)DRO awards MUST BE from the total vested account balance. Most plans will require that the alternate payee’s award in the (Q)DRO be a percentage or amount of the participant’s “total vested account balance” to ensure adequate funds are payable at the Date of Division. For that reason, our (Q)DRO forms award the alternate payee’s share from the total vested account balance.
In most jurisdictions, the alternate payee should receive the marital interest in any unvested balance upon vesting. Most states include both vested and unvested account balances as marital property. If the alternate payee should receive alternate payee’s community interest in the unvested balance once vested, then the following are possible ways parties resolve the “vesting” issue :
- If the parties agree that participant will likely vest in the unvested portion, the Calculation Suite can determine the amount to award alternate payee in the (Q)DRO based on participant’s total account balance (including the unvested portion) and then the (Q)DRO can be drafted with a set amount from the total vested account balance provided that the award does not exceed the vested balance. As a result, upon vesting, the participant will be allocated 100% of the unvested portion as participant’s separate property.
- The parties can reserve jurisdiction over the remaining unvested portion until such time as it does vest. And then a supplemental (Q)DRO can be prepared at that time with a set amount award of the then vested portion.
- Delete in the (Q)DRO the word “vested” from the phrase “total vested account balance” and add the following paragraph after the award to the alternate payee: “The Alternate Payee will be vested in the portion of the total account balance assigned to Alternate Payee to the extent the Participant is vested in the account and will vest in the unvested portion, if any, if and to the extent the Participant vests in Participant’s account.” This paragraph will order the plan to allocate the vested portion now to the alternate payee and allocate the unvested portion to the alternate payee once the participant becomes vested in that unvested portion. Except for small profit sharing plans and ESOPs, most defined contribution plans will NOT accept this language.
If the alternate payee should only be awarded the total vested account balance in the (Q)DRO, then there is no issue and any unvested balance will remain the participant’s separate property.
Language: The following language or similar language is in most (Q)DROs:
The Alternate Payee’s Share of the benefits shall be withdrawn from each of the Participant’s investment funds on a pro rata basis, and invested in the same fund(s) in the Alternate Payee’s account.
Explanation: Almost all plans interpret ERISA that the division of alternate payee’s share shall be withdrawn from each of the participant’s investment funds on a pro rata or proportionate basis, and invested in the same fund(s) in the alternate payee’s segregated account. Most profit sharing plans will divide pro rata as well unless their plan rules state otherwise. Note some plans require a pro rata award to alternate payee and will not allow specific investment sources to be excluded.
The pro-rata award does not apply to any self-directed brokerage accounts (also referred to as brokerage window). A brokerage account allows participants to transfer money within their 401(k) plan to specific investments not considered “core” investments previously selected by employer’s fiduciary. Investments held within a brokerage account must be liquidated and transferred into the core investments to the extent required to satisfy alternate payee’s award. The alternate payee’s share will be paid pro rata from the participant’s accounts that are not self-directed brokerage accounts.
Language: The following language or similar language is in most (Q)DROs:
Alternate Payee’s Share shall be segregated and separately maintained in an Account(s) established on Alternate Payee’s behalf and shall be credited with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to Alternate Payee.
Explanation: Under ERISA, a plan has an obligation, if possible, to separately maintain alternate payee’s share in a separate account established on alternate payee’s behalf and crediting the alternate payee’s share with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to alternate payee.
For small employer profit sharing plans, the funds are held in a pooled account which cannot be separately segregated for an alternate payee so no separate account is established. Funds for a profit sharing plan are held in a pooled trust account (“Trust Account”). Some profit sharing plans want specific language in the QDRO to reflect certain plan terms regarding “pooled accounts.” If you are dividing a small private employer profit sharing plan, be sure to send to the Third Party Administrator (person that files the IRC 5500 forms) for preapproval. It may be that the plan will want modifications to the QDRO to reflect certain plan terms regarding “pooled accounts.” If that is the case, contact QDROCounsel Support for additional assistance.
