Every divorce attorney recognizes the added complexity of cases when retirement assets must be divided. Mention the word QDRO and even the most seasoned veteran may be filled with mild fright. Imagine the confusion when a client tries to understand these important documents.
However, QDRO need not be difficult. A little education and relying on the services of a QDRO expert can help avoid some of these most common QDRO mistakes.
Misunderstanding of Plan Type
Often times, the divorce will proceed with both parties referring only to the parties’ “retirement plans”. Without specifying or understanding the specifics of each plan, potential problems can arise at a later date. It is important early on for any retirement plan to be clearly identified not only by the correct name but also by the type of plan it is – eligible or ineligible; defined contribution, defined benefit or cash balance; IRAs; etc.
Wrong Name of Plan
While this may seem like a very basic step, often the parties will simply say they have a “retirement account”. By knowing in advance the specific names of each retirement account held by either party, you can get a clearer picture of the exact nature of all retirement assets – often simply by knowing the full name of each plan. It is also very important that each final Settlement Agreement clearly identify all retirement accounts with as much specificity as possible. Misidentifying the plan in the signed court order could create problems later on when the alternate payee looks for the division he or she expects.
Not Setting a Clear Sharing Date
This is one area where there is no room for ambiguity. Unless one party receives a certain dollar amount that won’t match the plan’s income or loss, a clear split date is required! While many divorced parties assume that the divorce date is the split date for each retirement account involved, many post-divorce litigations that specifically involve QDRO tell a different story. Always clearly state the date of division in the final Divorce Agreement. Failure to do so opens the door to arguments about when the accounts will actually be split – date of filing, date of separation, date of agreement signed, date of court signing final decision, etc.
Failed to Overcome Profit and Loss
While a well-designed QDRO should always identify a specific date for the distribution of a retirement account, often the parties fail to consider what happens to the true value of the plan over time. Typically, there is a delay of months (or years) between the distribution date specified and the plan distribution date by the plan administrator. During this delay, significant fluctuations in the value of the plan may occur. Depending on which party you represent, this can be a good – or bad – thing for your client.
Each QDRO agreement must specify how any income and losses incurred between the award date and the distribution date are to be treated. If not, then one of the parties will be harmed when a split occurs. For example, if you do not make provision for an adjustment of the award for income and loss, the program participant assumes all risk of impairment of the account. Likewise, alternate payees will not be entitled to an increase in account value.
In both scenarios, one party comes out as the loser. The easiest way to avoid this is to agree that a given amount (either fixed or percentage) will be adjusted according to income and losses. This way, the interests of both parties will not be affected regardless of how long it takes to complete the division.
Not Considering the Risk Before Setting A Fixed Amount
Just like failing to address income and losses, agreeing to a non-adjustable fixed amount award from a retirement account can create major problems for program participants in the event of a market downturn. For example, let’s say a program participant owns a $200,000 401(k) at the time of divorce and she agrees to transfer $100,000 to the other spouse. However, by the time the QDRO was completed and the split was imminent, the value of the 401(k) had plummeted to just $90,000 due to deteriorating market conditions. Plan participants are now faced with the transfer of 100% of the 401(k) plus additional funds to an alternative payee to meet the exact language of the Divorce Decree. Once the tax implications are taken into account, plan participants will actually transfer more than the divorce agreement requires.
Ignoring Lasting Spouse Problems
Surviving spouse allowance is, by far, one of the most complex areas of QDRO work, yet it is often one of the areas most lawyers overlook. Clearly determining the status of alternative payees after the death of a program participant, especially for defined benefit plans, is of paramount importance.
When defined contribution plans are involved, it is usually sufficient to include language in the QDRO stating that the alternative payee receives the benefit regardless of when the plan participant dies. However, when working to split defined benefit plans, alternative beneficiary benefits are significantly affected by the time of death of the plan participant – before or after the start of benefit payments. Both scenarios should be handled in QDRO.
In many defined benefit plans, the alternative payee will not receive the benefit if the plan participant dies before payment begins, unless the alternative payee is specifically designated as the surviving spouse under the plan’s Eligible Pre-Retirement Victim Benefit (QPSA) clause. . There are many more nuances to consider when it comes to the issue of a surviving spouse, so it is important to discuss all possible scenarios with your QDRO professional.
Mismatching Some Packages
When a divorced spouse has multiple defined contribution plans, it is natural for the parties and their attorneys – in an effort to save money – to try and offset the value of one plan against the other to require only one QDRO or avoid a QDRO altogether. While in some cases this may be the case, it is often implemented incorrectly which ends up harming the parties in the long run.
One of the biggest mistakes when multiple defined contribution plans are involved is the failure to ask the parties to exchange bank statements by a certain date. When no date is set, the parties work with moving targets in terms of determining how much the equalization payout will actually be.
Likewise, failure to explain exactly how the calculation of equalization should be done is another common mistake. As simple as it sounds, many deals fail to spell out the exact calculation method, leading to potentially expensive litigation down the road.
Finally, if retirement assets are defined benefit plans, they can never be equated, because these plans are not set at a specific dollar value. This type of plan always requires separate QDROs in order for each to be shared effectively.
Ignoring Loan Balance
Another common mistake is forgetting to count existing loans against retirement accounts. While you can’t always tell from an account statement whether there is a loan, it’s important to know before making any calculations. In most plans, the loan is considered an asset and the value of the loan must be added to the total value of the account for the purpose of dividing the property.
How the parties decide to treat an existing loan depends on the purpose of the loan and can be negotiated during the divorce.
Not Assigned Responsibility To Prepare QDRO
An alarming number of divorce agreements fail to determine who is responsible for preparing QDRO. While the agreement may indicate that a QDRO is necessary, if neither party is specifically required to follow through with preparations, the QDRO is often never designed or completed. Each settlement agreement must clearly state who is responsible for drafting and presenting the QDRO to the Court and Plan Administrator.
Likewise, it is important to determine who will pay for the costs associated with QDRO, and ensure whoever is in charge understands the costs involved, including the costs the Plan itself may incur.
Failed to Implement QDRO
In a staggering number of divorces, although the proper QDRO may have been prepared and signed by the Court, the final QDRO was never submitted to the Plan Administrator. In some cases, even though a signed and valid QDRO is handed over to the Plan Administrator, for one reason or another the account is never shared.
It is important to follow up on each QDRO and receive written confirmation that the account was actually shared. Failing to do so could lead to years of litigation – even decades – down the road, as the alternative payee realizes he will not receive the funds he is entitled to.