
The California State Teachers’ Retirement System (CalSTRS) includes three retirement plans: Defined Benefit Program, Defined Benefit Supplement, and Cash Balance Benefit Program.
There is also a voluntary defined contribution program, referred to as CalSTRS Pension2.
Teachers also often participate in 403(b) plans (also referred to as Tax Shelter’s Annuities), which are only available to certain types of professions. The 403(b) Plans are not managed by CalSTRS, but are instead managed by 3rd party vendors that the various school districts contract with. Plan members may have any one, or all, of these plans.
The Defined Benefit Program is the basic plan that provides a lifetime benefit based on years of service credit, final compensation and age. The Defined Benefit Supplement plan is a cash balance plan that provides additional funds to members who earned service credits beginning in 2001 through 2011. The Cash Balance Benefit Program is intended for part-time and daily employees, such as substitute teachers.
All three plans require employee contributions, but the eventual payout options, including disability, death and survivor benefits, depend on various factors and elections made. Like any other pension or defined benefit plan, a CalSTRS plan may be among a couple’s largest assets. Accordingly, much care needs to be given when considering how to handle the account in divorce.
What exactly is CalSTRS?
The California State Teachers’ Retirement System was created over 100 years ago and provides public school educators with retirement benefits through administration of a variety of plans, including the primary traditional defined benefit plan (CalSTRS Defined Benefit), Defined Benefit Supplement (CalSTRS DBS), cash balance plan (CalSTRS Cash Balance) and defined contribution plan (CalSTRS Pension2), as well as survivor and disability benefits.
The responsibility for funding these plans is shared between members and the employer. Eligible members are automatically enrolled in the primary defined benefit and, when it was in in effect, the defined benefit supplement plans, and participation in the defined contribution plan is voluntary.
How does the CalSTRS Defined Benefit pension plan work?
Similar to private company pension plans, the CalSTRS defined benefit program provides a guaranteed lifetime monthly benefit, which is determined based on a formula rather than contributions. The formula includes years of service credit, age factor at retirement and final compensation.
Funding for this plan is shared by both employers and members, with the member portion deducted from each paycheck. While the benefit formula can vary based on additional service years, incentives and bonuses, the two benefit structures are “CalSTRS 2% at 60” and “CalSTRS 2% at 62,” with the normal retirement eligibility age dependent on which program the member belongs to.
The CalSTRS 2% at 60 structure applies to members hired before January 1, 2013, and CalSTRS 2% at 62 applies to members hired after that date. A minimum of five years of service credit is required regardless of which benefit structure members fall under.
How much do members have to contribute to the Defined Benefit program? Is it voluntary?
Retirement benefits are paid by CalSTRS using both contributions and investment income. Contributions are made by current members, employers and the state.
For full-time public school (preK-12 and community college) teachers and public school administrators, CalSTRS membership is mandatory. Generally, part-time employees including substitute teachers may elect to participate in the Defined Benefit program or the Cash Balance Benefit program.
The member contribution rates are based on the cost of the plans and can change accordingly. For the 2017-2018 year, members under the CalSTRS 2% at 60 plan contribute 10.25% of creditable compensation while members under the 2% at 62 plan contribute 9.205%. Additionally, employers contribute 14.43% and the state of California contributes 9.328% of creditable compensation to fund benefit payments. Note that there are no Social Security taxes withheld from member paychecks or collected from the employers.
It is extremely important to understand that because CalSTRS employees do not contribute to social security, they are commonly prevented from receiving some or all of the derivative Social Security benefits from a spouse or former spouse, under the federal ‘windfall elimination provisions’ of social security law.
How does the primary Defined Benefit Program formula work?
The formula is calculated based on three factors: service credit, age factor and final compensation.
Service credits are the number of full and partial school years a member has worked. Generally, full-time employees receive one service credit for each fiscal year worked. Part-time employees receive the percentage equal to a full-time contract, so an employee working 50% of a full-time contract would receive .5 service credit for that year.
