Interview with Mark Altschuler, Actuary
The President of Pension Analysis Consultants, Mark Altschuler is well-versed in the complex arena of equitable distribution and marital dissolution matters. He has prepared more than 15,000 marital pension valuations and drafted many QDROs for counsel. Mark is widely recognized and nationally respected by the legal community for clearly presenting and explaining the concepts of present value analysis and valuing pensions in the courtroom, seminars at state and county bar associations, private firms, and continuing legal education workshops. Mark writes a nationally distributed newsletter on pension issues and marital dissolution called “DivTips” and is a contributing editor to the companion textbook Valuation Strategies in Divorce. He is also the author of Value of Pensions in Divorce and numerous articles on pensions and divorce that have been published in major legal publications.
What are the pitfalls facing family lawyers who need QDROs for their clients?
There are three main areas. One is the survivor benefit area, another is not understanding what coverture means and the third is using dollar awards in defined benefit QDROs. The survivor benefit’s biggest pitfall is the military plan because it only allows one survivor beneficiary. If there isn’t a survivor benefit agreement already in the marital settlement agreement, it’s almost impossible to get a military court order—that’s what a QDRO is called for the military—agreed to by the other side. There can’t be two survivor beneficiaries. If the service member has named the first spouse as a survivor, the second can’t also be named.
There’s a workaround if the first spouse agrees to indemnify the second spouse to be the sole survivor beneficiary. The military plan has a lot of options but unfortunately it also has this caveat. If you’re representing the former spouse in military plans, you want the survivor benefit in your agreement.
Most state and federal plans allow more than one survivor. Even if it’s not in the agreement, the alternate payee can still claim in these plans. The alternate payee can be the survivor on his or her own portion because that’s his or her piece of the pension. Even if it’s not in the agreement, the alternate payee owns that piece. The problem is that it’s usually in the form of 50% survivor annuities. The client will still get a survivor benefit as owner of that piece of the pension, but without some language in the marital settlement agreement to keep the benefit level, the alternate payee’s benefit drops in half when the member dies.
Although most state and federal plans allow two survivors, there are a couple of exceptions. The New York City Employee Retirement System only allows one survivor, the same problem as the military. The Florida Retirement System allows zero, so regardless of the language in your agreement, it doesn’t make a difference. They don’t allow a survivor benefit—the alternate payee’s benefit ends when the member participant dies.
ERISA plans are private plans governed by the Employee Retirement Income Security Act, and companies like General Electric, General Motors, Lockheed, Merck, etc., plans are governed by ERISA. Almost all of them have what’s called a separate interest QDRO, meaning you can create a benefit payable for the life of the alternate payee, which makes a survivor benefit post-retirement irrelevant. Survivor benefit language isn’t critical in those plans but some ERISA plans require a pre-retirement survivor annuity. If you don’t have pre-retirement survivor annuity language, the alternate payee’s benefit will only be half of what it’s supposed to be if the participant dies before the alternate payee commences benefits. Once the alternate payee commences benefits and that benefit is a percentage of the marital portion and continues for life, you don’t need a survivor benefit.
In terms of the hierarchy, that’s not as bad because at least post-retirement you don’t need a survivor benefit. State plans need a survivor benefit pre and post-retirement but as they allow more than two, they won’t object to the alternate payee being the survivor beneficiary on their own portion. The military and NYCERS (New York City Employee Retirement System) are the worst cases because they only allow one survivor. Unless you get the survivor benefit language in your marital settlement agreement, the other side is certainly going to object.
Another problem is where the attorneys don’t quite understand coverture. They put language in agreements where the alternate payee’s portion will be 50% of the benefit accrued from marriage to the cut-off date. The cut-off date could be the date of separation in Pennsylvania, date of filing in New York, date of complaint in New Jersey, the date of filing in Florida. That’s the concept called bright line, where the marital piece of the pension ends at the cut-off date. Most of the states in this country follow the coverture method, where the marital piece doesn’t end at the cut-off date. The benefit in the future retirement time is called the coverture fraction, which is service during the marriage divided by total service. That’s how the marital and non-marital are partitioned. States that follow coverture are New York, Pennsylvania, New Jersey, and California, for example. States that are bright line are Virginia, Texas, Florida, and North Carolina. Actually, North Carolina’s a hybrid state – which means that if you put language in your agreement that the alternate payee will receive one-half the benefit accrued between marriage and the cut-off date, you’re short-changing your client. There’s no reason for that language. If you put in language “one-half the marital portion,” then that automatically means one-half the marital portion in a coverture state. Yet we see many agreements that say one-half the benefit accrued between marriage and the cut-off date. It’s important to understand the concept of coverture.