Language: The following language or similar language is in most (Q)DROs:
Should Participant’s accounts include any outstanding loans to Participant at the Date of Division, the value of the loan balance at Date of Division will be excluded for purposes of calculating the account balance to be divided.
Explanation: Regardless of whether there was a loan balance against the plan at the applicable marital division date based on your state’s law (Date of Division), there must be a paragraph regarding how to handle any possible loans in the (Q)DRO when a percentage is awarded.
The presumption for most states, is that if there is a loan taken before the applicable marital division date (Date of Division), it is a marital debt and therefore the value of the loan should be excluded from the total account balance. Excluding the loan value at Date of Division divides any loans at Date of Division equally between the parties. For both parties to be responsible for any loan, select the option to exclude a loan when drafting the (Q)DRO. You should select this option even if you do not know if there is a loan balance at Date of Division, unless the parties agree or the court orders to include the value of the loan balance at Date of Division. The default in our (Q)DROs is to exclude the loan.
EXAMPLE: What does it mean to “exclude” versus “include” any loan balance at Date of Division?
To exclude a loan means that the Participant’s account balance on the date of division is reduced by the value of any outstanding loan prior to calculating Alternate Payee’s share of the benefits. For example, if a participant’s total account balance is $15,000 with a $5,000 loan, the loan value of $5,000 is “excluded” such that an alternate payee would receive the alternate payee’s share of $10,000 as opposed to the alternate payee’s share of $15,000. The obligation to repay any loan remains solely with the Participant.
To include a loan means that the Participant’s account balance on the Date of Division is not reduced by the value of any outstanding loan prior to calculating Alternate Payee’s share of the benefits. Parties are less likely to “include” the loan taken during the marriage because then it is NOT treated as marital debt. The Participant is responsible for the entire loan and the Alternate Payee receives his/her share as if no loan was ever taken. For example, if a participant’s total account balance is $15,000 with a $5,000 loan, the loan value of $5,000 is “included” such that Alternate Payee would receive the alternate payee’s share of $15,000 as opposed to the alternate payee’s share of $10,000. The obligation to repay any loan remains solely with the Participant.
In the (Q)DRO, most plans will require language regarding how to handle loans when a percentage is awarded. This is true even if a loan does not exist. If a plan does not require a paragraph regarding loans, it is critical to include one regardless. If the loan allocation is not in the (Q)DRO, the default allocation by the plan may not be what the parties intend. Some plans will default to include the balance of the loan if not instructed otherwise. In such cases, if you are not specific as to how the loan should be addressed it can result in the alternate payee’s marital share not being reduced by alternate payee’s share of the loan obligation. If the participant took the loan before date of marriage, whether the loan should be treated as marital or separate property is based on your state’s law.
You may want to include the loan with Option 2 only if the participant may have taken a loan after Date of Division! If you selected Option 2 and the participant took out a loan after Date of Division, that loan is NOT marital debt and the alternate payee should not pay for it. Including the loan will ensure that any post Date of Division loan will be allocated to the participant in its entirety. However, check to make sure that there was no loan taken before Date of Division. If there was a loan taken before Date of Division, you should select Option 1 and NOT Option 2 and exclude the loan. Then any post Date of Division loan will be the participant’s responsibility.
Division method: $ as of a specific date, plus investment earnings and/or losses thereon
Language: The following language or similar language is in most (Q)DROs:
This Order assigns to Alternate Payee the amount of $[insert amount] from the Participant’s total vested account balance accumulated under the Plan effective as of the Plan valuation date closest to [insert applicable marital division date based on state law, court order or parties’ agreement] (“Date of Division”).
Explanation: Select Option 3 when the parties agree or the court so orders an amount to be awarded as of a specific date, plus investment earnings and/or losses thereon. Option 3 generally is selected when there is an equalization and offset or separate property calculation.
If there is a separate property interest in the Plan before Date of Division, for most states, in order to determine the marital property interest, the Plan will need to be valued from date of marriage through the applicable marital division date based on your state’s law (Date of Division) taking into account any separate property interest plus accruals thereon. Our Calculation Suite will calculate the marital property interest when there is separate property in a defined contribution plan.