Age factor is a percentage of the final compensation that is determined by age upon retirement. For those retirements occurring as soon as they reach the basic eligibility age, which would be 60 under the CalSTRS 2% at 60 benefit structure or 62 under the CalSTRS 2% at 62 structure, the age factor is 2%.
CalSTRS provides incremental age factor tables for each of the benefit structures. The lower limits are 1.4% at age 55 for the CalSTRS 2% at 60 structure and 1.6% at age 55 for the CalSTRS 2% at 62 structure. The upper limit is 2.4% under both structures, at age 63 under the CalSTRS 2% at 60 structure or age 65 CalSTRS 2% at 62.
For members under the CalSTRS 2% at 60 plan, the age factor increases by 0.2% with 30 years of service, with the cap remaining at 2.4%, and those who accrued 30 years of service credit by December 31, 2010 are eligible for a longevity bonus of $200-$400 per month.
Final compensation is defined the highest average compensation for 36 consecutive months. For those with 25 or more years of service credit under the CalSTRS 2% at 60 benefit structure, an enhancement may be applied in which the highest 12 consecutive months of compensation is used, rather than the 36-month average.
Following is an example of a CalSTRS 2% at 60 member retiring at exactly 60 years of age, with 25 service credit years and an average final 36-month compensation of $6,200/month.
Years of Service Credit x Age Factor x Final Compensation = Monthly Benefit
25.0 x 2.000% x $6,200 = $3,100.00
For comparison, an example of a CalSTRS 2% at 62 member retiring at 64 years and 6 months of age, with 28.3 service credit years and an average final 36-month compensation of $6,200/month is shown below.
28.3 x 2.333% x $6,200 = $4,093.48
Members can use the online CalSTRS Retirement Benefits Calculator to estimate future benefits.
Members and Former Spouses can also request a formal report of estimated future benefits by submitting a Community Property Estimate Request form:
You should know that CalSTRS will only respond if the Member Spouse submits this form OR if the Non-Member Spouse submits the form and a joinder has been filed. Note also that the Member Spouse will be copied on correspondence from CalSTRS, if the Non-Member Spouse submits the request.
Is there a limit to the compensation counted toward the CalSTRS Defined Benefit formula?
The determination of final compensation is limited by Internal Revenue Code (IRC) section 401(s)(17) for members hired on or after July 1, 1996. In 2018 the limit is $275,000. There is an additional state law applicable to members under the CalSTRS 2% at 62 plan which limits compensation, at $143,082 in 2018. Accordingly, no contributions are made on compensation exceeding this limit.
When am I eligible to retire under the CalSTRS Defined Benefit program? Can I retire early (or later)?
In order to formally retire and receive benefits, all members must earn a minimum of 5 years of service credit. CalSTRS 2% at 60 members may begin receiving retirement benefits at age 55, or at age 50 if they have 30 years of service credit.
Members under the CalSTRS 2% at 62 plan may begin receiving receive benefits at age 55. While uncommon, the State of California may also provide occasional retirement or concurrent service retirement incentives which reduce the age or service credit requirements.
Can I postpone receiving my CalSTRS Defined Benefit retirement benefits?
Once members have satisfied the 5 year service credit eligibility requirement, they may elect to continue working or leave active service. They can then formally retire any time after reaching the minimum age requirement for their plan.
The age factor used in the benefit formula will increase up to 2.4% upon reaching age 63 or 65, depending on which play applies, after which there is no advantage in delaying benefits. If a CalSTRS member is inactive, benefit payments must begin on April 1st following the date the member turns 70 ½, as per Section 401(a)(9) of the Internal Revenue Code. However, as long as a member is active in CalSTRS, or covered by another public retirement system, there is no mandatory retirement age.
What if I haven’t earned 5 years of service credits under the CalSTRS Defined Benefit program?
Members who do not earn 5 years of service credits may request a refund of their contributions plus interest earned by forfeiting their service credits, though this is generally not advisable and also means giving up any survivor and disability benefits.
Can members re-enter the CalSTRS Defined Benefit program after receiving a refund?
