MARITAL SETTLEMENT AGREEMENT LANGUAGE

ASSUMPTIONS:

1. Plan is qualified under ERISA.
2. The Plan is a “traditional formula” or “final average pay formula” defined benefit plan and not a cash balance pension plan or defined contribution plan. 
3. The marital portion is being defined pursuant to the PA Divorce Code, not some alternate methodology.
4. The Participant has not yet retired and will not retire until the QDRO is entered by the Court and qualified by the Plan.
5. The parties intend for the Alternate Payee’s benefit to be protected in the event of the Participant’s pre- and post-retirement death.

SUGGESTED LANGUAGE:

Through [his/her] employment, [Participant Spouse] has acquired an interest in a defined benefit plan known as the [insert precise plan name].  [Alternate Payee Spouse] shall receive [insert percentage] of the marital portion of this plan, which shall be determined pursuant to §3501(c)(1) of the Divorce Code, utilizing a date of marriage of [insert date of marriage] and a date of marital separation of [insert date of marital separation].

[Alternate Payee Spouse] shall receive [his/her] share of the Plan via a Qualified Domestic Relations Order (QDRO), which shall be prepared to assign [Alternate Payee Spouse] a “separate interest” in [Participant Spouse]’s  plan, so that [Alternate Payee Spouse]’s benefit is protected in the event that the [Participant Spouse] predeceases him/her after commencement of benefits.  To the extent necessary (and only to the extent necessary) to ensure that [Alternate Payee Spouse]’s benefits are not diminished, should [Participant Spouse] predecease [Alternate Payee Spouse] prior to retirement, [Alternate Payee Spouse] shall also be treated as [Participant Spouse]’s surviving spouse for purposes of the Plan’s pre-retirement survivor annuity.  Further, [Participant Spouse] expressly agrees that [he/she] will not elect to commence benefits until such time as the QDRO has been prepared, entered by the Court, and qualified by the Plan.  

The requisite QDRO shall prepared by Matthew Morley, Esquire and the cost of preparing the QDRO shall be shared equally by the parties.  The parties shall cooperate in providing Mr. Morley with any and all documents he requires to prepare the QDRO.

EFFECT OF LANGUAGE/OTHER CONSIDERATIONS

1. This language creates a “separate interest.”  Under a separate interest: 

a. The Alternate Payee’s benefits are actuarially adjusted to his or her life expectancy, which provides built-in survivor benefits so that the Alternate Payee’s benefits are not diminished by the Participant’s death, should the Participant die after either party retires.  All actuarial adjustments are applied to the Alternate Payee’s share only so the Participant’s benefits are not reduced. 

b. The Alternate Payee can commence benefits at any time after the Participant has reached the earliest retirement age under the plan (and, in rare cases, even sooner).  Under some plans, the Alternate Payee can commence no later than the date the Participant actually retires (or hits the norfmal retirement age)

c. The Participant is not required to elect a post-retirement survivor benefit for the Alternate Payee spouse (since the Alternate Payee spouse’s benefit is protected in the event of the Participant’s post-retirement death by virtue of the actuarial adjustment).  This has two benefits to the Participant:

i. The Participant can elect a survivor benefit for a subsequent spouse (if applicable) or a form of benefit that maximizes his or her monthly payment at retirement.  Decision can be deferred until retirement age, if the Participant is unsure whether he or she will remarry.

ii. Since the Participant is not required to elect an actuarially reduced benefit to protect the Alternate Payee, the Participant is not forced to subsidize a survivor benefit for the Alternate Payee.  

2. The Alternate Payee’s benefits are protected in the event of the Participant’s pre-retirement death in one of two ways.  Many plans permit us to simply state that “the death of the Participant before the Alternate Payee’s benefit commencement date shall not diminish the Alternate Payee’s award.”  If this is a possibility, this is the approach we take.   However, many plans, even plans that accept a separate interest, take that the position that, should the Participant predecease the Alternate Payee before either party retires, the Alternate Payee’s benefits will end, unless they are protected by an award of the pre-retirement surviving spouse benefit.  

Many times, it is impossible to know which approach a plan will take until we have prepared a draft of the QDRO.  Thus, the suggested agreement language gives us the flexibility to take either approach, depending on the actual plan at issue.

It is important to note, however, that most defined benefit plans only offer a 50% pre-retirement survivor annuity.  Thus, to fully protect the Alternate Payee spouse, we often need to award a disproportionate share of the pre-retirement surviving spouse annuity to the Alternate Payee. 

3. If the Alternate Payee dies before retirement, benefits generally revert to the Participant.  This is a result of Boggs v. Boggs, 520 U.S. 833 (1997), which has been widely interpreted to stand for the proposition that an Alternate Payee may not transfer by testamentary instrument undistributed pension benefits.   This is often an unintended windfall to the Participant, but generally cannot be addressed in the QDRO.  The parties can address via agreement however, whereby the Participant agrees to make payments to a third-party beneficiary (e.g. the parties’ children) of any payment (net or taxes) he or she actually receives as a reversion.

