Retirement Orders And Division

SPECIAL RETIREMENT ISSUES WITH LARGE LOCAL EMPLOYERS

PHILIP D. PHILLIPS 101 Summit Avenue Suite 700 Fort Worth, Texas 76102

Tarrant County Family Law Bar Association May 24, 2011 Special Retirement Issues With American Airlines has one defined contribution plan, commonly called the $uper$aver 401(k) and four Large Local Employers defined benefit plans. Three of the defined benefit plans are very similar and don’t present much of a I. INTRODUCTION problem, however the Pilot’s Retirement Plan can be a The more employees a large local company has, challenge. the more likely a family law attorney is to deal with the The Pilot’s plan has two components, a Fixed division of that company’s retirement benefits in a Fund, referred to as Plan A, which is a defined benefit divorce case. A number of the largest local employers plan and a Variable Fund, referred to as Plan B, which have unusual terms or provisions in their various is actually a defined contribution plan. Plan A may be retirement plans that must be considered in drafting the divided by percentage but Plan B cannot. Plan B Decree of Divorce and QDRO. consists of units that have been awarded to the pilot I am going to look at some of the “quirks” of the employee that have a dollar value that changes daily. retirement plans for Lockheed Martin, the various A statement is sent to the employee annually, ending school districts under the Teacher Retirement System on December 31 of a year and the statement is usually of Texas and TIAA-CREF, American Airlines, Tarrant received the following April. A QDRO prepared on County, Bell Helicopter Textron, UPS, General this plan must state the exact number of units of Plan B Motors, Alcon Laboratories, BNSF, EDS and the City to be awarded to the alternate payee and the division of Fort Worth. must be on a December 31 date. In cases where the Although the U.S. Government is a large local divorce is during the calendar year, the employee can employer, both civilian and military personnel, I am obtain an estimate of the number of units awarded for not including a discussion of the Civil Service the partial year from the pilot’s union but the division Retirement System (CSRS), Federal Employees date in the QDRO must still be on a December 31. If Retirement System (FERS) or military retirement since you use the prior December 31, the alternate payee can those plans are unusual enough to warrant a separate get an immediate distribution. If you use the upcoming paper. December 31, the distribution will be delayed. Another unusual feature of the Pilot’s Plan is that II. KNOW THE NAME OF THE PLAN the alternate payee has a choice in the Plan A benefit of Most large employers have multiple retirement receiving a monthly annuity payment or can elect a plans. It is important to know the exact name of the lump sum cash out. If the employee has reached early plan or plans to be divided early in a case so you can retirement age, the lump sum distribution can be determine any special problems that may be immediate. This feature has led to parties reaching an encountered in the division. For instance, American agreement whereby the alternate payee is awarded all Airlines has four separate defined benefit pension of the Plan A benefits and the employee is awarded all plans, depending upon the job the employee does. of the Plan B benefits. In times where American There is a Pilot’s plan, one for members of the Airlines is struggling, the parties find it attractive to Transportation Workers Union, one for flight opt for a division that allows the total and immediate attendants and one for Agents, Management and cash out of the Plan A benefits. That way, if American Specialists, Support Personnel and Officers. The was to go into bankruptcy and turn the Plan over to the Pilot’s plan is the one with the most quirks. PBGC, the parties would not face the possibility of a severe reduction in the value of the Plan A benefit. A III. SPECIFIC EMPLOYERS few parties have even gone so far as to divorce so they A. Alcon Laboratories could cash out all the benefits, then remarry. Alcon has a number of defined contribution plans A new quirk concerning the $uper$aver account so it is very important to name the correct plan. The has just been exposed. American Airlines has recently Alcon 401(k) Plan and Alcon Retirement Plan is a bit begun to use a third party company to process its unusual in that although they are separate plans, they QDROs. The model order provided by the Plan only can be divided in one QDRO. As with many plans, shows an option for division where any outstanding Alcon won’t accept a QDRO that attempts to make a loan value is not included in making the computation division between two dates, such as awarded the of the award to the alternate payee. In the past, the alternate payee 50% of the account accumulated from Plan has approved QDROs that do include the loan the date of marriage to date of divorce. In such cases, balance, however, I just received my first