Members who have received a refund and later re-enter the program, or another California public retirement system, have the option of redepositing all or a portion of the contributions and interest that have previously been refunded. Interest must be added to the amount redeposited in order to reinstate the service credits and there is a one year re-entry wait period prior to being eligible again for benefits.
Do the CalSTRS benefits ever increase for inflation?
The CalSTRS Defined Benefit Program provides for an annual benefit adjustment increase of 2% of original amount (non-compounded) each September 1st.
There is an additional supplemental benefit increase intended to guarantee purchasing power at 85% of the original retirement benefit in place.
The 2% annual benefit adjustment is similar to a cost of living adjustment, or COLA, but does not vary based on annual economic conditions. Instead, the increase is set at a consistent rate and the Legislature may adjust the amount if economic conditions dictate.
What happens to unused sick leave upon retirement from the Defined Benefit pension plan?
The program allows for the granting of service credit for unused sick leave upon retirement. However, there are limits on how much can be used to qualify for calculating final compensation, bonuses and enhancements, and sick leave credits cannot be used to meet the eligibility requirements for retirement from service.
What are the CalSTRS Defined Benefit distribution options for receiving retirement benefits?
Members may elect to receive retirement benefits over their own lifetime only (Member-Only Benefit), or, over both their own and one or more beneficiaries’ lifetimes (Option Election).
With Member-Only, as calculated per the basic benefit formula, the benefit is paid to the member during their lifetime and provides no monthly benefit to any beneficiaries. Under the Member-Only, it is possible that there may be a return of contributions and interest earned within the account that have not yet been paid out.
With an option election, members can choose to have their retirement benefit paid out over both their lifetime and one or more designated beneficiaries’ lifetime, at a reduced benefit amount based on the specific option selected and beneficiary age. There are currently four options members may choose from: 100% Beneficiary, 75% Beneficiary, 50% Beneficiary, or Compound Option.
The 100% Beneficiary option provides a monthly benefit for both the member’s lifetime and the beneficiary’s lifetime, and will continue at the same benefit level to the beneficiary upon the member’s death. If the member is predeceased by the beneficiary, the benefit increases to the Member-Only benefit amount (called a “pop-up”).
The 75% Beneficiary option provides a monthly benefit both the member’s lifetime as well as and the beneficiary’s lifetime, and then decreases to 75% of the benefit amount paid to the beneficiary upon the member’s death. If the member is predeceased by the beneficiary, the benefit increases to the Member-Only benefit amount. With this option, any nonspouse beneficiary must be no more than 19 years younger than the member.
The 50% Beneficiary option operates similar to the 75% option, without the age restriction for a nonspouse beneficiary.
The Compound option allows members to select more than one beneficiary with a designated portion of the Member-Only benefit allocated to each beneficiary, more than one beneficiary with an option for each while retaining a portion as a Member-Only benefit, or more than one beneficiary with an option for each without retaining a portion as a Member-Only benefit.
With this option, any nonspouse beneficiary must be no more than 19 years younger under the 75% Beneficiary Option or 10 years younger under the 100% Beneficiary Option.
When can the election of CalSTRS Defined Benefit distribution options be made?
Members may elect an option beneficiary upon becoming eligible for retirement, but before actually retiring, which is referred to as a preretirement election of an option. There are two main advantages in making such an election.
First, since both the member and beneficiary are younger, the modified benefit is likely to be higher, and second, if the member predeceases the beneficiary prior to retirement, the beneficiary is protected and will receive benefits for the rest of their life.
The disadvantage in electing a preretirement option is that future changes or cancellation of the option typically results in an assessment which reduces the monthly benefit. For example, if the beneficiary predeceases the member prior to retirement, it would be considered a cancellation of the option and result in a reduction of the monthly benefit.
However, it is important to understand that if the beneficiary passes away after retirement, the monthly benefit increases to the member-only benefit, as if there was no option in place. If no preretirement election of an option is made, it may be made upon retirement.
