QDRO's

Consider this example about a soldier who was covered under a military retirement plan and who obtained a divorce. The separation agreement included language whereby a qualifying court order would be prepared that would provide his former spouse with 50 percent of his military pension, known as retired pay. The Uniformed Services Former Spouses Protection Act (USFSPA), 10 U.S.C. § 1408, provided a vehicle for the division of a member's "military retired pay." As a result of the USFSPA, a former spouse could now receive a portion of the member's military retired pay directly from the appropriate military finance center. Such an order was prepared contingent upon the member's retirement from the military (which requires 20 years of creditable service). At that time, the former spouse would commence her equitable share of the participant's retired pay. However, after working in the military for 19 years and 10 months, the member voluntarily separated from military service and commenced receipt of a hefty annual separation benefit that assured him years of income. Under his arrangement, he would receive his large annual severance payment for 32 years. This stream of severance payments was, of course, in lieu of any retired pay from the pension plan. The result? The former spouse is currently receiving none of his severance payments and will never receive any portion of a military pension.

Another interesting result occurs when a member of the military opts for disability benefits in lieu of his retired pay. In the 1989 U.S. Supreme Court case of Mansell v. Mansell, 490 U.S. 581 (1989), the Court held that the USFSPA does not grant state courts the power to treat disability benefits as property divisible upon divorce where the participant has waived his retired pay in favor of receiving such disability benefits. The court relied on a strict reading of the USFSPA, which grants state courts the express authority to treat "retired pay" as community property. As a result, anything other than retired pay, even other forms of benefits received by a military retiree in lieu of retired pay, should not be divisible. Instead of looking to the intent behind the passage of laws such as the USFSPA, and the Retirement Equity Act of 1984, which applies to ERISA-governed retirement plans, the court, in one fell swoop, opened up a loophole that effectively stole the property rights of former spouses of military members.

As stated by Justice O'Connor, in her dissenting opinion:

The harsh reality of this holding is that former spouses like Gay Mansell can, without their consent, be denied a fair share of their ex-spouse's military retirement pay simply because he elects to increase his after-tax income by converting a portion of that pay into disability benefits. . . . I view the Court's holding as inconsistent with the language and purposes of the Act.

Family law practitioners should never underestimate the savvy of a plan participant when it comes to circumventing the marital entitlements of the nonparticipant spouse. You must protect your client from this conceived threat to his property. Whether you represent the former spouse under a military plan, a state or federal plan, or an ERISA-governed pension plan, your separation agreement should include language that protects your client from actions or inactions taken by the participant to the detriment of your client.

As a family law attorney, you must include language in your separation agreements that protects your client from some of these unforeseen circumstances. Although it is fine to include anticircumvention language in the QDRO or other court order to divide benefits, the primary place to include this protection is in the divorce decree and/or separation agreement. When the QDRO comes into play, it may be too late. The participant may have already taken some actions to circumvent the intended provisions of the QDRO that may have not yet been drafted.

You should also include language under the separation agreement that protects the alternate payee against actions taken by the participant other than merging his retirement benefits with another retirement system. You may want to include the following language:

"Actions by the Participant: The [defendant/participant] shall not take any actions, affirmative or otherwise, that can circumvent the terms and provisions of the QDRO, or that could diminish or extinguish the rights and entitlements of the [plaintiff/alternate payee] under the terms of the QDRO."

If the participant does take an action to the detriment of the alternate payee, you may also want to include language that reserves jurisdiction in the matter and also requires him to make any shortfall payments directly to the alternate payee. For example, you may want to include the following language:

"Further, should the [defendant/participant] take any actions to prevent, decrease, or otherwise limit the amounts to be paid to the Alternate Payee as set forth hereunder, he shall be required to make the required payments directly to the [plaintiff/alternate payee] in an amount sufficient to neutralize the effects of his actions, and to the extent of her full entitlements hereunder."

Merger of Benefits with Other Retirement Systems

Another example surrounds a court order that was prepared to provide a former spouse with a portion of her husband's pension that was accruing with the state's Public Employees Retirement System (PERS). She was to be entitled to 50 percent of his pension under PERS once he retired. Of course, this particular PERS plan does not currently accept QDROs, so any payments would have to be made directly by the participant to his former spouse. After the divorce, the participant separated his service from PERS and became a teacher covered under the State Teachers Retirement System. When he retired years later under the STRS pension plan, he merged his years of service that previously accrued under PERS with his STRS pension. The result? His former spouse is not receiving any of his STRS pension, since the court order only referred to his pension under PERS.

You may want to include language in your separation agreement that protects your client's rights to a portion of the participant's pension benefits based on service earned or merged under a different retirement system. For example, you may want to include some or all of the following language which is for a participant covered under a police and firemen's pension plan:

Merger Clause: In the event the [defendant]/participant merges his service credits in the [Police and Firemen's Disability and Pension Fund] with service credits earned under another plan sponsored by another retirement system, including, but not limited to, a Military Retirement Plan, the State Teacher's Retirement System ("STRS"), and the School Employees Retirement System ("SERS"), the [plaintiff]/alternate payee shall remain entitled to a portion of the [defendant]/participant's retirement benefits, as set forth under section ____ above, regardless of which retirement system actually pays the retirement benefits. The service credits that were earned under such other retirement system shall be included, to the extent applicable, in the calculation of the [plaintiff's]/alternate payee's share of the benefits as set forth herein.

Further, should the [defendant]/participant's retirement benefits earned under this Plan be paid under a retirement system other than the [Police and Firemen's Disability and Pension Fund], or should the [defendant]/participant's service accrued under this Plan be merged into another retirement system, the provisions of this Order shall be deemed modified to the extent necessary in order to provide the [plaintiff]/alternate payee under such other retirement system with all of the rights and privileges accorded to her under the provisions of this Order.

Reservation of Jurisdiction and the Recharacterization of Benefits

Always reserve jurisdiction with respect to the division of pension benefits, whether such distribution is accomplished through offsetting assets or a QDRO. The following language is the best I have seen, not just to enforce the court-ordered award of benefits to the nonparticipant but also to protect against detrimental actions by the participant.

Continued Jurisdiction: The Court shall retain jurisdiction to enter such further orders as are necessary to enforce the award to the spouse (Alternate Payee) of the pension benefits awarded herein, including the recharacterization thereof as a division of retirement benefits payable under another retirement system, or to make an award of alimony (in the sum of benefits payable under the Participant's current retirement plan plus future cost-of-living adjustments) in the event that the Participant fails to comply with the provisions contained above requiring said payments to Alternate Payee by any means, including the application for separation benefits, disability benefits, the filing of bankruptcy, or upon other government regulations or restrictions that interfere with payments to the Alternate Payee as set forth herein, or if the Participant fails to comply with the provisions contained above requiring said payments to Alternate Payee.