rejection for it will be necessary for you to obtain statements for the an order in which I attempted to include the loan two dates and make the calculation yourself, awarded a balance. There is no legitimate reason to not approve specific dollar amount. an order that includes the loan value, but unless the third party company reconsiders, you will be forced to B. American Airlines make the calculations yourself, including the loan 1 balance, and award the alternate payee a specific dollar Retirement System. Its name is the Burlington amount. Northern Santa Fe Retirement Plan and is a traditional American Airlines also has a stock option plan but pension. Salaried employees may also participate in a that is non-qualified and AA will not accept a QDRO defined contribution plan, the name of which is the or other division order for that plan. As a practical Burlington Northern Santa Fe Investment and matter, it is unlikely that AA stock will reach a price Retirement Plan. Since both the defined contribution that makes those options redeemable. plan and the defined benefit plan contain the word “Retirement”, confusion can result and you may divide C. Bell Helicopter Textron only one of the plans, rather than both. Bell has two defined benefit plans, one for hourly employees and one for salaried. Be aware that if the E. EDS employee has been both hourly and salaried, both plans EDS has a defined benefit plan named the EDS will have to be divided using separate QDROs. The Retirement Plan. For employees that terminated or plan for salaried employees is relatively new and is retired prior to 1/1/98, the Plan has a traditional named the Textron Retirement Program. It is a accrued benefit. For employees active after that date, complicated, two component plan with a cash balance the Plan has a Personal Pension Account (PPA), which part named the Retirement Account Plan and a is basically a cash balance plan, with an account in the traditional pension part named the Bell Helicopter name of the employee with a specific amount of Textron Master Retirement Plan – Salaried Plan Part. money in it. The quirk is that even though there is The traditional plan provides what they term a “Floor money in an account and lump sum awards may be Benefit” and there is an offset caused by the value of made, the alternate payee may not take a distribution the newer cash balance Retirement Account Plan. A until the participant reaches early retirement age. quirk of both of the defined benefit plans is that in the EDS also has a defined contribution 401(k) which event the employee is terminated prior to the division is a typical 401(k) plan. date, you must make the division as of the termination date rather than date of divorce. This requirement is F. Fidelity Investments nonsense, but if you want approval, you must comply. In addition to being a large Tarrant County employer, If you are dividing the retirement of a salaried Fidelity is the third party administrator for hundreds of employee and the division date is prior to 1/1/07, you large employer plans. Please see the Fidelity-related must use the old model and old name without the cash comments under General Motors below, especially balance Retirement Account Plan. For divisions after Fidelity’s online preparation service. For plans that date, use the new model and name. administered by Hewitt & Assoc. and Ceridian, those companies also have an online service that is useful, D. BNSF but more limited It can be confusing to make certain you know of and are dividing all of the retirement plans for an G. City of Fort Worth employee of BNSF. As with many employers, there is Rather than participating in the state-wide Texas a different between hourly employees and salaried. All Municipal Retirement System, employees for the City employees will participate in the federal Railroad of Fort Worth participate in the Employees’ Retirement System, which is in lieu of, and similar to Retirement Fund of the City of Fort Worth. This is a Social Security. Due to that fact, one can’t divide statutory plan, which means there are few options in Railroad Retirement Tier I benefits. All non-Tier I making a division or drafting a Decree and QDRO. As benefits may be divided. Additionally, there is a with almost all statutory plans, the alternate payee separate, statutory Divorced Spouse Annuity that is cannot begin to collect benefits until the participant provided by law, not by QDRO, in certain has actually retired. Further, the participant makes all circumstances. Don’t get caught agreeing to give your election decisions and the alternate payee is stuck with client the statutory Divorced Spouse Annuity, which those choices. The QDRO can’t direct or order the the client has by law, rather than doing a proper participant to make a certain election or name a certain division of the non-Tier I benefits. beneficiary, so any surviving spouse benefits are only For hourly employees, there may be a defined those provided statutorily by the Plan. contribution plan, the Burlington