Can the option election under the CalSTRS Defined Benefit plan be changed after retirement?
Generally, after retirement, option election can be changed only under specific circumstances. If an option beneficiary predeceases the member, a new beneficiary may be elected, if desired.
Upon divorce, an option election may be cancelled for a return to the Member-Only benefit, or, the member may elect a new option with one or more beneficiaries. If the divorce court order requires that the former spouse be kept as an option beneficiary for their community property portion, the member may elect additional option beneficiaries or keep the remaining portion as their Member-Only benefit. Those newly married (for at least one year) may add an option and name their new spouse or registered domestic partner as a beneficiary.
Finally, if the option beneficiary is a disabled individual with a qualifying special needs trust, the beneficiary may be changed to the trust in an effort to shield their eligibility for other public benefits.
Divorce cannot ‘create’ survivor benefits, meaning if at the time of retirement the member spouse, the non-member spouses waives their rights to survivor benefits and the ‘life only with no survivor benefits’ option is chosen, a later divorce does not allow for ‘restoration’ of the previously waived survivor benefit rights.
What is the Minimum Guarantee for the CalSTRS Defined Benefit program?
For certain members receiving benefits as of January 1, 2000, there is a guaranteed minimum benefit which is generally at least $15,000 annually for those with 20 years of service credit, increasing to $20,000 at 30 or more years of service credit.
Are there required minimum distributions from the Defined Benefit plan once I reach a certain age?
For retired members who have reached age 70 ½ but haven’t yet started receiving benefits, the Internal Revenue Code (IRC) 401(a)(9) requires that annual minimum distributions begin the following year. However, this rule doesn’t apply to most participants since most do not delay receiving benefits that long, as there is no additional benefit.
Is it possible to purchase additional service credits under the CalSTRS Defined Benefit pension plan to increase my benefit?
Members with employer-approved leaves or service not previously credited may purchase permissive service credit at a cost calculated by multiplying the service credit years to be purchased by the contribution rate for current age by the highest compensation earnable during the most recent three school years.
Leaves or types of service that may be eligible for service credit purchase may include part-time or substitute work, maternity or paternity leave, FMLA or CFRA family medical leave, sabbatical leave, Fulbright leave, child care center teaching, Native American or school for the deaf and blind teaching, Job or Peace Corps teaching, certain active U.S. military service, out-of-state or foreign school service, or California public university service.
Additionally, members who previously requested and received a refund of their contributions may redeposit all or a portion of the refund along with interest, currently 7%, to restore the service credit lost when refunded. If a divorce settlement divides service credit into a separate account, and the non-member spouse elects to take a refund, the member may purchase all or a portion of the service credit forfeited upon refund.
Am I allowed to work after retiring under the Defined Benefit plan?
While there are no restrictions for retired members working outside the California public school system, there are restrictions for employment within the public school system. Generally, members cannot work in classified positions, earn more than the annual post-retirement earnings limit ($43,755 for the 2017-2018 year), or return to work within 180 days from separation of service without affecting benefits.
What disability benefits are available to CalSTRS Defined Benefit members?
Members are eligible to apply for a disability allowance, usually after reaching at least five years of service credit.
Eligibility is based on criteria within the California Education code, and the basic benefit is 50% of compensation plus possible benefits for financially dependent children. In addition to five years of service credit, eligibility typically includes having a substantiated physical or mental impairment (permanent or expected to last at least 12 continuous months beyond work) that prevents the member from performing normal duties.
Of course, the application process must be handled promptly, the disability must be substantiated with medical documentation, and benefits are not available for conditions that existed prior to becoming a member, unless the condition has substantially worsened. There are two types of coverage members may be eligible for, Coverage A or Coverage B.
Individuals who became members prior to October 16, 1992 are eligible for Coverage A, unless they specifically opted into Coverage B. Those who became members on or after October 16, 1992 are eligible for Coverage B.
Coverage A members must be under age 60 to apply for the disability benefit, which will automatically end at age 60 and convert to a retirement benefit. For members between ages 45 – 60, and with less than 10 years of service credit, the benefit will be calculated using an alternative (reduced) formula.
