Every divorce attorney recognizes the added complexity of a case when retirement assets must be divided. Mention the word QDRO and even the most seasoned veteran may be filled with mild dread. Imagine the confusion when a client tries to understand these important documents.
However, QDROs do not need to be difficult. A bit of education and relying on the services of a QDRO expert can help avoid some of these most common QDRO mistakes.
Misunderstanding The Plan Type
Often times, a divorce will proceed with both sides simply referring to the parties’ “retirement plans.” Without specifying or understanding the specifics of each plan, potential issues can arise down the road. It is important early on for every retirement plan to be clearly identified not only by the correct name but also by the type of plan it is – qualified or non-qualified; defined contribution, defined benefit or cash balance; IRA; etc.
Incorrectly Naming The Plan
While this seems like a very basic step, often times the parties will simply say they have “retirement accounts.” By finding out early on the specific name of every retirement account owned by either party, you can get a clearer picture of the exact nature of all retirement assets- often just by knowing the full name of each plan. It is also critically important that any final Settlement Agreement clearly identifies all retirement accounts with as much specificity as possible. Misidentifying a plan in those signed court orders can create problems later on when an alternate payee seeks out the division he or she expects.
Not Setting A Clear Division Date
This is one area where there is no room for ambiguity. Unless one party is receiving a specific dollar amount that is not going to be adjusted for plan earnings or losses, a clearly defined division date is required! While many divorcing parties assume that the date of divorce is the date of division for any involved retirement accounts, myriad post-divorce litigation specifically involving QDROs tells a different story. Always clearly identify the date for division within the final Divorce Agreement. Failing to do so opens the door to arguments over when the account is actually to be divided – the date of filing, the date of separation, the date the agreement was signed, the date the court signed the final judgment, etc.
Failing To Address Earnings And Losses
While a well-drafted QDRO should always identify a specific date for division of a retirement account, often times the parties fail to consider what happens to the actual value of the plan over time. Usually, there is a delay of many months (or years) between the specified date of division and the date the plan is actually divided by the plan administrator. During this delay, significant fluctuation in the plan’s value can occur. Depending on which party you represent, this can be a good – or bad – thing for your client.
Every QDRO agreement must specify how any earnings and losses that occur between the date of the award and the date of division should be treated. If not, then one of the parties is going to be disadvantaged when the division finally occurs. For example, if you make no provision for adjustments to the award for earnings and losses, then the plan participant bears all risk of a falling account value. Likewise, the alternate payee will not be entitled to any increase in the value of the account.
In either scenario, one party comes out the loser. The easiest way to avoid this is to agree that the awarded amount (whether fixed or a percentage) will be adjusted for earnings and losses. In this way, neither party’s interest will be affected regardless of how long it takes to finalize a division.
Not Considering The Risks Before Settling On A Fixed Amount
Much like failing to address earnings and losses, agreeing to a non-adjustable, flat amount awards of a retirement account can create huge problems for the plan participant in the event of a market downturn. For example, say a plan participant has a 401(k) valued at $200,000 at the time of divorce and he or she agrees to transfer $100,000 to the other spouse. Yet, by time the QDRO is finalized and division is imminent, the 401(k) value has plummeted to only $90,000 due to deteriorating market conditions. The plan participant is now faced with transferring 100% of the 401(k) plus additional funds to the alternate payee to satisfy the exact language of the Divorce Decree. Once tax implications are factored in, the plan participant will actually have transferred more than the divorce agreement required.
Ignoring Surviving Spouse Issues
Surviving spouse benefits are, by far, one of the most complex areas of QDRO work, yet they are often one of the areas most often ignored by attorneys. Clearly defining the status of the alternate payee following the death of the plan participant, especially for defined benefit plans, is paramount.
When a defined contribution plan is involved, it is usually sufficient to include language in the QDRO stating that the alternate payee receives benefits regardless of when the plan participant dies. However, when working to divide a defined benefit plan, the alternate payee’s benefits are significantly affected by the timing of the plan participant’s death – before or after the start of benefit payments. Both scenarios must be addressed in the QDRO.
In many defined benefit plans, the alternate payee will receive no benefits should the plan participant die before payments begin, unless the alternate payee is specifically designated as the surviving spouse under the Qualified Pre-Retirement Survivor Benefit (QPSA) clause of the plan. There are many more nuances that must be considered when it comes to surviving spouse issues, so it is important to discuss all possible scenarios with your QDRO professional.
Incorrectly Equalizing Multiple Plans
When a divorcing couple has several 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 in order to only need one QDRO or avoid a QDRO altogether. While in some cases this may be possible, it is often implemented incorrectly which ultimately costs the parties more in the long run.
One of the biggest mistakes when multiple defined contribution plans are involved is failing to require that the parties exchange current account statements as of a specific date. When no date is specified, the parties are working with a moving target in terms of determining how much any equalization payment should actually be.
Likewise, failing to set forth exactly how the equalization calculation should be made is another common mistake. While it sounds simple, many agreements fail to spell out the exact calculation method, leading to potentially costly litigation down the road.
Finally, if a retirement asset is a defined benefit plan it can never be equalized, because these plans are not set up with specific dollar values. These type of plans always require a separate QDRO for each to effectively divide.
Ignoring Loan Balances
Another common mistake is forgetting to calculate loans that exist against any retirement account. While you cannot always tell from an account statement whether a loan exists, it is important to find out before making any calculations. In most plans, a loan is considered an asset and the value of the loan should be added to the account’s total value for purposes of property division.
How the parties decide to treat any existing loans depends on the purpose of the loans and is subject to negotiation during the divorce.
Not Assigning Responsibility For Preparing The QDRO
An alarming number of divorce agreements fail to specify who has responsibility for preparing the QDRO. While the agreement may indicate that a QDRO is needed, if neither party is specifically required to follow through with preparation, the QDRO often never gets drafted or completed. Every settlement agreement should clearly spell out who is responsible for drafting and presenting the QDRO to the Court and Plan Administrator.
Likewise, it is important to specify who will pay the costs related to the QDRO, and make sure whoever is responsible understands the costs involved, including any that may be issued by the Plan itself.
Failing To Implement The QDRO
In a surprising number of divorces, although a proper QDRO may have been prepared and signed by the Court, the final QDRO never gets submitted to the Plan Administrator. In a few cases, even though a signed and valid QDRO is submitted to the Plan Administrator, for one reason or another the account never gets divided.
It is important to follow up with every QDRO and receive written confirmation that the account was actually divided. Failing to do so can lead to litigation years – even decades – down the road, when an alternate payee realizes he or she is not going to receive the funds to which he or she is entitled.