Understanding QDROs: What Southwest Gas Holdings Employees Need to Know About Dividing Retirement Assets

If you are a resident in a US state, you should know how your Southwest Gas Holdings retirement assets may be affected by the Qualified Domestic Relations Order .

What is a Qualified Domestic Relations Order (QDRO)?

A qualified domestic relations order (QDRO) is a court judgment, decree, or order establishing the marital property rights of a spouse, former spouse, child, or dependent of a Southwest Gas Holdings pension plan participant with respect to certain qualified retirement plans. Several requirements and restrictions apply.

To What Extent Are Retirement Assets Subject to Divorce Court Jurisdiction?

A Southwest Gas Holdings retirement plan is a form of property. Like houses, cars, and bank accounts, a retirement plan can be divided between spouses at the time of a divorce. For example, if one spouse participates in a Southwest Gas Holdings pension plan at work while the other spouse remains at home to care for the children, a judge has numerous options with respect to the retirement plan. Among other choices, he or she can award all of the pension to the working spouse, award all of it to the nonworking spouse, or split it equally (50/50). Judges often use QDROs to effect these pension assignments. In a marriage of long duration, a pension plan may be one of the most valuable marital assets.

How Are Retirement Plans Classified?

Many different kinds of retirement plans exist, with individual retirement accounts ( IRAs ) being one of the more common forms. In terms of employer-sponsored retirement plans, plans are classified as either qualified or nonqualified. Basically, qualified plans are those that satisfy federal requirements and are afforded special tax treatment. Most qualified plans can be further categorized as either defined contribution plans or defined benefit plans.

Defined contribution plans--Each participant in a Southwest Gas Holdings defined contribution plan has an individual account. When you retire, you're entitled to receive your entire account balance. Funding depends on the type of plan. With some plans, the employees are the only ones who contribute, and with others, the employers do all the contributing or may match employee contributions dollar for dollar (or according to a certain percentage). Typical examples of defined contribution plans include 401(k) plans and profit-sharing plans.
Defined benefit plans--A Southwest Gas Holdings defined benefit plan does not use individual accounts. Instead, benefits for the participants in the plan are fixed under a particular formula. Specified benefits are paid to participants based on such factors as age, length of service, and amount of compensation. Generally, the plan promises to pay the employee a certain amount per month at retirement time based on enumerated factors.

Before you think about dividing pension plans, it's important to understand the difference between defined contribution plans and defined benefit plans.

What Requirements and Restrictions Apply to QDROs?

A QDRO provides for child support, alimony payments, or marital property rights for a spouse, former spouse, child, or other dependent of a qualified plan participant and is made pursuant to a state domestic relations law. It creates or recognizes the existence of the right of the individual other than the plan participant (i.e., the alternate payee) to receive all or a portion of a participant's benefits under a qualified retirement plan.

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A QDRO must satisfy certain requirements. It must clearly specify:

The name and last known mailing address of the participant and each alternate payee covered by the order
The amount or percentage of the participant's benefits the plan must pay to each alternative payee (or the manner in which such amount or percentage is to be determined)
The number of payments or periods to which the order relates, and
Each qualified retirement plan to which the order applies

However, a QDRO may not require the plan to do any of the following:

Mandate increased benefits
Pay benefits to an alternate payee that must already be paid to a different alternate payee under another QDRO, or
Provide a type or form of benefit (or any option) not otherwise provided under the plan

For instance, the QDRO can't require the plan to provide cost-of-living increases if the plan doesn't already have cost-of-living provisions. Furthermore, a spouse's plan can't allocate 60 percent of the benefits to his or her former spouse if 50 percent of the benefits had previously been allocated to another prior spouse.

In What Ways May Southwest Gas Holdings Retirement Plans Be Divided Pursuant to a QDRO?

The QDRO specifies what the plan administrator is to do with the spouse's share of the plan. If under the plan a participant has no right to an immediate cash payment, a QDRO can't require the plan administrator to make an immediate cash payment to a spouse. Instead, a QDRO will probably be used to segregate plan assets into a subtrust for the benefit of the alternate payee-spouse, with cash distributions made at the earliest time they would be permitted under plan provisions.