Coverage B members may apply at any age and the benefit may continue for life, as long and qualified.
Members eligible for a CalSTRS service retirement who are in the process of applying for a disability benefit may request the service retirement benefit while the disability application is being reviewed in order to receive regular income during the evaluation period.
Whether qualified under Coverage A or B, members who pass away while receiving disability benefits qualify for a lump-sum death payment made to the designated death benefit beneficiary. The amount is adjusted by the board and is $6,163 as of 2018. Additionally, there may be benefits payable to a beneficiary or dependent children.
Is there a death benefit paid to my survivors as a CalSTRS Defined Benefit member?
A lump-sum death payment will be paid to the designated survivors of CalSTRS retired members. Prior to retirement, as of 2018, the benefit is $6,372. After retirement, the benefit is $24,652 for those qualified under Coverage B and $6,372 for those under Coverage A. These amounts can be adjusted by the Teachers’ Retirement Board based on changes to the All Urban California Consumer Price Index (CCPI). Any ongoing monthly benefits would depend on the option elections made.
How is my CalSTRS Defined Benefit plan affected by Social Security?
Social Security is a federally administered benefits program funded by collecting taxes from salaries earned by covered workers, primarily private sector employees, to pay current recipient benefits.
CalSTRS members do not pay into the Social Security program or receive benefits for their CalSTRS-covered employment. However, CalSTRS members may be eligible for Social Security benefits because of non-CalSTRS employment or spousal benefits.
In these cases, when a Social Security recipient is also eligible to receive CalSTRS benefits, the Social Security Act includes provisions that may reduce or eliminate the CalSTRS member’s Social Security benefit. These are the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Note that it is the Social Security benefits that are reduced, not the CalSTRS benefits.
The WEP formula will reduce Social Security benefits based on the number of years an individual paid into the program. It is important to understand that Social Security benefit statements do not reflect the possible WEP reduction.
The GPO applies when individuals are eligible to receive Social Security benefits as a spouse or widow/er, rather than under their own Social Security covered employment. Under GPO, The Social Security benefit is reduced by an amount equal to 2/3 of the CalSTRS benefit amount, resulting in a reduced or eliminated benefit.
How are CalSTRS Defined Benefit contributions and benefits taxed?
Member contributions are made on a pre-tax basis, and benefits, whether monthly or lump sum, are taxable in the year received. Members taking distributions should plan their federal and state withholding elections accordingly.
What is the CalSTRS Defined Benefit Supplement program and how does it work?
The Defined Benefit Supplement account is separate from the primary Defined Benefit plan, and members of the primary DB plan were automatically enrolled in the Supplement plan. This is a cash balance defined benefit plan which, from January 1, 2001 through December 31, 2010, received funding through a redirection of ¼ of member Defined Benefit contributions (2%). There is currently no redirection, but members with more than one year of service credit who perform additional duties, above and beyond their contract such as outgrowth or extra pay assignments, will automatically have 8% contributed to their Supplemental plan, which is then matched with an 8% employer contribution. Additionally, contributions earn interest as set each year by the Teachers’ Retirement Board.
Upon retirement, members may select a lump sum payment, period certain or lifetime annuity, or a combination of both. Members may also have funds rolled over to a qualified tax-deferred account, such as a 403(b) or IRA. Tax withholding options vary depending on the withdrawal method elected.
What is the CalSTRS Cash Balance Benefit Program?
The CalSTRS Cash Balance Benefit Plan is designated for substitute, part-time, temporary or adjunct educators as an alternative to the CalSTRS Defined Benefit program. Cash Balance Benefit plan contributions are made by both the member and employer, and contributions earn interest as set each year by the Teachers’ Retirement Board. Similar to the Defined Benefit Supplement plan, upon retirement members may elect either a lump sum or annuity benefit. Additionally, members who have benefit coverage under both the Cash Balance Benefit and Defined Benefit plans may be eligible to consolidate and transfer their Cash Balance Benefit contributions and interest to the Defined Benefit plan.
