When a marriage dissolves, all assets are eligible to be divided among the couple, and this includes retirement benefits. When it comes time to take on the division of pension or other retirement benefits, a Qualified Domestic Relations Order or QDRO is generally the document that is prepared to submit to plan administrators to affect the process.
At QDRO Masters, we specialize in the DRO process and can help you understand what goes into creating your domestic relations order and how it affects you. Let’s learn about retirement benefits in Arizona and divorce, the Arizona State Retirement System and the role that a QDRO plays in divorce proceedings in this state.
What Is a QDRO?
A QDRO, in its simplest form, is a court order, decree or judgment that allows for a retirement plan to contribute to alimony, child support or marital property to your former spouse, dependent, or even current spouse. Each QDRO contains very specific data, which may include the names and mailing addresses of each participant and alternate payee and the percentage of benefits to be paid out to each payee.
Any spouse or former partner who gets benefits from a QDRO must report the benefits just as though they were personally participating in the plan from which the benefits come. They effectively become a beneficiary of the retirement plan for tax purposes.
In some cases, the individual can roll over part or all of their distribution tax free, if they are the spouse or former spouse of the employee. Any distribution paid out to a child or dependent, however, taxes the participant.
Arizona State Retirement System
First established by the Arizona state legislature in 1970, the Arizona State Retirement System is the plan that defines retirement in Arizona for all state employees under participating employers. Employers include public schools, state universities, community colleges, towns, cities, counties and other public political subdivision entities across the state. ASRS covers over 578,000 members.
ASRS is a multi-employer, public employee, cost-sharing benefits program. Both the employer and the member contribute a percentage to the retirement account. It is qualified under the Internal Revenue Code 401(a), and is under section 414(2)(2) as an employer pick-up plan. In simple terms, this means that contributions are tax deferred until the benefits are drawn (usually after retirement).
Type of Plan and Benefits
The ASRS is a defined benefit plan, as opposed to a defined contribution plan. The defined benefit plan requires both members and employers to make contributions for both long-term disability and retirement.
Under this program, members are immediately considered vested in their contributions. After the completion of five years following the membership date, they can also be considered vested in a portion of the contributions made by their employer for refunded payments before retirement.
In addition, members can be eligible to get long-term disability benefits, retiree group healthcare benefits and to provide benefits to designated beneficiaries. Survivor benefits are also payable upon the death of the member.
Survivor’s benefits are equal to the contributions of the member and employer, plus interest, and plus any service monies paid. The benefits will also depend on the retirement options chosen and other calculations depending on individual situations. The survivor can choose to get this benefit as an annuity or in a lump sum and may be eligible for ASRS group health insurance.
Survivor benefits are paid to the designated beneficiary who is on file with the system; this beneficiary must have been filed before the member’s passing. If there is no designated beneficiary, ASRS will pay benefits to any surviving spouse, children, parents or estate — in that order. Employers are encouraged, however, to ensure that employees keep beneficiary designations up to date, as a lack of designation could result in delayed payment.
Calculation of Benefits
The benefits from ASRS are for a lifetime and are based on a calculation multiplying their average monthly compensation (AMC), service credit (SC) and a graded multiplier (GM) based on the years of credited service at the time the employee retires:
- Those who work up to 19.99 years are graded at 2.1%.
- Those who work up to 24.99 years are graded at 2.15%.
- Those who work up to 29.99 years are graded at 2.2%
- Those who work over 30 years are graded at 2.3%
Arizona Retirement Benefits and Divorce
Arizona is a community property state. This means that all property held by a married couple belongs to both people and includes ASRS retirement accounts into which the member was paying while married. A QDRO will be filed to deal with Arizona retirement benefits and divorce.
Several options for delineating a retirement option under a QDRO are available, including a monthly benefit for life (Straight Life Annuity B) and a reduced monthly benefit (Life Annuity -5, -10, or -15 Year Certain B; Joint and Survivor -100%, -66 2/3%, or -50%). Members who have already retired will retain their selected option, but the DRO requires renaming the spouse as a former spouse to avoid nullification of the divorced spouse.
If you’d like more information on QDROs and how they apply to retirement benefits in Arizona, contact QDRO Masters today.