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Retirement Plans – Understanding The Differences Between QDROs And QILDROs
What is a pension plan?
A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf, and the earnings on the investments generate income to the worker upon retirement. Generally, there are two types of pension plans: defined benefit plans and defined contribution plans. In a defined benefit plan, the employer guarantees that the employee receives a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool. About 90% of public employees, and roughly 10% of private employees, in the U.S are covered by a defined benefit plan today. In a defined contribution plan, the employer makes specific plan contributions for the worker, usually matching to varying degrees the contributions made by the employees. The final benefit received by the employee depends on the plan’s investment performance. The most commonly known defined contribution plan is the 401(k), and its equivalent for nonprofits’ workers, the 403(b).
What is a QDRO?
A QDRO is a court order that creates or recognizes the existence of an alternate payee’s right to receive all or a portion of a participant’s accrued benefits in a retirement plan. A QDRO is required in order to have a valid and enforceable assignment of all or part of a tax-qualified retirement plan. A pension plan must comply with a valid QDRO. A QDRO must contain the following four elements in order to be valid:
- The name and last known mailing address of the participant and alternate payee
- The dollar amount, percentage or method to calculate transfer amount
- The number of payments or period of payments that are to be paid
- The name of the plan
Under federal law, a pension plan, whether defined benefit or defined contribution, must provide survivor benefits for the participant’s spouse. If the participant and the participant’s spouse divorce before the participant’s annuity starting date, the divorced spouse loses all right to the survivor benefits. If the participant remarries, the new spouse may acquire the survivor benefits. However, a QDRO can change that result. To the extent that a QDRO requires a former spouse to be treated as the surviving spouse for all or a part of the survivor benefits, a subsequent spouse cannot be treated as the participant’s surviving spouse. If the participant remarries, the new spouse may acquire the survivor benefits.
Not all plans can be allocated in a divorce; federal and state governmental pensions in particular are not qualified plans divisible by QDRO. Retirement benefits for federal employees, for example, are generally administered by the Civil Service Retirement System. In Illinois, a state government pension plan will be allocated pursuant to a QILDRO.
What is a QILDRO?
QILDRO” means an Illinois court order that creates or recognizes the existence of an alternate payee’s right to receive all or a portion of a member’s accrued benefits in a retirement system and is Section 503(b)(2) of the Illinois Marriage and Dissolution of Marriage Act.
A QILDRO is not the same as a QDRO. Most notably, because a QILDRO terminates on the participant’s death or refund terminating the participant’s participation in the fund, the former spouse only receives benefits when they are paid to the participant and may never receive a full payment of benefits. If the participant dies while still in active service, the former spouse will never receive benefits. This differs from a QDRO, which creates an independent interest in the former spouse. Also, while a QDRO can assign survivor benefits, QILDROs do not apply to death or survivor benefits; with the exception that a former spouse may be assigned part of the “death benefit.” The death benefit, however, is not the same as a periodic survivor benefit. It generally is a small, one-time payment. Moreover, QILDROs do not apply to disability, life or health insurance benefits. All QILDROs relating to a member’s participation in a particular retirement system shall expire and cease to be effective upon the issuance of a member’s refund that terminates the member’s participation in that retirement system, without regard to whether the refund was paid to the member or to an alternate payee under a QILDRO. An expired QILDRO shall not be automatically revived by any subsequent return by the member to service under that retirement system.
Where retirement benefits are concerned in relation to a divorce, the Judgment for Dissolution of Marriage and any accompanying Marital Settlement Agreement must allocate how such benefits will be divided post-judgment. Subsequently, a QDRO or QILDRO that reflects the agreement should be drafted and entered for approval by a Plan Administrator. However, Illinois courts retain infinite jurisdiction to enforce a Judgment for Dissolution by entering or amending a QDRO/QILDRO that reflects the language in the JDM. In re Marriage of Allen, 798 N.E.2d 135, 137 (Ill. App. Ct. 2003). In Allen, the judgment in question specified a formula for determining a former spouse’s share of a pension plan. The original QDRO contained a different formula. The amendment to the QDRO changed the formula to conform to the judgment. This change did not impose new or different obligations on the parties. The amendment to the QDRO was necessary to enforce the petitioner’s rights and obligations with respect to the pension. Since the amended order only enforced the provisions of the judgment, the court had jurisdiction to make the modifications.