4. Historically, it has been good practice to hold the divorce decree until such time as the QDROs are completed.  The logic behind holding the decree is that, while married, spouses have inherent survivorship protections.  Under a defined benefit, spouses are generally entitled to a death benefit in the event the participant dies pre-retirement in the amount of around 50% of the participant’s accrued benefit.  Upon the entry of the divorce decree, however, this benefit is no longer payable to the former spouse.  The QDRO can award the former spouse a share of the pre-retirement death benefit, but having the decree entered prior to the QDRO would create a dangerous “risk period” between the date the decree issued and the date the QDRO was finally “qualified” by the Plan.

Federal courts have been chipping away at this risk period (see e.g. Files v. ExxonMobil Pension Plan, 428 F. 3d 478 (3d Cir. 2005)) and QDROs entered after the death of the Participant are becoming more and more acceptable.  However, the risk is not completely eliminated.  Some plans have taken the position that the only benefit payable after the death of a plan participant is the plan’s death benefit and, if the Participant married as an unmarried Participant, there is no death benefit payable.  Thus, the QDRO does not fail solely by virtue of timing, but because it was issued when there was no longer a benefit to divide.  It is not clear whether this dubious distinction will ultimately hold up in Court, but there is certainly still some risk in not holding the divorce decree until the QDROs are completed.  This can be minimized by confirming the specific Plan’s position on posthumous QDROs prior to the entry of the decree.

ASSUMPTIONS:

1. Plan is qualified under ERISA.
2. The Plan is a “traditional formula” or “final average pay formula” defined benefit plan and not a cash balance pension plan or defined contribution plan. 
3. The marital portion is being defined pursuant to the PA Divorce Code, not some alternate methodology.
4. The Participant has retired (i.e. has left employment with the plan sponsor and is receiving benefits.
5. The parties intend for the Alternate Payee’s benefit to be protected in the event of the Participant’s pre- and post-retirement death.

SUGGESTED LANGUAGE:

Through [his/her] prior employment with [insert plan sponsor], [Participant Spouse] has acquired an interest in a defined benefit plan known as the [insert precise plan name], which is currently in pay-status.  [Alternate Payee Spouse] shall receive [insert percentage] of the marital portion of this plan, which shall be determined pursuant to §3501(c)(1) of the Divorce Code, utilizing a date of marriage of [insert date of marriage] and a date of marital separation of [insert date of marital separation].

[Alternate Payee Spouse] shall receive [his/her] share of the Plan via a Qualified Domestic Relations Order (QDRO), which shall be prepared to assign [Alternate Payee Spouse] a “shared interest” in [Participant Spouse]’s  plan under which the Alternate Payee’s benefits will end on the earlier of the death of either parties death.  The parties acknowledge that, at retirement, [Participant Spouse] elected [insert form of benefit elected at retirement and the survivor annuitant/beneficiary, if applicable].  The parties understand that this election is irrevocable.  Therefore, while payments under the QDRO shall end upon the death of [Participant Spouse], benefits to [Alternate Payee Spouse] will begin upon [Participant Spouse’s] death under the aforementioned survivor benefit elected at retirement. 

The requisite QDRO shall prepared by Matthew Morley, Esquire and the cost of preparing the QDRO shall be shared equally by the parties.  The parties shall cooperate in providing Mr. Morley with any and all documents he requires to prepare the QDRO.

During the period between the date of execution of this agreement and the date the QDRO is implemented by the Plan, [Participant Spouse] shall pay [Alternate Payee Spouse] $ [insert dollar amount] per month, which sum represents an estimate of [Alternate Payee Spouse’s] share of the marital portion, less [Participant Spouse]’s tax liability.  In the event that the Plan freezes benefits during the QDRO process the parties shall cooperate in attempting to have the Plan lift such freeze so that the monthly payments from the Plan can be divided in accordance with this Paragraph.  If the Plan will not lift the freeze (and for all periods prior to the lift of the freeze), the parties will bear the reduction in proportion to their respective share of the total benefit.  Any retroactive payment(s) made upon the qualification of the QDRO for benefits that were frozen during the process will also be divided in proportion to the parties’ respective shares.  The parties understand that it is unlikely that this can be addressed in the QDRO and may require a payment from one party to the other after the QDRO has become effective.  