What is the CalSTRS Pension2 program and how does it work?
Pension2 is a voluntary defined contribution plan that allows members to make additional contributions to either a 403(b), 457(b), Roth 403(b) or Roth 457(b) plan through payroll deductions in order to increase retirement savings. The annual contribution limits and other terms are similar to those of a 401(k) or Roth IRA.
Do CalSTRS Defined Benefit and Defined Benefit Supplement accounts always have to be divided in a California divorce?
Generally, in a divorce, retirement accounts deemed to be marital may be divided.
Understand, however, that they do not necessarily have to be divided.
When the decision is made to divide the account(s), the court order should address all of the member benefits, including service retirement, Coverage A disability benefit (disability allowance), Coverage B (disability retirement), option election, and lump-sum death benefits.
Spouses may agree to handle the division of assets differently, and perhaps offset the CalSTRS retirement accounts with some other asset.
Before agreeing to an offset or on how an account might be divided, spouses should thoroughly understand their options and how their retirement benefits may be affected. When offset, the retirement accounts should be actuarially valued so parties can determine what other assets to award to the non-member spouse for the offset.
The cash value listed on the annual statement, or retirement progress report, is NOT an appropriate value to use in the divorce process when offsetting assets. Here, an actuarial present value of the CalSTRS benefits should be obtained.
When is an actuarial pension valuation of a CalSTRS account necessary?
When the community interets in a CalSTRS Defined Benefit or Defined Benefit Supplement plan is being divided equally in a divorce, a valuation is not typically required.
When parties are considering offsetting the plan value with another asset, however, obtaining a valuation becomes critically important. Since the benefits will pay out for the recipient’s lifetime, pensions are often one of the most valuable assets a couple has.
The cash value and balance listed on the statement does NOT reflect the current value of the account.
Rather, the estimated benefit should be calculated using the appropriate plan formula in order to determine the actuarial present value of the future stream of benefit payments. Several assumptions go into these calculations and it is worth consulting with a financial professional to be sure this is done correctly.
What method is used to divide a CalSTRS Defined Benefit or Defined Benefit Supplement account in a California divorce?
There are two basic methods of division used to assign an interest in a CalSTRS plan from the Member to the Non-Member spouse: 1) the time rule formula, or 2) the segregation method.
The status of membership limits which method can be used. Members who divorce before receiving retirement or disability benefits may select either method. Members already receiving a retirement or disability benefit, however, may only use the time rule formula.
What method is used to divide a CalSTRS Cash Balance account in divorce?
For Cash Balance plans, members divorcing before receiving their retirement or disability benefits must use the segregation method of division. Those divorcing while already receiving a Cash Balance retirement or disability benefit must divide it by assigning a community property share in the form of a specific percentage or dollar amount.
What are the time-rule formula and segregation methods for dividing a CalSTRS pension?
With the time rule formula, the number of service credits earned during the marriage is divided by the total number of service credits, then typically divided in half to determine the amount of the monthly benefit that shall be paid to the nonmember spouse.
As a simple example, if 15 years of service credit are earned during the community period and a total of 25 years of service credit upon retirement, the community portion is 60.00% (15 years / 25 years) and the nonmember’s “half” of that would be 30%.
If the benefit, based on total years of service credit, final salary, and age factor of the member, is $1,000 per month, then the nonmember spouse would receive $300 per month and the member spouse would receive the balance of $700 per month. Keep in mind this is a simplified example. There may be adjustments based on the life expectancy of the nonmember spouse.
When the time rule formula is used, the court order must address specific issues including what happens if the member dies before the nonmember spouse, option elections, what happens if the nonmember spouse dies before the member spouse, and lump-sum death benefits.
While the nonmember spouse may benefit from increases in salary between the time of separation through retirement, they must wait for the member to retire and begin taking retirement benefits before receiving any themselves.