Note for a few states, the marital property interest includes all investment earnings and/or losses on the separate property interest. In that situation, the marital property interest is the marital property interest at the Date of Division less the separate property interest. If you are not sure if your state’s law includes accruals on separate property, contact QDROCounsel Support.
Note that the valuation date is the date closest to “Date of Division.” Defined contribution plans value daily, monthly, quarterly and yearly depending on the plans. Most small employer profit sharing plans will ONLY value yearly. If a plan values yearly, the parties may want to consider conducting their valuation of the awarded amount to the date closest to the plan’s yearly valuation date. See below for further explanations regarding profit sharing plans.
Language: The following language or similar language is in most (Q)DROs:
Alternate Payee’s shall also be entitled to any interest and investment earnings and/or losses attributable to Alternate Payee’s Share for periods subsequent to the Date of Division until the date of account segregation.
Explanation: In most cases, the Plan will calculate investment earnings and/or losses on the alternate payee’s marital interest from the Date of Division until the date of distribution to the alternate payee, so any separate property accrued after Date of Division will remain the separate property of the participant. On some occasions, the Plan will calculate earnings and/or losses only from a date after the Date of Division. We see this occur when the plan changes custodians, or perhaps the plan was involved in a corporate merger. In most cases, you will NOT know if there is an issue with whether the plan can calculate investment earnings and/or losses until you send a proposed (Q)DRO dividing as of the Date of Division to the plan for preapproval. For this reason, we strongly advise you to seek preapproval of the (Q)DRO before filing. The plan will tell you if there is an issue and provide the earliest valuation date it will calculate investment earnings and/or losses. You can then use the Calculation Suite to determine the alternate payee’s marital interest as of the date the plan will calculate investment earnings and/or losses if warranted and revise the proposed (Q)DRO.
Almost all states find that alternate payee’s marital interest includes any investment earnings and/or losses on the percentage awarded to alternate payee after Date of Division. The funds invested are a moving target. If the account balance has risen after Date of Division, both parties should benefit from that gain. Likewise, should the account balance fall after Date of Division, both parties suffer that loss. QDROCounsel forms under Option 3 default to include any investment earnings and/or losses from Date of Division to date of distribution to the alternate payee. If you want to award a specific amount with no investment earnings and/or losses, select Option 4.
There may be issues with the small private employer profit sharing plans calculating investment earnings and/or losses. See the discussion below.
Most plans will calculate the total vested account balance awarded to an alternate payee and investment earnings and/or losses thereon from the plan valuation date closest to a specific date in the (Q)DRO (Date of Division). For most plans, the closest plan valuation date to the Date of Division will be that actual date in the (Q)DRO or the closest month end or quarter end date.
For the small private employer profit sharing plans, the plan valuation date is often yearly (every “Plan Year”). This may be an issue for both parties depending on the facts of the case. For example, if the Date of Division in the QDRO is 06/30/2017 and the Plan Year is every 12/31, the closest valuation date is 12/31/2016. The alternate payee’s share would include contributions allocated for Plan Year 2016 but would not include any contributions made for Plan Year 2017. However, if the Date of Division in the QDRO is 07/01/2017, the alternate payee’s share would include all contributions made for Plan Year 2017. For a small profit sharing plan, you should contact that plan’s third party administrator (person that files the IRC 5500 forms) to determine whether the plan will ONLY value an alternate payee’s interest on a yearly basis.
Language: The following language or similar language is in most (Q)DROs:
The Alternate Payee’s Share of the benefits shall be withdrawn from each of the Participant’s investment funds on a pro rata basis, and invested in the same fund(s) in the Alternate Payee’s account.
Explanation: Almost all plans interpret ERISA that the division of alternate payee’s share shall be withdrawn from each of the participant’s investment funds on a pro rata or proportionate basis, and invested in the same fund(s) in the alternate payee’s segregated account. Most profit sharing plans will divide pro rata as well unless their plan rules state otherwise. Note some plans require a pro rata award to alternate payee and will not allow specific investment sources to be excluded.