Defined contribution plans are easy to value because the money is in an individual account and the plan administrator usually provides a quarterly report of the value. Defined benefit plans can pose a problem, however, and often require the services of an actuary to ascertain the present value of the fund. An actuary may be necessary, for example, if your eventual pension payout is tied to your compensation during your three highest paid years.

Example(s): John is 50 years old and has a defined benefit plan that has no cash value right now. When John retires, he currently expects to receive $1,200 per month. His ex-wife, Mary, will get a portion of the payout. If there is a 50 percent split of the present value according to a QDRO, John and Mary will each get $600 per month at retirement time. However, if John actually receives $1,800 per month when he retires, Mary will still only get $600 per month.

Segregation of Plan Assets

One option is to segregate the alternate payee's portion of the plan until the employee reaches retirement age. At that time, the alternate payee can access the funds. With this approach, the alternate payee is treated as a participant in the plan. The employee's defined contribution plan balance (or defined benefit plan accrued benefit) is valued as of a certain date, and that benefit is divided between the participant and the alternate payee in accordance with the QDRO. Once divided, the alternate payee is treated similarly to a terminated participant with a vested deferred benefit.

There are certain advantages to this approach. For example, if you're the alternate payee, you're probably assured of receiving some retirement income in the future. Also, you won't have to deal with the problems of how to invest your money right now and how to value the plan today.

However, staying in the plan maintains your economic ties with your ex-spouse, so you might lose some money if your ex-spouse takes early retirement. Also, you will not be able to control the investment decisions for your share of the retirement assets. And finally, your share of the plan will generally not be accessible to you until your ex-spouse reaches retirement age.

Current Distribution of Plan Assets

the plan allows, the plan administrator can distribute (to the alternate payee) the full amount of money due. The alternate payee can then either keep the money and pay tax on it now, or roll it into an IRA within 60 days, delaying taxation until later. There are also certain advantages to this approach. For example, if you need cash now for living expenses, you can keep all of the distribution. Also, you're able to control the investment decisions.

There are some drawbacks. For example, you may be subject to income tax (and perhaps the 10 percent penalty tax) if you don't roll the money into an IRA account within 60 days. Also, requesting a current distribution requires you to make your own investment decisions. And finally, you'll lose the long-term tax-sheltering advantage as well as the retirement savings if you spend the money now.

Tip: The IRS has authority to waive the 60-day rule for rollovers under certain circumstances, such as proven hardship.

Aside From QDROs, What Options May Spouses Consider With Respect to Retirement Plan Assets?

One option is to trade retirement assets for something else. For example, a divorcing couple can simply decide that one spouse gets the entire retirement plan and the other gets the house plus alimony. Or perhaps the other spouse gets a big cash buyout right now instead of a claim on the pension assets.

There are advantages to avoiding QDROs. You will save time and money by not having to draft a QDRO. QDROs can be very expensive, especially when actuaries must be hired. Trading assets can simplify the property settlement considerably, which saves attorney's fees. Also, you may be able to trade for an asset you really want, like the house.

However, you may jeopardize your future financial security if you relinquish pension rights today. Also, you and your spouse may not have enough other assets to make a fair division if one of you keeps the entire retirement plan. And if the retirement plan is a defined benefit plan, it will have to be valued in order to determine what amount of other assets would make an equitable offset.

Tip: Remember that QDROs don't apply to most nonqualified retirement plans, such as certain annuity plans and certain deferred compensation plans. So, if your spouse's plan is a nonqualified one, the specific QDRO rules may not have to be followed.

Tip: Also, the QDRO rules don't apply to IRAs. Nevertheless, it is possible for a QDRO to require a distribution of pension benefits to an employee and then a transfer of the distribution to an IRA for the benefit of the former spouse.

When Retirement Plans Are Divided Pursuant to a Court Order, What Are the Income-tax Ramifications?