The third problem area is in boarding a dollar amount and defined benefit pension. We do a valuation and sometimes there’s a case like the ABL case in New Jersey that I wrote an article on in the American Journal of Family Law. The pension valuation was about $96,000. You would take that valuation and do an offset against other assets, or at least the house. You take that valuation, the pension’s worth as a certain dollar amount, offset against other assets and come to a percentage award based upon it. In the ABL case, they got the valuation and said the alternate payee gets 50% comma half of $96,000, which became a real problem. There’s no point in doing the pension valuation if you’re giving 50%. They put comma half of $96,000. The participant said the wife was only entitled to half of $96,000 and it became a real mess. Pension valuation tends to limit the alternate payee’s award.
Another problem we see is lump sum values or dollar values for defined benefit plans. You can’t award a lump sum in a defined pension QDRO. It’s a monthly benefit for the alternate payee—a lump sum can’t even be done. Those are the three main pitfalls.
Can you tell us when a percentage is used?
A percentage would be used in a defined benefit QDRO because a lump sum can’t be assigned. Even if you turn that into a monthly benefit, in a coverture state it’s going to short-change the alternate payee. The present value is tied into a benefit accrued as of a past date. Under coverture you’re not freezing the marital portion — it’s a future benefit. Even with a dollar amount, a QDRO that awards the alternate payee $300 a month. The problem is the benefit is always subject to adjustment because when a plan takes that benefit, it’s converted to a lifetime. In a separate interest QDRO, we have a benefit originally payable for the plan participant, and now payable for the alternate payee. They have to actuarially convert that benefit. They have to convert the $300 a month to make it payable for the life of the alternate payee. Typically they’re not the same age so there’s a problem right there, and the plans don’t know what to do with that. Secondly, there could be a cost of living adjustment – you fix that benefit. Thirdly, there’s early retirement. Under an ERISA plan, the alternate payee can retire or start commencing benefits before the participant. If they take early retirement, then there’s a reduction of that $300 a month.
If you’re in a bright line state you want to award a percentage of an accrued benefit as of some date in the past, or in a coverture state, you want to award a percentage of the coverture benefit. But a dollar award in a defined benefit plan doesn’t work.
When would a specific dollar figure be used in a plan?
In a defined contribution plan like a 401(k). For example, using 50% in a defined contribution plan. If you’re going to award 50%, it should be 50% as of what date. If the cut-off date was several years ago, it wouldn’t just be 50%. It would be 50% of that past cut-off date, plus gains and losses. The only reason you would use a dollar figure is if there are no other assets, because it’s going to be 50%. Otherwise, you have statements on a defined contribution plan that you can always turn into a dollar award. When only other asset is a house, they could sell the house, split the assets and get 50% of the 401(k). The house is an asset you could also offset against that 401(k) and let one of the spouses keep the house.
The problem with when people get a house appraised is they typically get a house appraised close to trial date. The house is appraised currently, meanwhile their cut-off date was years ago. Then typically the clients will resist getting the 401(k) valued. In one case there were several assets, 401(k)s and IRAs that we knew as of the cut-off date in 2012, and we did an offset based upon that. In most cases, you’re going to value the house currently, because that’s when someone comes out to appraise it, and then you the 401(k) should also be valued currently. If the clients don’t want to pay for the valuation, a way of estimating it, assuming there’s no pre-marital agreement, is simply subtracting the post cut-off date contributions. It still includes contributions made after the cut-off date but gives a reasonable estimate to do an offset. It’s certainly a better idea than simply selling the house, splitting the proceeds and doing a 50% QDRO. In one case the house was offset against cash and multiple pension accounts were all offset as of the cut-off date. In that case, the lawyers actually did it themselves. We did a pension valuation as of the cut-off date and the lawyers were actually able to do the offset of the 401(k)s as of the cut-off date.