The pro-rata award does not apply to any self-directed brokerage accounts (also referred to as brokerage window). A brokerage account allows participants to transfer money within their 401(k) plan to specific investments not considered “core” investments previously selected by employer’s fiduciary. Investments held within a brokerage account must be liquidated and transferred into the core investments to the extent required to satisfy alternate payee’s award. The alternate payee’s share will be paid pro rata from the participant’s accounts that are not self-directed brokerage accounts.
Language: The following language or similar language is in most (Q)DROs:
Alternate Payee’s Share shall be segregated and separately maintained in an Account(s) established on Alternate Payee’s behalf and shall be credited with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to Alternate Payee.
Explanation: Under ERISA, a plan has an obligation, if possible, to separately maintain alternate payee’s share in a separate account established on alternate payee’s behalf and crediting the alternate payee’s share with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to alternate payee.
For small employer profit sharing plans, the funds are held in a pooled account which cannot be separately segregated for an alternate payee so no separate account is established. Funds for a profit sharing plan are held in a pooled trust account (“Trust Account”). Some profit sharing plans want specific language in the QDRO to reflect certain plan terms regarding “pooled accounts.” If you are dividing a small private employer profit sharing plan, be sure to send to the Third Party Administrator (person that files the IRC 5500 forms) for preapproval. It may be that the plan will want modifications to the QDRO to reflect certain plan terms regarding “pooled accounts.” If that is the case, contact QDROCounsel Support for additional assistance.
Language: The following language or similar language is in most (Q)DROs:
If Alternate Payee’s Share is greater than the full vested amount of the Participant’s account at date of distribution (after any outstanding loan balances and/or withdrawals have been deducted), the net fully vested amount of the Participant’s account will be the assigned amount. This Paragraph shall not serve as a waiver of rights which Alternate Payee may have against Participant in the event that Participant has depleted the account to an amount which is less than the full amount awarded to Alternate Payee hereinabove.
Explanation: If alternate payee’s award is greater than the full vested amount of the participant’s account at date of distribution (after any outstanding loan balances and/or withdrawals have been deducted), the (Q)DRO awards the alternate payee the total account balance available. Note that this paragraph shall not serve as a waiver of rights which alternate payee may have against participant in the event that participant has depleted the account to an amount which is less than the full amount awarded to alternate payee hereinabove.
QDROCounsel includes this paragraph to ensure that if there are not sufficient funds in the participant’s account that the alternate payee will still receive whatever is payable from the account. Similar language is included with other third party administrators (e.g. Alight). Fidelity as a third party administrator does not include this language and will reject the (Q)DRO if insufficient funds exist.
Warning: There may be strategic reasons why the family law attorney may want to delete this paragraph; however, our QDROs default to include this paragraph to capture whatever is in the account. The alternate payee will need to pursue other remedies to obtain the rest of the funds owed.
Division method: $ as of date of account segregation, plus investment earnings and/or losses thereon
Language: The following language or similar language is in most (Q)DROs:
This Order assigns to Alternate Payee the amount of $[insert amount] of the Participant’s total vested account balance accumulated under the Plan effective as of the date a separate account is established for Alternate Payee (“Date of Division”).
Explanation: This Option is selected when the parties agree or the court so orders an amount to be awarded as of date of account segregation, plus investment earnings and/or losses thereon. The amount in the (Q)DRO should be based on the parties’ agreement or court order. Option 4 generally is selected when there is an equalization and offset and the parties have agreed to a set amount without investment earnings and/or losses. If the amount awarded to alternate payee should include investment earnings and/or losses, select Option 3.
Language: The following language or similar language is in most (Q)DROs:
The Alternate Payee’s Share of the benefits shall be withdrawn from each of the Participant’s investment funds on a pro rata basis, and invested in the same fund(s) in the Alternate Payee’s account.
Explanation: Almost all plans interpret ERISA that the division of alternate payee’s share shall be withdrawn from each of the participant’s investment funds on a pro rata or proportionate basis, and invested in the same fund(s) in the alternate payee’s segregated account. Most profit sharing plans will divide pro rata as well unless their plan rules state otherwise. Note some plans require a pro rata award to alternate payee and will not allow specific investment sources to be excluded.
