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 Large Local Employers

I. INTRODUCTION

The more employees a large local company has, the more likely a family law attorney is to deal with the division of that company’s retirement benefits in a divorce case. A number of the largest local employers have unusual terms or provisions in their various retirement plans that must be considered in drafting the Decree of Divorce and QDRO.

I am going to look at some of the “quirks” of the retirement plans for Lockheed Martin, the various school districts under the Teacher Retirement System of Texas and TIAA-CREF, American Airlines, Tarrant County, Bell Helicopter Textron, UPS, General Motors, Alcon Laboratories, BNSF, EDS and the City of Fort Worth.

Although the U.S. Government is a large local employer, both civilian and military personnel, I am not including a discussion of the Civil Service Retirement System (CSRS), Federal Employees Retirement System (FERS) or military retirement since those plans are unusual enough to warrant a separate paper.

II. KNOW THE NAME OF THE PLAN

Most large employers have multiple retirement plans. It is important to know the exact name of the plan or plans to be divided early in a case so you can determine any special problems that may be encountered in the division. For instance, American Airlines has four separate defined benefit pension plans, depending upon the job the employee does. There is a Pilot’s plan, one for members of the Transportation Workers Union, one for flight attendants and one for Agents, Management and Specialists, Support Personnel and Officers. The Pilot’s plan is the one with the most quirks.

III. SPECIFIC EMPLOYERS

A. Alcon Laboratories

Alcon has a number of defined contribution plans so it is very important to name the correct plan. The Alcon 401(k) Plan and Alcon Retirement Plan is a bit unusual in that although they are separate plans, they can be divided in one QDRO. As with many plans, Alcon won’t accept a QDRO that attempts to make a division between two dates, such as awarded the alternate payee 50% of the account accumulated from the date of marriage to date of divorce. In such cases, it will be necessary for you to obtain statements for the two dates and make the calculation yourself, awarded a specific dollar amount.

B. American Airlines

American Airlines has one defined contribution plan, commonly called the $uper$aver 401(k) and four defined benefit plans. Three of the defined benefit plans are very similar and don’t present much of a problem, however the Pilot’s Retirement Plan can be a challenge.

The Pilot’s plan has two components, a Fixed Fund, referred to as Plan A, which is a defined benefit plan and a Variable Fund, referred to as Plan B, which is actually a defined contribution plan. Plan A may be divided by percentage but Plan B cannot. Plan B consists of units that have been awarded to the pilot employee that have a dollar value that changes daily. A statement is sent to the employee annually, ending on December 31 of a year and the statement is usually received the following April. A QDRO prepared on this plan must state the exact number of units of Plan B to be awarded to the alternate payee and the division must be on a December 31 date. In cases where the divorce is during the calendar year, the employee can obtain an estimate of the number of units awarded for the partial year from the pilot’s union but the division date in the QDRO must still be on a December 31. If you use the prior December 31, the alternate payee can get an immediate distribution. If you use the upcoming December 31, the distribution will be delayed.

Another unusual feature of the Pilot’s Plan is that the alternate payee has a choice in the Plan A benefit of receiving a monthly annuity payment or can elect a lump sum cash out. If the employee has reached early retirement age, the lump sum distribution can be immediate. This feature has led to parties reaching an agreement whereby the alternate payee is awarded all of the Plan A benefits and the employee is awarded all of the Plan B benefits. In times where American Airlines is struggling, the parties find it attractive to opt for a division that allows the total and immediate cash out of the Plan A benefits. That way, if American was to go into bankruptcy and turn the Plan over to the PBGC, the parties would not face the possibility of a severe reduction in the value of the Plan A benefit. A few parties have even gone so far as to divorce so they could cash out all the benefits, then remarry.

A new quirk concerning the $uper$aver account has just been exposed. American Airlines has recently begun to use a third party company to process its QDROs. The model order provided by the Plan only shows an option for division where any outstanding loan value is not included in making the computation of the award to the alternate payee. In the past, the Plan has approved QDROs that do include the loan balance, however, I just received my first rejection for an order in which I attempted to include the loan balance. There is no legitimate reason to not approve an order that includes the loan value, but unless the third party company reconsiders, you will be forced to make the calculations yourself, including the loan balance, and award the alternate payee a specific dollar amount.

American Airlines also has a stock option plan but that is non-qualified and AA will not accept a QDRO or other division order for that plan. As a practical matter, it is unlikely that AA stock will reach a price that makes those options redeemable.

C. Bell Helicopter Textron

Bell has two defined benefit plans, one for hourly employees and one for salaried. Be aware that if the employee has been both hourly and salaried, both plans will have to be divided using separate QDROs. The plan for salaried employees is relatively new and is named the Textron Retirement Program. It is a complicated, two component plan with a cash balance part named the Retirement Account Plan and a traditional pension part named the Bell Helicopter Textron Master Retirement Plan – Salaried Plan Part. The traditional plan provides what they term a “Floor Benefit” and there is an offset caused by the value of the newer cash balance Retirement Account Plan. A quirk of both of the defined benefit plans is that in the event the employee is terminated prior to the division date, you must make the division as of the termination date rather than date of divorce. This requirement is nonsense, but if you want approval, you must comply.

