If you and your spouse find yourself having to divide an IBM employee’s retirement incident to divorce, you will want to make sure you know everything there is to know about the process. You’ll want to know what plans are available to IBM employees, the particulars of these plans, and what rules you must follow to divide them among other topics.
Whether you are the IBM employee curious about what will happen to your retirement if you divorce, or you are the non-employee spouse curious about what your rights are, this article will equip you with everything you need to know about splitting IBM retirement benefits incident to divorce.
What retirement benefits do IBM employees have access to?
There are two main retirement benefits currently available to IBM employees: the 401(k) Plus Plan (formerly known as he IBM Savings Plan) and the Employees Stock Purchase Plan. Without getting into too much detail, we will give you a basic understanding of how each plan works and what the benefit is.
The 401(k) Plus Plan is a defined contribution plan that allows an employee to defer up to 80% of their eligible compensation on a before-tax basis. And, after one year of service, IBM will match the employee’s savings up to 5% of eligible pay. IBM will contribute it’s match in a lump sum payment at the end of the year. An additional 10% of eligible pay may be added on an after-tax basis; the employee contributes after taxes have been deducted so the employee will not owe any investment gain taxes until it is withdrawn.
IBM also offers after-tax savings through a Roth 401(k). The Roth 401(k) allows for tax-free investment growth on contributions when you later withdraw the funds. If the account is at least 5 years old and you make the withdrawal after age 59 ½, the employee can benefit from this tax savings. As with the 401(k) plan, IBM will match contributions up to 5% of eligible pay after completing one year of employment with the company.
Of course, contributions to both the 401(k) plan and the Roth 401(k) are subject to limits set by the IRS.
IBM provides many investment options for these 401(k) plans. There are modest-return funds, conservative funds, moderate funds and aggressive funds. There are also life cycle funds, core funds and expanded choice funds. The employee will be able to choose which funds he or she would like to participate in.
The Employee Stock Purchase Plan on the other hand, simply allows eligible employees to purchase company stock at a 5% discount off the market price each pay period.
IBM formerly offered a defined benefit plan, however this was discontinued in 2006. Currently, the 401(k) plans and stock purchase plan are the only plans available to IBM employees.
How do you divide an IBM 401(k)?
In order to divide this particular retirement plan, you will need a Qualified Domestic Relations Order (QDRO). A QDRO is necessary to divide qualified employer plans that are subject to ERISA, the 401(k) Plus Plan is exactly that.
Although the defined benefit pensions and cash balance pensions are no longer offered, if you or your spouse has one of these, it can also be divided through a QDRO.
What is a QDRO?
A QDRO, simply put. is a legal instrument that allows for a person to assign rights in a retirement account to another person. This order will allow the account to be separated and withdrawn with no tax penalty, so long as the funds are deposited in another retirement account. The order itself will be sent to the plan administrator, after a judge signs it, and it will instruct the administrator as to how the funds are to be dispersed.
Who drafts the QDRO?
Because of the complexity of QDROs, it is advised that an attorney draft the QDRO. Typically the spouse who is receiving the funds will be the spouse required to pay the legal fees necessary to obtain the QDRO, and it will be that spouse’s attorney who does the legwork in creating and filing the QDRO. Obtaining a QDRO is essentially a separate legal process, and therefore can increase your legal fees and is not something that happens overnight.
Because obtaining a QDRO can increase legal fees, the spouse entitled to receive funds from the other spouse’s retirement account will often accept another asset of comparable value in lieu of the retirement funds. For example, if a spouse is entitled to $100,000 from her IBM employee-husband’s 401(k) Plus Plan, she might prefer to take a lump sum in that amount from a non-retirement account, or even receive an asset worth $100,000, like a boat, condo, jewelry or the like rather than going through the process of obtaining a QDRO.
Fidelity is the plan administrator of IBM retirement plans, and they offer a unique service that is helpful in obtaining a QDRO. By visiting their online QDRO center, a person can view the QDRO Guidelines and Procedures specific to IBM plans, get assistance with creating a QDRO, and he or she can actually create one.
The Fidelity Center will generate a draft QDRO, which is either created by your attorney or should be reviewed by an attorney.
What goes in the QDRO?
To get a better understanding of what a QDRO looks like, and what actually is included in the document, please look at the sample we have provided.
At a minimum, as mandated by ERISA, the QDRO will require:
- The name of the plan
- The name and last known mailing address of the participant
- The name and mailing address of the participant
- The name and mailing address of the alternate payee (spouse of employee)
- The amount to be paid
- The manner in which the payment is to be determined
- The number of payments or period to which the order applies
Keep in mind that if you are dividing multiple plans, a separate QDRO will need to be drafted for each plan. So if a spouse has a cash balance pension and a 401(k) Plus Plan, two separate QDROs will need to be drafted.
Where do I send the QDRO?
Once the QDRO has been drafted, either manually by the attorney or through the Fidelity QDRO center, it will be submitted to the court for a judge’s signature and the person who submits it will receive a “court certified” or “true” copy of the order. The true copy will then be sent to the plan administrator. For IBM 401(k) owners, the administrator is Fidelity, and all QDROs should be sent to the following address:
QDRO Administration Group
P.O. Box 770001
Cincinnati, OH 45277-0065
Attn: International Business Machines Corporation
What happens next?
Once Fidelity has the certified or true copy of the order it will be reviewed to ensure compliance with the plan requirements. If something is missing, a notification will be sent to all relevant parties and corrective measures will need to be taken. You cannot simply modify the existing QDRO, but you can draft a new one, including a provision that it amends or supersedes the previous QDRO. The new one will have to be submitted to the court and signed by the judge just as the original one was.
If, on the other hand, the initial QDRO is in compliance with the requirements and accepted, Fidelity will provide information to the non-employee spouse regarding how he or she may access the award.