Avoid these 10 QDRO mistakes

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 can feel a mild trepidation. Imagine the confusion when a customer tries to understand these important documents.

However, QDROs do not have to be difficult. A little education and relying on the services of a QDRO expert can help you avoid some of these more common QDRO mistakes.

Not understanding the type of plan

Many times, a divorce will proceed with both parties simply referring to the “retirement plans” of the parties. Without specifying or understanding the details of each plan, potential problems can arise in the future. It is important that each retirement plan is clearly identified from the start 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; GONNA; etc.

Misnaming the plan

While this seems like a very basic step, many times the parties will simply say they have “retirement accounts.” By finding out the specific name of each retirement account owned by either party up front, 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 extremely important that any Final Settlement Agreement clearly identify all retirement accounts with as much specificity as possible. Misidentifying a plan in those signed court orders can create problems later when an alternate payee seeks the division they hope for.

Not setting a clear division date

This is an area where there is no room for ambiguity. Unless one party receives a specific dollar amount that will not be adjusted for plan gains or losses, a clearly defined split date is required! While many divorcing parties assume that the date of divorce is the date of division of any retirement account involved, the myriad of post-divorce litigation specifically involving QDROs tell a different story. Always clearly identify the date of division within the final Divorce Agreement. Failure to do so opens the door for arguments about when the account will actually be divided: the filing date, the separation date, the date the agreement was signed, the date the court signed the final judgment, etc.

Failing to address profit and loss

While a well-written QDRO should always identify a specific date for the division of a retirement account, many times the parties do not consider what happens to the actual value of the plan over time. There is usually a delay of many months (or years) between the specified split date and the date the plan administrator actually splits the plan. During this delay, significant fluctuation in plan value may occur. Depending on which party you represent, this can be good or bad for your client.

Each QDRO agreement must specify how gains and losses that occur between the award date and the split date are to be treated. Otherwise, one party will be at a disadvantage when the split finally occurs. For example, if you do not anticipate adjustments to the award for gains and losses, then the plan participant bears all risks of a decline in account value. Also, the alternate payee will not be entitled to any increase in the value of the account.

In either scenario, one party loses. The easiest way to avoid this is to agree that the amount awarded (either fixed or a percentage) will be adjusted for profits and losses. In this way, the interest of neither party will be affected regardless of how long it takes to complete a split.

Not considering the risks before deciding on a fixed amount

Like not addressing gains and losses, accepting non-adjustable lump-sum awards from a retirement account can create big problems for a plan participant in the event of a market downturn. For example, let’s 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. However, as the QDRO ends and the split is imminent, the value of the 401(k) has plummeted to just $90,000 due to deteriorating market conditions. The plan participant must now transfer 100% of the 401(k) plus additional funds to the alternate payee to comply with the exact language of the Divorce Decree. Once the tax implications are factored in, the plan participant will actually have transferred more than the divorce settlement requires.

Ignore the problems of the surviving spouse

Surviving spouse’s benefits are by far one of the most complex areas of QDRO work, but they are often one of the areas most often ignored by attorneys. Clearly defining the status of the alternate payee after the plan participant’s death, especially for defined benefit plans, is paramount.

When it comes to a defined contribution plan, it is generally sufficient to include language in the QDRO indicating that the alternate payee receives benefits regardless of when the plan participant dies. However, when working to split 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 not receive any benefits if the plan participant dies before payments begin, unless the alternate payee is specifically designated as the surviving spouse under the Prior Survivor Benefit clause. Qualified Pre-Retirment Survivor Benefit (QPSA) from the plan. There are many more nuances to consider when dealing with surviving spouse issues, so it is important to discuss all possible scenarios with your QDRO professional.

Incorrect equalization of various plans

When a divorcing couple has multiple defined contribution plans, it is natural for the parties and their attorneys, in an effort to save money, to try to offset the value of one plan against the other in order to need only one QDRO or avoid a QDRO. total. While in some cases this may be possible, it is often implemented incorrectly, ultimately costing the parties more in the long run.

One of the biggest mistakes when it comes to multiple defined contribution plans is not requiring the parties to exchange checking statements by a specific date. When no date is specified, the parties are working with a moving target in terms of determining how much any compensation payment should actually be.

Also, not stating exactly how the equalization calculation should be done is another common mistake. While it sounds simple, many agreements do not specify 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 matched, because these plans are not set with specific dollar values. These types of plans always require a separate QDRO for each to be divided effectively.

Ignore loan balances

Another common mistake is forgetting to calculate the loans that exist against any retirement account. While you can’t always tell from a statement if there’s a loan, it’s important to find out before doing any calculations. In most plans, a loan is considered an asset and the value of the loan must be added to the total value of the account 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.

Failure to assign responsibility for preparing the QDRO

An alarming number of divorce settlements do not specify who is responsible for preparing the QDRO. While the agreement may state that a QDRO is needed, if neither party is specifically obligated to proceed with preparation, the QDRO is often never drafted or completed. Each settlement agreement must clearly specify who is responsible for drafting and submitting the QDRO to the Court and the Plan Administrator.

Also, it is important to specify who will pay the costs related to the QDRO and to make sure that whoever is responsible understands the costs involved, including those that may be issued by the Plan itself.

Do not implement the QDRO

In a surprising number of divorces, even though the court has prepared and signed a proper QDRO, the final QDRO is never submitted to the Plan Administrator. In some cases, even if a valid, signed QDRO is submitted to the Plan Administrator, for one reason or another, the account is never divided.

It is important to keep track of each QDRO and receive written confirmation that the account was indeed split. Failure to do so can lead to years of litigation, even decades, in the future when an alternate payee realizes that he is not going to receive the funds to which he is entitled.