If you are dividing the retirement of a salaried employee and the division date is prior to 1/1/07, you must use the old model and old name without the cash balance Retirement Account Plan. For divisions after that date, use the new model and name.

D. BNSF

It can be confusing to make certain you know of and are dividing all of the retirement plans for an employee of BNSF. As with many employers, there is a different between hourly employees and salaried. All employees will participate in the federal Railroad Retirement System, which is in lieu of, and similar to Social Security. Due to that fact, one can’t divide Railroad Retirement Tier I benefits. All non-Tier I benefits may be divided. Additionally, there is a separate, statutory Divorced Spouse Annuity that is provided by law, not by QDRO, in certain circumstances. Don’t get caught agreeing to give your client the statutory Divorced Spouse Annuity, which the client has by law, rather than doing a proper division of the non-Tier I benefits.

For hourly employees, there may be a defined contribution plan, the Burlington Northern Santa Fe Company Non-Salaried Employees 401(k) Retirement Plan, but no defined benefit plan other than the federal Railroad Retirement. Participation in the 401(k) is not mandatory.

For salaried employees, there will be another defined benefit plan, in addition to the federal Railroad Retirement System. Its name is the Burlington Northern Santa Fe Retirement Plan and is a traditional pension. Salaried employees may also participate in a defined contribution plan, the name of which is the Burlington Northern Santa Fe Investment and Retirement Plan. Since both the defined contribution plan and the defined benefit plan contain the word “Retirement”, confusion can result and you may divide only one of the plans, rather than both.

E. EDS

EDS has a defined benefit plan named the EDS Retirement Plan. For employees that terminated or retired prior to 1/1/98, the Plan has a traditional accrued benefit. For employees active after that date, the Plan has a Personal Pension Account (PPA), which is basically a cash balance plan, with an account in the name of the employee with a specific amount of money in it. The quirk is that even though there is money in an account and lump sum awards may be made, the alternate payee may not take a distribution until the participant reaches early retirement age.

EDS also has a defined contribution 401(k) which is a typical 401(k) plan.

F. Fidelity Investments

In addition to being a large Tarrant County employer, Fidelity is the third party administrator for hundreds of large employer plans. Please see the Fidelity-related comments under General Motors below, especially Fidelity’s online preparation service. For plans administered by Hewitt & Assoc. and Ceridian, those companies also have an online service that is useful, but more limited

G. City of Fort Worth

Rather than participating in the state-wide Texas Municipal Retirement System, employees for the City of Fort Worth participate in the Employees’ Retirement Fund of the City of Fort Worth. This is a statutory plan, which means there are few options in making a division or drafting a Decree and QDRO. As with almost all statutory plans, the alternate payee cannot begin to collect benefits until the participant has actually retired. Further, the participant makes all election decisions and the alternate payee is stuck with those choices. The QDRO can’t direct or order the participant to make a certain election or name a certain beneficiary, so any surviving spouse benefits are only those provided statutorily by the Plan.

This Plan does have a DROP provision and if so elected by the participant, monthly DROP payments will be placed in an account for the participant until actual retirement. Once the participant has retired, the alternate payee will be able to access this lump sum account and take a distribution under the same terms as elected by the participant. Be cautious of cases in which the divorce occurs prior to a DROP election. If you neglect to include DROP division language (since there is no DROP account at the time of divorce), when the participant subsequently elects to participate in DROP, the former spouse will not share in those DROP payments. They must be specifically mentioned in the QDRO.

H. General Motors

GM has two defined benefit plans, one for hourly employees and one for salaried. The plans are quite similar. For a number of years, GM has offered employees an early retirement subsidy to entice early retirement. This subsidy is usually paid in a lump sum upon early retirement. If you represent the alternate payee, make certain that these benefits are specifically mentioned in the Decree and QDRO.

A quirk in GM orders, both the defined benefit and defined contribution plans, is that they are administered by Fidelity. Fidelity has very rigid requirement and can very challenging to deal with. One can sign up with Fidelity, at no cost, for access to its online services. Anytime you see a plan statement from Fidelity or any evidence that Fidelity is involved, check the online site to see if Fidelity is actually the plan administrator or simply the record keeper. For plans in which Fidelity is the Administrator, QDRO Procedures and model orders are available online and under normal circumstances, the QDRO should be prepared using the online service.

Although use of Fidelity’s online preparation service results in an order that does not follow the normal format of our Texas orders, you should still use it. Online preparation will result in much quicker review and approval of the QDRO. More important, online preparation can greatly reduce the fee charged by Fidelity in processing the QDRO. For most defined contribution plans, Fidelity charges the parties $300 to process a QDRO. If you decide to use your own form rather than the online service or, if you simply retype the order to look like a normal Texas order, the fee increases to $1,200. Occasionally, a Judge will refuse to sign the unusual Fidelity order, but once you explain why it’s being used, I haven’t had a problem in getting a signature.