Tax impact of QDRO on plan participant--If a QDRO orders a distribution of funds from a participant's plan to a spouse or former spouse, those funds will not represent taxable income to the plan participant. The 10 percent early withdrawal penalty will not apply. If the alternate payee is a child or dependent (rather than a spouse), then the distribution will be taxed to the plan participant. In such a case, the 10 percent early withdrawal penalty will still not apply.
Tax impact on plan participant if there is no QDRO--If there is no QDRO and retirement plan assets are distributed to a spouse (or anyone else), then the distribution will be taxed to the plan participant. Furthermore, the 10 percent early withdrawal penalty may apply. Beware, also, of withholding requirements.
Tax impact of QDRO on former spouse (or alternate payee)--A spouse or former spouse who receives a distribution under a QDRO steps into the shoes of the plan participant. As a result, such distributions become taxable to the spouse rather than to the plan participant. The money will be included in the alternate payee's gross income for the year of distribution. However, any cost basis that the participant had in the plan must be apportioned. It will be allocated on a pro rata basis between the present value of the alternate payee's interest and the total present value of all the benefits payable with respect to the plan participant.

Example(s): Assume John was married to Mary and had a vested balance in his 401(k) plan of $300,000. John had made after-tax contributions to the plan in the amount of $30,000. When John and Mary negotiated a divorce, it was decided that Mary would get 50 percent of the plan assets immediately ($150,000). John's $30,000 after-tax basis in the plan will be allocated to him and Mary based on the ratio of their respective interests in the plan. Thus, $15,000 of the $150,000 distribution to Mary will be nontaxable. The remaining $135,000 will be taxable to Mary unless she rolls this money over into an IRA within 60 days of receipt. Since the distribution was made pursuant to a QDRO, there will not be a 10 percent early withdrawal penalty.

Tip: Distributions to children and other dependents will be taxable to the plan participant.

If the alternate payee is the spouse or former spouse, the taxable part of any distribution received by such person will qualify as an eligible rollover distribution. Thus, it can be rolled over into an IRA within 60 days of receipt. If the alternate payee is a child or other dependent, the money may not be rolled over into an IRA.
Tax impact on former spouse if there is no QDRO--If there is no QDRO, the former spouse doesn't include the distribution in gross income; the distribution is taxable to the plan participant. Also, the plan participant may be subject to the 10 percent early withdrawal penalty. Such a distribution doesn't qualify to be rolled over into an IRA.

Tip: Distributions from a Section 457 plan made pursuant to a QDRO are taxed under the same rules that apply to qualified plans.

How does the Southwest Carpenters Pension Plan accommodate changes in benefits for employees who have been affected by the COVID-19 pandemic, and what specific provisions have been implemented to ensure continuity of pension credit during such interruptions? Employees of the Southwest Carpenters Pension Plan are particularly encouraged to review how these provisions may impact their retirement plans and benefits, especially given the unprecedented circumstances of the pandemic.

The Southwest Carpenters Pension Plan accommodated changes due to COVID-19 by extending various deadlines for participants, such as the 12-month deadline to apply for pension credit for periods of disability, and other deadlines regarding claims and appeals. These extensions were applied from March 1, 2020, to a period of up to one year after the original deadline or 60 days after the end of the COVID-19 national emergency, ensuring continuity of pension credit during the pandemic interruptions(Southwest Carpenters Pe…).

What enhancements to pension benefit calculations have been introduced for the years following January 1, 2021, under the Southwest Carpenters Pension Plan, and how do these changes affect participants working more than 1,800 hours? This question emphasizes the implications of increased benefit accrual rates and the actual processes employees must follow to calculate their pensions effectively.

Enhancements to pension benefit calculations effective January 1, 2021, under the Southwest Carpenters Pension Plan include an increase in the monthly benefit accrual rate for participants working 1,800 hours or more. The rate increased from $100 to $200, and for those working more than 1,800 hours, a maximum benefit accrual rate of $244.44 was introduced(Southwest Carpenters Pe…).

In the context of the Southwest Carpenters Pension Plan, could you explain the eligibility criteria for receiving a Service Pension and how employees can accumulate the necessary Pension Credits more quickly? This consideration is vital for members who wish to understand the retirement options available to them and the strategies they might employ in their careers to maximize their benefits under the Southwest Carpenters Pension Plan.