The pro-rata award does not apply to any self-directed brokerage accounts (also referred to as brokerage window). A brokerage account allows participants to transfer money within their 401(k) plan to specific investments not considered “core” investments previously selected by employer’s fiduciary. Investments held within a brokerage account must be liquidated and transferred into the core investments to the extent required to satisfy alternate payee’s award. The alternate payee’s share will be paid pro rata from the participant’s accounts that are not self-directed brokerage accounts.
Language: The following language or similar language is in most (Q)DROs:
Alternate Payee’s Share shall be segregated and separately maintained in an Account(s) established on Alternate Payee’s behalf and shall be credited with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to Alternate Payee.
Explanation: Under ERISA, a plan has an obligation, if possible, to separately maintain alternate payee’s share in a separate account established on alternate payee’s behalf and crediting the alternate payee’s share with any interest and investment earnings and/or losses attributable thereon from the date of account segregation until the date of total distribution to alternate payee.
For small employer profit sharing plans, the funds are held in a pooled account which cannot be separately segregated for an alternate payee so no separate account is established. Funds for a profit sharing plan are held in a pooled trust account (“Trust Account”). Some profit sharing plans want specific language in the QDRO to reflect certain plan terms regarding “pooled accounts.” If you are dividing a small private employer profit sharing plan, be sure to send to the Third Party Administrator (person that files the IRC 5500 forms) for preapproval. It may be that the plan will want modifications to the QDRO to reflect certain plan terms regarding “pooled accounts.” If that is the case, contact QDROCounsel Support for additional assistance.
Language: The following language or similar language is in most (Q)DROs:
If Alternate Payee’s Share is greater than the full vested amount of the Participant’s account at date of distribution (after any outstanding loan balances and/or withdrawals have been deducted), the net fully vested amount of the Participant’s account will be the assigned amount. This Paragraph shall not serve as a waiver of rights which Alternate Payee may have against Participant in the event that Participant has depleted the account to an amount which is less than the full amount awarded to Alternate Payee hereinabove.
Explanation: If alternate payee’s award is greater than the full vested amount of the participant’s account at date of distribution (after any outstanding loan balances and/or withdrawals have been deducted), the (Q)DRO awards the alternate payee the total account balance available. Note that this paragraph shall not serve as a waiver of rights which alternate payee may have against participant in the event that participant has depleted the account to an amount which is less than the full amount awarded to alternate payee hereinabove.
QDROCounsel includes this paragraph to ensure that if there are not sufficient funds in the participant’s account that the alternate payee will still receive whatever is payable from the account. Similar language is included with other third party administrators (e.g. Alight). Fidelity as the third party administrator does not include this language and will reject the (Q)DRO if insufficient funds exist.
Warning: There may be strategic reasons why the family law attorney may want to delete this paragraph; however, our (Q)DROs default to include this paragraph to capture whatever is in the account. The alternate payee will need to pursue other remedies to obtain the rest of the funds owed.
Other Information
Language: The following language or similar language is in most (Q)DROs:
The tax attributes (i.e. pre-tax contributions, rollover contributions, after tax contributions or investments in contract etc.) of all assets in the Plan are to be divided between Alternate Payee and Participant in the same ratio as that set forth in Subparagraph B above.
Explanation: The tax attributes of all assets in the plan are divided between alternate payee and participant in the same ratio. This paragraph is included in most of our (Q)DROs. Regardless of whether it is included in the (Q)DRO, most custodians will apply the tax attributes in the same ratio.
Language: The following language or similar language is in most (Q)DROs:
If the Alternate Payee so elects, the date of distribution of Alternate Payee’s Share to Alternate Payee shall occur as soon as administratively possible, or at the earliest date permitted under the Plan or Section 414(p) of the Internal Revenue Code of 1986, as amended (“Code”), if later, following approval and implementation of this Order and Alternate Payee’s application for benefits.
