Municipal Domestic Relations Orders in Divorce
By:Mark K. Altschuler
Many municipal retirement systems in Florida that do not participate in FRS will not accept a QDRO or QDRO type domestic relations order. One example of a municipal retirement system not participating in FRS is the City of Clearwater Employees’ Pension Fund. Supposing there is insufficient cash for an immediate offset, the question remains as to how proceed with equitable distribution regarding the Participant’s pension.
The solution is a between the parties domestic relations order (DRO), paid to the Alternate Payee on an as-if-when basis. Since payments go from the Participant to the Alternate Payee, rather than from the Plan, counsel for the Alternate Payee may consider inserting a breach of contract clause in the settlement agreement, including a judgment award. The judgment award can be based on the present value of the pension, as determined by a qualified pension actuarial expert.
Assuming payments are made by the Participant, the biggest remaining problem is the tax issue, since the Participant makes after tax payments to the Alternate Payee. The question, then, is what is the effective tax rate the Participant is paying? The payments made each month by the Participant to the Alternate Payee are typically based on Federal withholding plus payroll and local taxes (if any), but the actual Federal tax rate is not known until taxes are filed. Therefore, there needs to be language in the DRO to the effect that the Participant’s adjusted gross income (or taxable income after itemized deductions) and taxes on that income will determine the actual Federal tax rate. Once the Federal tax rate is determined from the filing, the actual total tax rate, including payroll and local taxes (if any) is then determined. If the withholding was too high, the Alternate Payee will then receive additional makeup payments, and if the withholding too low, the Participant will receive a credit.
The settlement agreement should include a clause giving the Alternate Payee the right to review the Participant’s tax returns, and also a clause to the effect that any dispute over the tax computation will be settled with binding arbitration, thus avoiding further returns to court. While this method is not ideal, it is workable, and a potential equitable distribution solution where there are insufficient assets for a cash buyout and the plan does not accept QDROs.
For further review of this issue, drafting settlement agreements under Boyett, Blaine, and Padot, FRS, the Armed Forces Retirement System, and all your QDRO and pension valuation needs, please visit our exhibit table at the upcoming AAML 34th Annual Institute in Orlando May 3-5, 2012, or contact our office at (305) 777-0468/toll free (800) 288-3675 or firstname.lastname@example.org.