How are percentages determined through that type of an analysis?
Since there was a mixed defined benefit, defined contribution plan, and several 401(k)s, they turned that into a percentage with the offset number. The house was already taken care of and so we had several 401(k)s, plus a public school employees retirement system. We valued everything as of the cut-off date, did the offset, and turned that into a percentage for the defined benefit pension plan. Typically, if you just have a 401(k) and a house, we’d recommend either valuing it or doing an estimate. We’d get a current marital value of a 401(k) and compare it to the currently appraised house. Consider the basket of apples analogy. Suppose there were 100 apples in the basket that the husband and wife owned as of the cut-off date, the date of filing. Since then the wife put in 10 apples so now there are 110 apples in the basket. The marital value isn’t the value of 110 apples.
But it’s also not the value of 100 apples back on the date of filing. It’s 100 apples with today’s prices. That’s the marital value of the basket of apples. The 100 apples that existed then – at today’s prices. It’s the value as of the cut-off date plus gains and losses up until today’s date.
You’re better off comparing the marital value to the house than 50% of the 401(k) and selling the house and splitting the assets. At least you can offset a 401(k) vs. the house and allow one party to stay in the house.
How is the flat dollar value determined?
Again it’s the offset. Typically the retirement asset is pre-tax and a house is typically is post-tax.
We recommend is to do your offset, and value everything currently. You come out with a flat dollar amount and that flat dollar amount is what’s subject to the QDRO. Whereas again, with the defined benefit plan, we do the same offset scheme. We value the pension now, and come up with a dollar amount that’s owed to the alternate payee. Assuming there’s not enough cash to give the complete offset, we take what’s owed to the alternate payee divided by the marital present value and that’s the percentage award in a defined benefit plan.
Is there anything more you want to say about present value calculation?
It’s needed, because many family lawyers have a misconception that you have to do a complete offset. If the pension is valued as worth $200,000, there has to be $100,000 in cash to do an offset. That cash would have to be grossed up anyway because the pension is pre-taxed. Typically there isn’t enough money to do a complete offset. If there is enough money to do a complete offset, you’re just comparing the cash to the pension, and then you would gross down the pension. The pre-tax is $100,000, so it would be grossed down 15% to $85,000. One spouse can pay out the other $85,000 in cash and they’re done. That would be a complete offset.
A lot of attorneys think if there isn’t cash for a complete offset, they have to do a 50% QDRO. This is not true because we value the pension and the cash, the house, and 401(k) to determine the QDRO percentage. The overall scheme—all the assets are split 50/50, but the pension a specific percentage is given to the alternate payee. The present value is needed to give you a rational way of dividing the assets even though there’s possibly not enough money. It avoids the necessity of selling the house, splitting it and then doing a 50% QDRO.
Present value is useful in almost all cases unless there’s no house or the house is underwater. If there’s nothing to offset it against, no cash, nothing, then a present value wouldn’t be applied, you would just do your typical 50% QDRO.
Can you summarize what pitfalls to look out for?
If you don’t get the language in for ERISA plans, it isn’t necessarily going to be that bad. For non-ERISA plans, particularly for the military, worry about the survivor benefit. That’s the red flag.
A way to avoid these pitfalls is to use divorcetools.com, which is an intuitive way of helping with offsetting methodologies and coming out with the percentages or dollar figures. You can use your own spreadsheet, input in the various assets and your own formulas, and it calculates the offsets exactly for you.
See the article section on the Pension Analysis Consultant website for more information about pensions, a breakdown of ERISA and non-ERISA plans, and determining percentages in a QDRO.
Sometimes a client’s expectations are different from the eventual outcome. Following are some problem areas, including a few simple illustrations of QDROs gone wrong, with pointers to help you avoid a malpractice claim.
Family Lawyer Magazine publisher Dan Couvrette recently interviewed pension and QDRO expert Tim Voit and family lawyer Jordan Gerber about the role of the QDRO expert in discovery, red-flagging potential issues and time-bombs, and reducing a family lawyer’s liability.