In cases in which there was credited service in the Plan prior to marriage, be cautious in using the Fidelity marital property fraction formula. Many times the formula generated uses the Cearley-Taggart formula, which makes the division as of the date of retirement, rather than the Berry formula, which makes the division as of date of divorce. In those instances, you have little choice but to retype the order so that you can reword the formula. However, the Fidelity processing fee usually only applies to defined contribution plans, not defined benefit plans.

A final quirk to GM plans is in removing a former spouse as a beneficiary of a Plan in the event of the death of the participant. Most plans simply allow the parties to sign forms to remove a former spouse and appoint a new beneficiary. GM requires a QDRO to do that, even if 100% of the benefit is awarded to the participant. The good news is that a model for that is provided online by Fidelity and it can be prepared online. Although rarely used, Fidelity also provides model order for child support and alimony for GM plans.

I. Lockheed Martin

Lockheed Martin has a number of defined benefit and defined contribution plans, primarily separated as those for hourly employees and those for salaried employees. The defined benefit plans are traditional pension plans and fairly straight-forward. The only real quirk with the defined contribution (savings) plans is that the plan doesn’t allow a division between two dates, such as 50% of the account accumulated from the date of marriage to the date of divorce. In the event the participant has contributions to the account prior to marriage, the parties will have to obtain account statements as of the date of marriage and date of divorce and do the calculation, awarded the alternate payee a specific dollar amount.

J. Tarrant County

Most employees participate in the Texas County and District Retirement System (TCDRS). As with most state retirement plans, the employee makes contributions to the System as a percentage of his or her income.

Unlike the Teacher Retirement System, lump sum dollar awards can be used in the division. However, the parties should understand that no distribution will occur until the employee takes a distribution upon retirement or termination. Further, the Decree and/or QDRO cannot direct the employee as to which election of benefit form to take. The employee may elect a refund of his or her contributions (rarely done) or elect a monthly annuity payment. Whatever the employee elects, the alternate payee is stuck with.

In drafting the Decree, the attorney should state whether the division is being made based upon credited service time or accumulated contributions. The QDRO will then be drafted following the terms of the Decree. In some cases, the awarded amount can vary greatly depending upon which division method is used.

K. Teacher Retirement System

The vast majority of public school system employees participant the Teacher Retirement System of Texas (TRS). A few employees opt for the Texas Optional Retirement Plan. TRS is a hybrid defined benefit plan in that members are required to contribute a percentage of their pay into the system. Upon retirement, the member can elect a refund of his or her contribution, however, the usual election is for a monthly annuity payment (or a combination of lump-sum payments and monthly annuity).

The first quirk of TRS is its valuation. Annual statements are sent to members showing the amount the member has contributed to the System. The unwary accept that as the value of the member’s benefit. However, if the Member does what most do, elect monthly annuity payments, the amount of the member’s contributions have little relationship to the plan’s present value.

Since statements are sent out stating the amount the Member has contributed to the System, many believe that a specific lump sum amount can be awarded and will be immediately distributed. That is not accurate. The division of TRS benefits should be made as a percentage. TRS will not accept an order that attempts to make a lump sum division.

As with most State retirement plans, the alternate payee can only begin to receive benefits once the employee begins to receive benefits. Further, the employee elects the form of the benefit and the alternate payee is also bound by that choice.

L. TIAA-CREF

TIAA-CREF is primarily for employees of private educational institutions. The quirk with this plan is not so much in the division as in drafting the QDRO, but care should be taken in drafting the division language in the Decree if the intent is to 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.

The UPS/IBT Full-Time Employees Pension Plan has participants that may also have benefits in the Teamsters pension, the Central States, Southeast and Southwest Areas Pension Fund. For participants in the UPS/IBT plan prior to 1/1/2008, they also have a benefit in what is termed the “Old Plan” with Central States. There is an offset that occurs between the two plan benefits, but the important thing for the alternate payee’s attorney is to realize that there may be benefits in two separate plans which will require two separate property divisions and QDROs.

IV. CONCLUSION

The most common complaint I hear in regards to the division of retirement plans is the length of time it takes to actually conclude the transfer. It is important for the parties to know in advance that division of a retirement plan is seldom quick and many times difficult. Even when the QDRO is drafted promptly, entered by agreement and timely delivered to the Plan, most plans will take a minimum of 60 – 90 days to process the order. Once the QDRO is approved by the Plan, additional paper work is normally required to complete the transfer or distribution, which takes additional time. Many parties have financial issues and may need access to the funds as soon as possible. Make certain your client knows that the process is not fast and it is not that unusual for an initial QDRO to be rejected for a variety of reasons, which causes even more delay. Further, make certain the plan you are dividing allows immediate lump sum distribution after the divorce if you know a party is in need of immediate cash.

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