3-Pronged Approach for Handling the Division of Ohio State Government Plans

We are pleased to present you with a new approach for handling the equitable division of state pension plans that are otherwise exempt from QDROs. Once you obtain the necessary present value reports, if offsetting assets are insufficient for the disposition of your case, this "3-Pronged" Approach will help secure the non participant spouse's full entitlements to the marital share of the pension. This newly integrated approach is necessitated by the severe restrictions imposed by House Bill 535, which became effective on January 1, 2002. As you know, the new Division of Property Order acceptable to the state plans (referred to as the DOPO) will not be sufficient to secure the former spouse's full entitlements, especially in areas such as COLA and survivorship. Our new approach requires you to address the division of the pension separately through the use of the following three documents:

Prong I: "Judgment Entry"

Prong II: Division of Property Order ("DOPO")

Prong III: "Comprehensive" QDRO

This new 3-pronged approach should be considered whenever your case involves one or more of the following plans:

• Police & Fire Pension Fund
• State Teachers Retirement System
• Public Employees Retirement System
• School Employees Retirement System
• State Highway Patrol Retirement System

Prong I: The "Judgment Entry"

Description: The use of separate Judgment Entry language is critical to securing the former spouse's "full entitlements" to the marital portion of the employee's pension benefits. Because the state plans will not honor a court order containing COLA provisions or survivorship protection for the former spouse in the event of the employee's death, it is necessary (as a fallback position) to address these provisions in the Judgment Entry. The employee should be required to make "direct payments" to the former spouse reflecting the former spouse's lost COLA increases each year. Further, the Judgment Entry should include survivorship protection for the former spouse in the event of the employee's death either before or after retirement. Alternatives include a standalone term insurance policy and/or a proviso requiring the employee to elect a joint and survivor option upon retirement for the benefit of the former spouse. The following issues should be considered for inclusion in the Judgment Entry:

1. Amount of Assignment:
•  Coverture Formula (should use specific numerator, because plan will not  calculate it in the DOPO)
•  Cost-of-Living Adjustments
•  Social Security Offset, if applicable
   
2. Direct Payments to Former Spouse by Employee
• Employee must pay former spouse directly, as a fallback, if order does not provide former spouse with full entitlements
   
3. Tax Liability Offset
• This is necessary because employee will be taxed on any direct payments made to former spouse
   
4. Duration of Payments to Former Spouse
   •  Earlier to occur of employee's death or former spouse's death, subject to  survivor provisions
   •   Cannot actuarially adjust to former spouse's lifetime
   •  Former spouse must wait for employee to retire in order to
      commence benefits
      
5. Refund of Employee Contributions
   •  Include language barring employee from requesting a refund, unless  employee not eligible for deferred pension at termination
   •  Mutual consent of parties to receive refund
      
6. Survivorship Protection for Former Spouse in the Event of Employee's Death
   There are four (4) potential vehicles for obtaining survivorship protection for the former spouse:
   1. Standalone Term Insurance Policy (for "pre" and "post-retirement" protection)
   2. Employer-Provided Term Life Insurance Policy (for "pre-retirement" protection only)
   3. Joint and Survivor Annuity Election Upon Retirement (for "post-retirement" protection only)
   4. Refund of Employee/Employer Contributions Upon Death of Employee (for "pre" and "post-retirement" protection, but may not be sufficient to secure entire ownership interest of former spouse
      
      Standalone Term Insurance Policy May Be Your Best Alternative: It may be in the best interest of the former spouse to use this approach, if the employee is still otherwise healthy and can obtain a reasonably priced policy. The Judgment Entry should include the appropriate level of coverage necessary to secure the former spouse's share of the benefits. This can be obtained by preparing a "present value" report on the employee's pension. If this approach is not feasible, you may want to consider utilizing the "employer-provided" coverage available to the employee through his/her employment.

      Warning Against "Employer-Provided" Term Life Insurance: Because the employee may lose his/her employer-provided life insurance coverage upon termination of employment or upon retirement, it may be more feasible for the parties to obtain a "Standalone" Term Insurance policy as set forth under Option 1 above. Also, the maximum level of coverage provided by the Plan may be insufficient to secure the former spouse's entire ownership interest in the pension.

      Warning Against Post-Retirement Joint and Survivor Election for Former Spouse: Because the Plan may not permit the employee to elect two beneficiaries (such as his former spouse and a current spouse), whereby each survivor would receive a proportionate share of the total survivor annuity, we caution the use of a post-retirement joint and survivor election for younger plan participants who will likely remarry. There may also be difficulty in securing a joint and survivor annuity for the former spouse because Ohio law currently requires the consent of the employee's "new spouse" if survivorship coverage is anticipated for anyone but the new spouse. Such written waivers are unlikely to be obtained. As a result, term life insurance may represent your best option. Remember though, because the term insurance policy (and the associated premiums) will have to remain in effect during the employee's retirement years, this may be an incentive for the employee (and his/her new spouse) to agree to a joint and survivor election for the former spouse at retirement. In this manner, the term insurance could be eliminated once the former spouse secures joint and survivorship protection under the plan.

