Whether you farm out QDROs or prepare them yourself, shield yourself against liability threats.
By Timothy C. Voit, Financial Analyst
With so many financial professionals and attorneys getting into the QDRO business, there are issues you should be aware of as a family lawyer. Here is a list of problem areas to help you avoid an unintended malpractice claim.
Not Having the QDRO, or like order, prepared and entered at the time of divorce. It is vital to have a QDRO prepared and entered for when the final divorce judgment is entered. In one example, the pension plan participant died one month later in a motorcycle accident, and the former wife lost her share of the monthly pension benefit because the QDRO did not exist.
Failure to provide pre-retirement survivor benefits can be detrimental. If your QDRO preparer fails to mention pre-retirement survivor benefits, be prepared to address the issue in the settlement agreement or divorce judgment. Make it clear the intent of the parties is for the former spouse to receive their awarded share, even if the plan participant spouse predeceases them before or after retirement, through a survivor benefit. Awarding a separate interest (private sector) doesn’t guarantee the benefit to the former spouse if pre-retirement survivor benefits are not included.
Awarding 50% of marital portion of a 401(k) or like plan & placing burden on alternate payee to figure out marital portion. A plan cannot compute a marital portion of a 401(k) because the account fluctuates in value daily and the company may have changed plan administrators or may not have records going back to the date of marriage. Do not put the burden of calculating the marital portion on the alternate payee spouse, but on the plan participant to have the premarital portion excluded.
Disregard for loans, which adversely affects a former spouse’s share. Every attorney should pay careful attention to loans in a 401(k) and whether they were intended for marital use or considered non-marital. State plainly in the settlement agreement whether the former spouse’s share will be reduced by a specific amount or not adversely affected.
Relying on a 401(k) distribution to pay off debt when the plan does not make an immediate lump-sum distribution. This is dangerous, but in today’s economy, a practical approach to take if one party is sitting on a large (illiquid) 401(k) balance. Consult the plan first to determine when a distribution can be made – monthly, quarterly, etc.
Using a model QDRO that’s not consistent with the domestic relations laws of the State you’re in. Attorneys often think QDROs are easy and all they need is a model QDRO. If the company you’re dividing the plan for is located outside of your state, it’s likely the model QDRO is more consistent with the domestic relations law of the state in which the company is located, not the one you’re in.
If you retain anything from this article, understand that:
- The terms and conditions of the plan will always prevail over the intent of the courts or the parties.
- Benefits awarded to an alternate payee spouse are derived through the eligibility of the plan participant spouse.
- Using QDROs to collect attorney fees is not allowed, though there are approaches that can be used.
- Using QDROs to collect child support is a big plus. Remember to shift the tax liability to the plan participant.
- Neglecting to address survivor benefits, in the event the plan participant predeceases the alternate payee spouse, is a claim waiting to happen.
Tim Voit is a recognized expert, financial analyst and founder of Voit Econometrics Group Inc (www.vecon.com). He has been retained in QDRO malpractice cases by insurance carriers to fix Qdros or computed damages. Mr. Voit is the author of Retirement Benefits & QDROs in Divorce, and Federal Retirement Plans in Divorce – Strategies and Issues.