California has rules that allow a former spouse to ‘force’ a member spouse to pay a former spouse a monthly amount, as if they retired, if the former spouse becomes impatient waiting for the Member Spouse to retire. This action is commonly referred to as a ‘Gillmore election.’
The segregation method actually divides the member’s CalSTRS account into two separate, individual accounts.
The nonmember’s account will then include contributions, interest and service credit from the member’s Defined Benefit account as instructed per the court order.
For Defined Benefit Supplement and Cash Balance plans, the new nonmember’s account will include contributions and interest, no service credit.
With the segregation method, the nonmember’s account will accumulate interest, but the service credits and salary are frozen at the level in place at the date of separation.
This is an important difference, as it impacts the formula used to determine the monthly benefit upon retirement. However, the nonmember spouse has complete control over their segregated account and can decide, assuming eligibility requirements are satisfied, when to request benefits rather than waiting for the member spouse to retire. The nonmember spouse may also designate a death benefit recipient and may also qualify for a prorated share of any retirement benefit enhancements the member was eligible for as the date of separation.
Deciding whether to use the time rule formula or the segregation method depends on the personal situation of the parties. The ages of the parties, possible salary increases, and other factors should be considered carefully. Seeking the assistance of a Certified Divorce Financial Analyst can be really helpful here.
There are a couple other details pertaining to division that are useful to keep in mind.
If the segregation method is used for the Defined Benefit account, then it must also be used to divide the Defined Benefit Supplement account.
If parties decide only to divide the Defined Benefit Supplement account, and not the Defined Benefit account, then segregation method is required.
Finally, while the time rule and segregation are the two primary methods of division, the court may also order that when a member receives a benefit, the nonmember spouse shall get a predetermined percentage or flat dollar amount.
What is a Qualified Domestic Relations Order, or QDRO, and how does it work?
A QDRO or a DRO (QDRO is pronounced “quadro”) is a court order that instructs the retirement plan administrator (CalSTRS) how to divide a member’s retirement plan.
It is a separate legal document filed with the courts, and can be filed either before or after the divorce judgment has been granted. However, CalSTRS requires a copy of the divorce or legal separation decree, in addition to the DRO to process the division of benefits.
It is best to determine the terms of the DRO during the divorce proceedings and have the form drafted, and perhaps even reviewed/approved by CalSTRS, before the divorce is finalized in order to ensure it is completed correctly.
While CalSTRS division orders are technically Domestic Relations Orders (DROs), they are commonly referred to as QDROs.
DROs are typically prepared by the attorney preparing the court documents, or, by an attorney who specializes in DRO preparation.
It is important to understand that even though the court may grant a dissolution for the marriage which includes the order to divide the qualified retirement accounts, the actual division does not take place until the DRO is ordered by the court and processed by the administrator, CalSTRS.
While it may seem easy to put off in the aftermath of a divorce, this is an important step and should not be postponed.
What is a Joinder? Is it necessary in all California divorces?
In order to join CalSTRS as a party to the divorce action and enforce a court order for the division of member benefits, a joinder form must be served upon CalSTRS.
The joinder notifies CalSTRS that there may be a community property interest in the account, and is later followed by the final court order indicating how the account should be divided.
A joinder is not required when the CalSTRS account is not being divided, but it is often recommended as a means of protecting the nonmember’s interest. It also then allows the nonmember to request a Statement of Account and Estimate of Benefits based on California Community Property laws.
A free resource for preparing joinder paperwork can be found here.
Is it a good idea to take the “Lump Sum” payout option or elect a refund of contributions?
Unless there is a significant hardship or special circumstance (such as a health condition where life expectancy is short), or the balance is too low to meet the monthly lifetime benefit requirements, it is generally best not to request a lump sum payout or refund of contributions.
These options usually mean losing much of the benefit the retirement plans have to offer and are also typically subject to a 10% federal and 2.5% California state tax penalty, in addition to the regular income taxes that are due in the year received.
When the balance is too low to meet the monthly lifetime benefit requirements, rolling the funds over to another tax-deferred plan is usually the best option.
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