Explanation: Once the (Q)DRO is filed and served on the plan, in almost all cases, the alternate payee may elect to have the benefits distributed to alternate payee, as soon as administratively practicable. There are a few plans that will require the alternate to wait until the participant is age 55 based on that plan’s interpretation of ERISA. There are also a few plans that will require an immediate distribution. The alternate payee will be able to obtain that information from the plan once the (Q)DRO is served on the plan.
Language: The following language or similar language is in most (Q)DROs:
Alternate Payee may receive Alternate Payee’s distribution in any form allowed by the Plan to its participants, except in the form of a joint and survivor annuity with a subsequent spouse. Distribution may include, but is not limited to, a single lump-sum cash payment to an Individual Retirement Account (“IRA”), or other qualified plan, established by Alternate Payee for Alternate Payee’s benefit. To the extent Alternate Payee elects to rollover Alternate Payee’s share of benefits to an IRA or eligible retirement plan, said rollover shall be made pursuant to Section 401(a)(31) of the Code so as to defer imposition of the mandatory twenty-percent (20%) withholding under Section 3405(c) of the Code. Payment shall be made pursuant to procedures generally applicable to participant distributions under the Plan.
Explanation: Our forms utilize the language above or similar language as some plans will only approve a (Q)DRO using their specific language. Our forms provide the tax code section on the tax free transfer to an IRA or other qualified plan for the parties’ benefit.
There are no tax penalties for early withdrawal if funds from a defined contribution plan (Q)DRO are distributed directly to the alternate payee as cash. When a transfer from any ERISA qualified defined contribution plan is made pursuant to a (Q)DRO if the alternate payee wishes to receive those funds as CASH and NOT roll them into an IRA or other qualified plan, then the alternate payee’s funds will be subjected to taxes but NO tax penalty for early withdrawal if younger than 59 and 1/2. See Internal Revenue Code Section 72(t)(2)(C). If the alternate payee wishes to roll over alternate payee’s share to an IRA or other qualified plan, then alternate payee is not subjected to taxes or penalty in that transfer. But if the IRA holder then withdrew funds from that IRA before 59 and 1/2, that IRA holder would be subject to taxes and the tax penalty.
Language: The following language or similar language is in most (Q)DROs:
On or after the date that this Order is deemed to be a Qualified Domestic Relations Order, but before the alternate payee receives alternate payee’s total distribution under the plan, the alternate payee shall be entitled to all of the rights and election privileges that are afforded to alternate payees under the Plan.
Explanation: Almost plans will allow the alternate payee to designate beneficiaries and direct plan investments after the alternate payee’s share has been segregated.
Language: The following language or similar language is in most (Q)DROs:
If the Alternate Payee dies before full payment to Alternate Payee has been made, the amount unpaid shall be made to Alternate Payee’s designated beneficiary, or if none then pursuant to the terms of the Plan.
Explanation: Once the (Q)DRO is filed and served on the plan, the alternate payee should contact the plan and complete a designated beneficiary form as soon as possible regardless of whether alternate payee intends to move the funds right away or wait. Alternate payee’s share of benefits will be paid either to alternate payee’s beneficiary/ies, or pursuant to the terms of the Plan, which usually provides for payment to the alternate payee’s estate.
Language: The following language or similar language is in most (Q)DROs:
If the Participant predeceases the Alternate Payee, payment of Alternate Payee’s Share shall nonetheless be made under the terms of this Order. The death of the Participant shall have no effect on the payment of the award hereunder to Alternate Payee. The Alternate Payee shall not be treated as the Participant’s surviving spouse with respect to the remaining balance of Participant’s accounts in the Plan.
Explanation: An alternate payee will receive alternate payee’s interest in this plan regardless of the participant’s death. Most DCP (Q)DROs include this language or similar language.
However, an employee stock ownership plan (ESOP), a tax sheltered annuity, and a few defined contribution plans will require language that the alternate payee shall be treated as the surviving spouse of the participant for purposes of receiving alternate payee’s share. The impact on the alternate payee and participant is the same. Alternate payee will receive alternate payee’s share and participant will receive the remainder.