Northern Santa Fe This Plan does have a DROP provision and if so Company Non-Salaried Employees 401(k) Retirement elected by the participant, monthly DROP payments Plan, but no defined benefit plan other than the federal will be placed in an account for the participant until Railroad Retirement. Participation in the 401(k) is not actual retirement. Once the participant has retired, the mandatory. alternate payee will be able to access this lump sum For salaried employees, there will be another account and take a distribution under the same terms defined benefit plan, in addition to the federal Railroad as elected by the participant. Be cautious of cases in 2 which the divorce occurs prior to a DROP election. If A final quirk to GM plans is in removing a you neglect to include DROP division language (since former spouse as a beneficiary of a Plan in the event of there is no DROP account at the time of divorce), the death of the participant. Most plans simply allow when the participant subsequently elects to participate the parties to sign forms to remove a former spouse in DROP, the former spouse will not share in those and appoint a new beneficiary. GM requires a QDRO DROP payments. They must be specifically to do that, even if 100% of the benefit is awarded to mentioned in the QDRO. the participant. The good news is that a model for that is provided online by Fidelity and it can be prepared H. General Motors online. Although rarely used, Fidelity also provides GM has two defined benefit plans, one for hourly model order for child support and alimony for GM employees and one for salaried. The plans are quite plans. similar. For a number of years, GM has offered employees an early retirement subsidy to entice early I. Lockheed Martin retirement. This subsidy is usually paid in a lump sum Lockheed Martin has a number of defined benefit upon early retirement. If you represent the alternate and defined contribution plans, primarily separated as payee, make certain that these benefits are specifically those for hourly employees and those for salaried mentioned in the Decree and QDRO. employees. The defined benefit plans are traditional A quirk in GM orders, both the defined benefit pension plans and fairly straight-forward. The only and defined contribution plans, is that they are real quirk with the defined contribution (savings) plans administered by Fidelity. Fidelity has very rigid is that the plan doesn’t allow a division between two requirement and can very challenging to deal with. dates, such as 50% of the account accumulated from One can sign up with Fidelity, at no cost, for access to the date of marriage to the date of divorce. In the its online services. Anytime you see a plan statement event the participant has contributions to the account from Fidelity or any evidence that Fidelity is involved, prior to marriage, the parties will have to obtain check the online site to see if Fidelity is actually the account statements as of the date of marriage and date plan administrator or simply the record keeper. For of divorce and do the calculation, awarded the plans in which Fidelity is the Administrator, QDRO alternate payee a specific dollar amount. Procedures and model orders are available online and under normal circumstances, the QDRO should be J. Tarrant County prepared using the online service. Most employees participate in the Texas County Although use of Fidelity’s online preparation and District Retirement System (TCDRS). As with service results in an order that does not follow the most state retirement plans, the employee makes normal format of our Texas orders, you should still use contributions to the System as a percentage of his or it. Online preparation will result in much quicker her income. review and approval of the QDRO. More important, Unlike the Teacher Retirement System, lump sum online preparation can greatly reduce the fee charged dollar awards can be used in the division. However, by Fidelity in processing the QDRO. For most defined the parties should understand that no distribution will contribution plans, Fidelity charges the parties $300 to occur until the employee takes a distribution upon process a QDRO. If you decide to use your own form retirement or termination. Further, the Decree and/or rather than the online service or, if you simply retype QDRO cannot direct the employee as to which election the order to look like a normal Texas order, the fee of benefit form to take. The employee may elect a increases to $1,200. Occasionally, a Judge will refuse refund of his or her contributions (rarely done) or elect to sign the unusual Fidelity order, but once you explain a monthly annuity payment. Whatever the employee why it’s being used, I haven’t had a problem in getting elects, the alternate payee is stuck with. a signature. In drafting the Decree, the attorney should state In cases in which there was credited service in the whether the division is being made based upon Plan prior to marriage, be cautious in using the Fidelity