      Warning Against Refund of Contributions in Event of Employee's Death: There may be insufficient coverage to secure the former spouse's ownership interest in the pension. Use this as a last resort if a term insurance policy is not feasible. Further, this refund of contributions is not available if statutory survivorship is being extended to eligible dependents, such as minor children or a subsequent spouse.

7. Future Plan Acceptance of Comprehensive DROs (And "Shortfall" Payments Made by Employee to Former Spouse):
   •  Parties to submit the "Comprehensive DRO" when allowed (See Prong III)
   •  Even when the DOPO is accepted (See Prong II), the employee will still be  required to pay former spouse directly for any shortfall due to lost COLA  payments
   •  Employee will also be required to pay former spouse directly for any shortfall  due to employee's support obligation that is deducted solely from former  spouse's share of benefits
     
8. Continued Jurisdiction:
   •  Original intent of parties
   •  Further orders required to enforce assignment provisions

Prong II: Division of Property Order (DOPO)
(Acceptable to Plan Administrator Beginning 1/1/02)

Description: As you all know, effective January 1, 2002, the state plans began accepting a form of QDRO. Effectively, it provides for an incomplete assignment to the former spouse because the plans will not honor the QDRO if it includes COLA increases or survivor protection for the former spouse. Also, any future support obligations of the employee/retiree, will come from the former spouse's share of the benefits. This is to assure that the employee never receives less than 50% of the total pension. In light of all these restrictions, it is still necessary to submit a DOPO to the plan administrator in order for the former spouse to receive "direct" payments from the plan. In this manner, the former spouse will not have to rely on an ex-spouse to send monthly checks in the mail. Therefore, we suggest you get the DOPO prepared and submitted to the plan just as you would any other QDRO, and then be sure that your Judgment Entry language fills in the appropriate gaps by (a) requiring the employee to pay the former spouse his/her lost COLA increases, and (b) including survivor protection in the form of a term insurance policy and/or a joint and survivor election under the plan. The following issues should be considered for inclusion in the DOPO:

1. The DOPO should be a "standalone" document and incorporated-by-reference into Judgment Entry
   
2. While acceptable to the plan, will "NOT" provide former spouse with:
   •   COLA increases
   •   Survivor Protection
   •   Full assignment in case of employee-obligated support deductions
     
3. Must Use Judgment Entry as "fall-back" to provide former spouse with:
   •   COLA increases (perhaps payable annually instead of monthly)
   •   Survivor Protection (through term insurance and/or employee's requirement   to elect joint and survivor pension at retirement)
     
     • Important Note: Employee's new spouse would have to consent to former spouse J&S election; therefore, term insurance may be best alternative (also remember that term insurance MUST remain in effect until earliest to occur of his death, her death or date employee retires and elects J&S option under the plan); do NOT include language whereby term insurance would be canceled when employee retires--term insurance would still be necessary after retirement if J&S not elected for former spouse.
   •   Shortfall payments in case of employee-obligated support
   •   Remember tax liability offset for shortfall payments because employee will be   taxed on direct payments made to former spouse
     
4. DOPO can include:
   •   Coverture fraction, with numerator supplied
      
5. Employee cannot receive less than 50% of pension
   •   Support obligations will come from former spouse's share of the benefits
      
6. Payments Will Stop at Earlier of Employee's Death or Former Spouse's Death
   •   Must have survivor protection in JE
      
7. Administrative Fee
   •   Amount of Fee Currently Unknown
   •   Will be divided equally between the Employee and the Former Spouse.
     

Prong III: The "Comprehensive DRO"
(Will Likely Be Rejected By Plan)

Description: This Comprehensive DRO attempts to provide the former spouse with his/her full ownership interests in the state pension, just as an ERISA-governed QDRO would do for a General Motors participant, for example. It includes coverture, COLA, survivorship, etc. As you know, however, this Comprehensive DRO will not currently pass-muster with the state plan administrator. We do suggest that you get this Comprehensive DRO signed by the judge as a stand-alone document, along with the DOPO. You may want to submit the comprehensive DRO to the plan administrator first and force them to reject it. Of course, you would then follow-it up with a submission of the DOPO, to at least let direct payments started for the former spouse. The following issues should be considered for inclusion in the "Comprehensive" DRO:

1. Still Considered Important Document in the Event Laws are Changed
   •   Intended to provide former spouse with "full" entitlements, including COLA   and Survivorship
   •   Get it executed as a stand-alone document and incorporate-by-reference   into JE
   •   Should submit to plan first in order to force a rejection
     
2. Standard Provisions for Comprehensive DRO
   •  Coverture (must furnish numerator; plan won't calculate)
   •  Cost-of-Living Adjustments
   •  Benefit Commencement Date (Former Spouse must wait for Employee to  retire)
   •  Death of Former Spouse (reversion to employee)
   •  Refund of Contributions With Interest, in the event Employee quits before  retirement
   •  Post-Retirement Survivor Annuity Election by Employee (to extent of former  spouse's assigned interest)