EFFECT OF LANGUAGE/OTHER CONSIDERATIONS

1. Once a Participant has retired, the only form of benefit available is known as a “shared interest”.  Under a shared interest: 

a. Benefits are paid to the Alternate Payee at the same time as the Participant;

b. Benefits are paid to the Alternate Payee in the form elected by the Participant at retirement; this means that benefits will be paid over the Participant’s lifetime and, if the Participant did not elect a joint and survivor annuity for the Alternate Payee’s benefit, the Alternate Payee’s benefits will end upon the Participant’s death.

c. If the Alternate Payee predeceases the Participant, the Alternate Payee’s benefit will revert to the Participant.  

2. Because the Alternate Payee’s benefits end upon the death of the Participant, special care should be taken to determine what form of benefit was elected at retirement.  If a survivor benefit was not elected, the Alternate Payee should be counseled that her benefits will end upon the Participant’s death.  The Alternate Payee spouse could look to life insurance to provide protection in the Event of the Participant’s death.  

3. If the Participant elected a survivor annuity at retirement and named the Alternate Payee as his or her survivor benefit, that option and the Alternate Payee’s status as the survivor annuitant is generally irrevocable, notwithstanding the parties’ subsequent divorce.  The QDRO that is drafted should confirm this election to ensure that the Plan will honor the prior election.  

4. Palladino v. Palladino, 713 A.2d 676 (Pa Super. 1998), provides that a survivor benefit can be valued and charged as an asset to the recipient spouse in equitable distribution.  

5. As provided above, under a shared interest assignment, all benefits revert to the Participant upon the Alternate Payee’s death.  This is a result of Boggs v. Boggs, 520 U.S. 833 (1997), which has been widely interpreted to stand for the proposition that an Alternate Payee may not transfer by testamentary instrument undistributed pension benefits.   This is often an unintended windfall to the Participant, but generally cannot be addressed in the QDRO.  The parties can address via agreement however, whereby the Participant agrees to make payments to a third-party beneficiary (e.g. the parties’ children) of any payment (net or taxes) he or she actually receives as a reversion.

[AP] shall receive [X% or $Y] of [P]’s total account balance in the ABC Corporation 401(k) Plan as of [valuation date / date such funds are segregated into an account for AP’s benefit] plus market experience on such amount/percent from [valuation date / date of segregation] through distribution to the [AP].   [AP]’s share shall be taken pro rata from all contribution sources and investments in the plan.  

[if using percentage assignment, include one of the following:  (1) If [P] had a loan on the account as of the [valuation date/date of segregation], [AP]’s benefit will be calculated based on the total account balance, as if [P] had not taken out a loan OR (2) If [P] had a loan on the account as of the [valuation date/date of segregation], [P]’s total account balance shall be reduced by the outstanding loan amount prior to calculating the Alternate Payee’s share.

The QDRO shall be prepared to permit the Alternate Payee to initiate a distribution at the earliest date permitted under the terms of the plan.  Until such time as the QDRO is in place, [P] shall maintain [AP] as [P]’s beneficiary for an amount not less than [AP]’s share, specified above.  Further, to the extent that [P] does not comply with this provision, [P] acknowledges that [AP] may pursue a claim against [P]’s estate and beneficiaries.   Pending implementation of the QDRO, [P] may name a different beneficiary on the remaining portion of [P]’s interest in the Plan.  After implementation of the QDRO, [P] may name a different beneficiary on the entirety of [P]’s interest in the Plan.  [AP] shall execute any paperwork to Finally, the QDRO shall be prepared so that [AP]’s benefit shall be paid to [AP]’s beneficiary or estate if [AP] dies after qualification of the QDRO.

[AP] shall receive [X% or $Y] of [P]’s total account balance in the ABC Corporation Cash Balance Pension Plan as of [valuation date] plus interest credits on such amount from [valuation date] through distribution to [AP].  [AP]’s share shall be taken pro rata from all contribution sources and investments in the plan.

The QDRO shall be prepared to permit [AP] to initiate a distribution at the earliest date permitted under the terms of the plan, to allow [AP] to elect any form of benefit available to participants under the Plan (with the exception of a joint and survivor annuity with a subsequent spouse), and to ensure the death of [P] either before or after commencement of benefits will not impact [AP]’s amount of or right to receive benefits.

Until such time as the QDRO is in place, [P] shall maintain [AP] as [P]’s beneficiary for an amount not less than [AP]’s share specified above.  Further, to the extent that [P] does not comply with this provision, [P] acknowledges that [AP] may pursue a claim against [P]’s estate and beneficiaries. Finally, the QDRO shall be prepared so that [AP]’s benefit shall be paid to [AP]’s beneficiary or estate if [AP] dies after qualification of the QDRO.

Pending implementation of the QDRO, [P] may name a different beneficiary on the remaining portion of [P]’s interest in the Plan.  After implementation of the QDRO, [P] may name a different beneficiary on the entirety of [P]’s interest in the Plan.  [AP] shall execute any paperwork to effect these provisions within 7 days of receipt from [P].