While helping your clients through their divorce proceedings, you must be aware of and prepared for common mistakes in splitting assets, pension or retirement plans, starting with the simple definitions.
By Noah B. Rosenfarb and Dr. Robert G. Hetsler, Jr., Financial Specialists
Mistake #1 – Misunderstanding the Type of Plan to Be Divided
This is probably one of the most common mistakes in settlement agreements and even final judgments, since often times attorneys prepare the final judgment which the judge simply signs. It often erroneously states “retirement plan” without ever defining the type of plan(s) to be divided.
Retirement plans can be defined contribution plans, defined benefit plans or some type of hybrid. These plans are vastly different and have different implications when trying to divide them. In defined contribution plans, an employee and/or employer make contributions into an account maintained in the employee’s name. These plans have a known account balance at any given time, since the underlying account is nearly always invested in publicly traded securities. In a defined benefit plan, the employee accumulates credits towards their retirement based upon years of service to an employer, and often based on compensation earned.
Typically, when a settlement agreement says the parties will “divide a retirement plan” it can be interpreted that the non-employee is going to receive a lump sum amount. However, if the plan is a defined benefit plan, they may not be receiving any money until the working party retires. Further, they may never receive a lump sum – but rather a monthly benefit payment.
Knowing the plan type and the benefit that can be divided (a lump sum now, a lump sum later or a stream of income) can substantially affect how you may choose to negotiate a resolution.
- Include the plan type in your agreement if it is not part of the name of the plan.
- Describe in the agreement if the receiving party will get a lump sum now, a lump sum at a future date or payments over time and when those payments will begin and end.
Example: The husband participates in the “ABC Company Pension Plan” which has a cash balance plan with a defined benefit component. If the parties desire to divide the cash balance equally and the defined benefit component based on the marital coverture, the language must be specific. In this case “divide the retirement plan equally” would not be an acceptable reference for the plan administrator to implement a QDRO.
This article has been excerpted from the ebook “12 QDRO Mistakes to Avoid” which offers advice for attorneys to be aware of, prevent and potentially correct mistakes when designing and drafting QDROs for clients; whether properly defining the plan to be divided, addressing the details in plan issues, or properly drafting the details of division, among other considerations, this book will give you practice tips, solutions and examples of the mistakes you should avoid.
This is an excerpt from "12 QDRO Mistakes to Avoid" by Noah Rosenfarb and Robert Hetsler. Family Lawyer Magazine is exclusively offering “12 QDRO Mistakes to Avoid” for download here.
Noah B. Rosenfarb, CPA is Managing Director at Freedom Divorce Advisors where he provides sophisticated tax and financial advice to affluent divorced women. Mr. Rosenfarb integrates life planning with financial planning to ensure clients experience the maximum benefits of affluence post-divorce. His holistic approach increases the probability of leading a life that is filled with prosperity – the kind that is measured more by personal happiness than merely by currency.
Robert G. Hetsler, J.D., CPA, CVA, CFF, FCPA is a financial specialist in the division of retirement and pension accounts in divorce cases. Dr. Hetsler is often called upon during divorce proceedings by attorneys and mediators nationwide to provide expert assistance in the division of retirement accounts. Hetsler Mediation & Valuation, Inc. is a Forensic & Investigative Accounting Firm specializing in litigation consulting, investigative accounting, and business valuations in family law and civil matters.