Language: The following language or similar language is in most (Q)DROs:
The remaining balance of Participant’s accounts are confirmed to Participant as Participant’s sole and separate property.
Explanation: This paragraph serves to clarify that participant maintains all rights to participant’s share of the pension benefit.
Language: The following default language or similar language is in most (Q)DROs:
In the event that the Plan charges an administrative fee to process the (Q)DRO, such fee shall be allocated between the parties, equally. However, if the Plan does not allow for any such fee to be shared between the parties for any reason, said fee shall instead be allocated from Participant’s account.
Explanation: Many defined contribution plans have a one-time “reasonable” determination fee for review of a (Q)DRO. ERISA allows defined contribution plans to charge a “reasonable” fee to review and process (Q)DROs. The fees must be outlined in the plan’s summary plan description. See the Department of Labor’s Field Assistance Bulletin 2003-3 dated May 19, 2003 and 29 CFR § 2520.102-3(l). The fee range is usually between $300 to $1,200.
Most parties agree to split the fee equally such that 50% is paid from the participant’s account and 50% from the alternate payee’s account. However, a few plans will only allow the fee to be paid from participant’s account. If that occurs, the parties will need to resolve any issues regarding reimbursement from alternate payee to participant between themselves. If the parties are allocating any administrative fee to alternate payee, we recommend obtaining preapproval of the QDRO if possible to ensure that the plan allows this allocation.
Language: The following language or similar language is in most (Q)DROs:
For purposes of Sections 402 and 72 of the Internal Revenue Code, any Alternate Payee who is the spouse or former spouse of the Participant will be treated as the distributee of any distributions or payments made to the Alternate Payee under the terms of this Order, and as such, will be required to pay the appropriate federal and/or state income taxes on such distribution. The Plan shall provide to Participant and Alternate Payee in accordance with its customary procedures such information as is normally provided to Participants in the Plan with respect to the taxability of distributions from the Plan. Any payments to the Alternate Payee made by the Plan shall be subject to withholding for Federal and State tax, unless a valid current election to waive withholding is on file with the Administrators of the Plan.
Explanation: If the alternate payee is not rolling over the award to an IRA or qualified defined contribution plan, then alternate payee will pay taxes on whatever payment is made to alternate payee from the plan. The participant does NOT pay taxes on alternate payee’s share (unless the alternate payee is a child or dependent of the participant in which case the payments are taxable to the participant).
Language: The following default language or similar language is in most (Q)DROs:
It is the parties’ desire to avoid any deferred sales charges, loads, surrender or distribution penalties/charges (collectively referred to as “Surrender Charges”), exclusive of penalties for early distribution which may be imposed by state and local taxing authorities. If any Surrender Charges apply, if applicable, said Surrender Charges will be applied to reduce both the Participant’s and Alternate Payee’s shares in proportion to the amount disbursed. (The Participant’s share will be deducted from the accumulation value of the existing contract and the Alternate Payee’s portion will be reduced by the amount distributed.)
Explanation: One of the biggest potential issues with tax sheltered annuities (“TSA”) are surrender charges. A tax-sheltered annuity (TSA) also known as a tax-deferred annuity (TDA) plan or a 403(b) retirement plan, is a type of defined contribution plan for employees of certain public education organizations, non-profit organizations, cooperative hospital service organizations and self-employed ministers. TSAs are governed by Internal Revenue Section 403(b). Many TSAs are invested as annuity contracts. Teachers often have TSAs.
Depending on the TSA custodian, there could be a surrender charge in the event the alternate payee takes a distribution from the Plan in a divorce with a (Q)DRO. The (Q)DRO should direct who incurs the cost of the surrender charge. Our forms default to the parties splitting any surrender charges. However, you have the option to modify so that either the alternate payee or the participant bears the cost.
You should contact the TSA custodian to find out whether surrender charges apply in a divorce. The participant’s statement may show that surrender charges apply. However, many times the surrender charges identified on the statement will NOT apply in divorce. Often when an alternate payee is awarded alternate payee’s share in a (Q)DRO and elects to opens a new account with that custodian under the same terms as participant’s TSA, surrender charges will NOT apply. Sometimes you have to reach a contact beyond the customer service line to determine how surrender charges apply in divorce, but with persistence you can usually find out this information. It may be that there are no surrender charges in divorce and in that case this paragraph in the (Q)DRO is a nonissue.