credited service time or accumulated contributions. marital property fraction formula. Many times the The QDRO will then be drafted following the terms of formula generated uses the Cearley-Taggart formula, the Decree. In some cases, the awarded amount can which makes the division as of the date of retirement, vary greatly depending upon which division method is rather than the Berry formula, which makes the used. division as of date of divorce. In those instances, you have little choice but to retype the order so that you K. Teacher Retirement System can reword the formula. However, the Fidelity The vast majority of public school system processing fee usually only applies to defined employees participant the Teacher Retirement System contribution plans, not defined benefit plans. of Texas (TRS). A few employees opt for the Texas Optional Retirement Plan. TRS is a hybrid defined 3 benefit plan in that members are required to contribute The UPS/IBT Full-Time Employees Pension Plan a percentage of their pay into the system. Upon has participants that may also have benefits in the retirement, the member can elect a refund of his or her Teamsters pension, the Central States, Southeast and contribution, however, the usual election is for a Southwest Areas Pension Fund. For participants in the monthly annuity payment (or a combination of lump- UPS/IBT plan prior to 1/1/2008, they also have a sum payments and monthly annuity). benefit in what is termed the “Old Plan” with Central The first quirk of TRS is its valuation. Annual States. There is an offset that occurs between the two statements are sent to members showing the amount plan benefits, but the important thing for the alternate the member has contributed to the System. The payee’s attorney is to realize that there may be benefits unwary accept that as the value of the member’s in two separate plans which will require two separate benefit. However, if the Member does what most do, property divisions and QDROs. elect monthly annuity payments, the amount of the member’s contributions have little relationship to the IV. CONCLUSION plan’s present value. The most common complaint I hear in regards to Since statements are sent out stating the amount the division of retirement plans is the length of time it the Member has contributed to the System, many takes to actually conclude the transfer. It is important believe that a specific lump sum amount can be for the parties to know in advance that division of a awarded and will be immediately distributed. That is retirement plan is seldom quick and many times not accurate. The division of TRS benefits should be difficult. Even when the QDRO is drafted promptly, made as a percentage. TRS will not accept an order entered by agreement and timely delivered to the Plan, that attempts to make a lump sum division. most plans will take a minimum of 60 – 90 days to As with most State retirement plans, the alternate process the order. Once the QDRO is approved by the payee can only begin to receive benefits once the Plan, additional paper work is normally required to employee begins to receive benefits. Further, the complete the transfer or distribution, which takes employee elects the form of the benefit and the additional time. Many parties have financial issues and alternate payee is also bound by that choice. may need access to the funds as soon as possible. Make certain your client knows that the process is not L. TIAA-CREF fast and it is not that unusual for an initial QDRO to be TIAA-CREF is primarily for employees of rejected for a variety of reasons, which causes even private educational institutions. The quirk with this more delay. Further, make certain the plan you are plan is not so much in the division as in drafting the dividing allows immediate lump sum distribution after QDRO, but care should be taken in drafting the the divorce if you know a party is in need of immediate division language in the Decree if the intent is to cash. award a specific dollar amount. There are TIAA Account numbers and CREF Contract numbers that usually coincide, such as TIAA RA #B713224-8 and CREF RA #V713224-3. Note that all but the first and last letter and number match. When a specific dollar amount is awarded, unless the Decree states differently, the QDRO will probably be drafted to make the award pro rata from each account or contract. If the intent is to not divide pro rata, the Decree should state the dollar amount that will come from each specifically named account or contract. In drafting the QDRO, all accounts and contracts must be specifically identified by number. It is important to have a recent statement from the Plan that identifies all accounts and contracts so that none are omitted. On occasion, TIAA-CREF also requires the educational institution to separately approve the QDRO, which can significantly slow the approval process.

M. UPS UPS has a number of defined benefit and defined contribution plans. Most are straight-forward, however, one defined benefit plan has a quirk. 4 5