Employees of the Southwest Carpenters Pension Plan are eligible for a Service Pension after earning 30 years of Pension Credit. Additional Service Pension Eligibility Credit was introduced, allowing employees working over 1,800 hours annually to accumulate credits more quickly, up to a maximum of 2,200 hours(Southwest Carpenters Pe…).

How do temporary disability benefits interact with the accumulation of Pension Credits within the Southwest Carpenters Pension Plan? Specifically, employees may have questions about how their working history and service time might be affected should they take leave for health-related reasons, highlighting the intricate balance between pay and benefits during challenging times.

Temporary disability benefits under the Southwest Carpenters Pension Plan allow participants to accumulate Pension Credits during non-working periods if they are on short-term disability or receiving workers' compensation. Pension Credits can be granted for up to 1,200 hours annually, depending on the nature of the disability and employment history(Southwest Carpenters Pe…).

What are the implications of the revised definitions under the Required Beginning Date as specified by the Southwest Carpenters Pension Plan, particularly in compliance with the SECURE Act (Setting Every Community Up for Retirement Enhancement Act)? Employees should understand how these legislative changes affect their retirement strategies, especially in light of penalties for failing to comply with mandatory commencement dates.

The Required Beginning Date for the Southwest Carpenters Pension Plan was revised to comply with the SECURE Act. Participants born on or after July 1, 1949, must begin receiving benefits by April 1 of the calendar year following the year they turn 72. Failure to comply with this could result in a 50% excise tax(Southwest Carpenters Pe…).

How can employees of the Southwest Carpenters Pension Plan navigate the process for applying for pension credit during periods of Temporary Disability, and what specific documentation is required? This inquiry encourages a deeper understanding of protocol surrounding disability applications and the associated benefits that participants are entitled to under the Plan.

Employees applying for pension credit during periods of Temporary Disability must submit a written application within one year of the onset of the disability, and provide documentation such as state-approved short-term disability certification or workers' compensation benefits(Southwest Carpenters Pe…).

What are the implications of the retroactive increases to the Southwest Carpenters Pension Plan benefits aimed at participants who accrued credit during the years 2011 to 2020, and how can affected employees determine their eligibility for said increases? Employees often seek clarification on how historical contributions can manifest in current benefits.

Retroactive increases to the Southwest Carpenters Pension Plan benefits for the years 2011 to 2020 apply to participants who worked at least 1,000 hours in 2020 or under specific collective bargaining agreements. A 50% increase in benefit accrual rates was applied to these years, and eligible employees can determine their eligibility based on their hours worked(Southwest Carpenters Pe…).

What role does the Southwest Carpenters Administrative Office play in assisting employees who have questions regarding modifiability in their pension plans, and what are the best methods for contacting them for assistance? This question highlights the importance of communication within the organization concerning employee inquiries and issue resolution.

The Southwest Carpenters Administrative Office assists employees with questions regarding modifications to their pension plans. Participants can contact them at (213) 386-8590 or (800) 293-1370 for personalized assistance(Southwest Carpenters Pe…).

Can you detail the factors influencing the Benefit Accrual Rate for participants of the Southwest Carpenters Pension Plan for the calendar years after 2021, and how might employees calculate their expected pension benefits? Participants will want to understand the nuances of how their benefits are computed to make informed decisions regarding their retirement planning.

The Benefit Accrual Rate for participants of the Southwest Carpenters Pension Plan after 2021 increased to $200 for 1,800 hours worked, with higher accrual rates for additional hours. Employees can calculate their benefits by multiplying their benefit accrual rate by the applicable benefit factor(Southwest Carpenters Pe…).

In the event of legal actions regarding benefits under ERISA against the Southwest Carpenters Pension Plan, what venue restrictions apply, and what does this mean for participants seeking resolution in disputes? Employees need to be informed of the legal frameworks governing their benefits and understand their rights and the procedures that affect their claims within the Southwest Carpenters Pension Plan.

Legal actions regarding benefits under ERISA against the Southwest Carpenters Pension Plan must be filed in Federal District Court in Los Angeles County, California. This venue restriction defines the jurisdiction where participants must file claims(Southwest Carpenters Pe…).