Furthermore, you should check with the custodian regarding the terms of any annuity product upon receipt of a court order dividing the account. The guaranteed death benefit and other terms of the annuity contract may be reset upon the division of the annuity
Language: The following default language or similar language is in most QDROs:
As of the date of this Order, any dividends distributed by the Plan, to which the Alternate Payee is entitled under the terms of the Plan, shall be distributed to the Alternate Payee. Alternate Payee understands that dividend amounts distributed after the parties’ Date of Division and prior to the acceptance and implementation of this Order are collectible only from the Participant.
Explanation: The following paragraph is included in our ESOP QDROs so it is clear to the plan and all parties that an alternate payee is not entitled to dividends until after the QDRO has been approved by the Plan. The parties will need to work out any issue that may exist regarding dividend payments after Date of Division but before this QDRO is filed.
Language: The following language or similar language is in most TSP QDROs:
Payee’s share shall be adjusted to reflect earnings and losses from the Entitlement Date through the date of distribution to the Payee.
Explanation: TSP will calculate investment earnings and/or losses on the alternate payee’s marital interest from the specific date provided in the QDRO until the date of distribution to the alternate payee, so any separate property accrued after Date of Division will remain the separate property of the participant. The date inputted in the QDRO is usually the applicable marital division date based on state law, court order or parties’ agreement (referred to generally as the Date of Division and in the TSP Order as the Entitlement Date).
However, TSP will only calculate investment earning and/or losses on alternate payee’s marital interest based on the actual investment choices at the Date of Division. This means that investment earnings and/or losses will not be calculated based on any changes in investment choices made by the participant after the Date of Division. To calculate earnings based on any changed investments after the Date of Division, go to the Calculation Suite for a simple tracing. Because any changes in investment choices after the Date of Division generally are not significant, most parties find the way in which TSP calculates investment earnings and/or losses acceptable.
Almost all states find that alternate payee’s marital interest includes any investment earnings and/or losses on the percentage awarded to alternate payee after Date of Division. The funds invested are a moving target. If the account balance has risen after Date of Division, both parties should benefit from that gain. Likewise, should the account balance fall after Date of Division, both parties suffer that loss. QDROCounsel TSP forms in Option 1, 3 and 5 default to include any investment earnings and/or losses from Date of Division to date of distribution to the alternate payee. If you want to award a percentage or set amount as of date of account segregation, select Option 2 or Option 4.
Language: The following language or similar language is in most TSP QDROs when TSP is ordered to calculated accumulations between Date of Marriage and Date of Division (Option 5):
Payee is awarded [50]% of the TSP funds accumulated in Participant’s account between [Date of Marriage] and [insert applicable marital division date based on state law, court order or parties’ agreement] (the “Entitlement Date”). Payee’s share shall be adjusted to reflect earnings and losses from the Entitlement Date through the date of distribution to the Payee.
Explanation: Option 5 is commonly used if the Participant entered the Plan before Date of Marriage and the Participant agreed to waive any earnings and/or losses on Participant’s separate property interest that accrued during the marriage. This occurs generally when that separate property interest in minimal. The TSP DRO may be drafted so that TSP subtracts the balance at Date of Marriage from the balance at the valuation date closest to the applicable marital division date based on state law, court order or parties’ agreement (referred to generally as the Date of Division and in the TSP Order as the Entitlement Date). This mean that investment earnings and/or losses on the premarital separate interest are included in the marital estate. If the Participant does not agree to waive that interest, go to the Calculation Suite to calculate the investment earnings and/or losses on Participant’s separate property premarital interest.
Note for a few states, the marital property interest includes all investment earnings and/or losses on the Participant’s separate property interest. In that situation, Option 5 is the option to select. If you are not sure if your state’s law includes accruals on separate property, contact QDROCounsel Support.
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