Some of these can have serious consequences, so avoid these nine pitfalls.
By Theodore K. Long, Jr., Pension Analyst
In most cases, dividing a retirement account requires a Domestic Relations Order (DRO) or Qualified Domestic Relations Order (QDRO) that must be properly prepared, approved by the pension plan administrator, and issued as a court order. Some mistakes can have serious consequences while others simply slow an already protracted process with multiple revisions to correct errors. Retirement account law and QDROs are among the most complex and difficult parts of family law. Some of the most common QDRO missteps include:
Misunderstanding the Type of Account Being Divided
There are three basic types of retirement assets: Defined Contribution Plans (DC plans), Defined Benefit Plans (DB plans), and Cash Balance Plans (CB plans). In a DC plan – such as a 401(k) – the worker makes pre-tax contributions (or after-tax contributions in the case of Roth 401(k) plans) to an account in his or her name. At retirement, the worker uses the money in his or her account to supplement income. However, there is no guarantee of how much money will be in the account at that time. In a DB plan, the worker receives a monthly benefit based on a formula set forth by the plan administrator. A CB plan is a DB plan with features similar to DC plan. The language in the settlement agreement and QDRO should be applicable to the type of retirement benefits being divided. Furthermore, plans may or may not be subject to ERISA (Employees Retirement Income Security Act) and REA (Retirement Equity Act), the federal statutes that govern the division of private plans. The rules for an order are different depending on the plan’s ERISA status. Practitioners must know the plan’s status and the rules that govern its division.
Assuming once a judge signs off, the agreement is enforceable and the QDRO can be drafted.
ERISA and REA, the two laws that govern the division of private retirement assets, are federal statutes. Although the division of marital property is generally governed by state domestic relations law, any assignments of retirement interests must also comply with federal law. A state judge does not have jurisdictional discretion with regard to dividing retirement assets that are subject to federal law.
Attempting to Use a QDRO to Divide Plans that Cannot be Divided
Some retirement plans cannot be divided – such as some supplemental benefits and some municipal plans. “One of the most difficult post-divorce situations to deal with is when the parties discover, after the final judgment (in some cases, several years after the divorce), that one of the retirement assets they have agreed to divide is simply not divisible or assignable,” says the American Bar Association (ABA).
Failing to Specify the Correct Name of the Plan
The number-one reason QDROs are rejected is referencing the wrong plan name. The Department of Labor states that a plan administrator is not required to reject an order if it fails to correctly specify factual information that is easily obtainable; however, the reality is plan
administrators will fail an order for the slightest error in the plan name. If the name has an ampersand, the word “and” may cause the order to be rejected.
Failing to Set a Cut-Off Date for Marital Property Rights
Most states utilize a specific date that serves as the line of demarcation for marital property rights – which may or may not be the date of divorce. The agreement must set a specific date as to when the rights to the retirement asset as marital property end.
Failing to Define the Method for Calculating a Marital Coverture
For those states that incorporate the concept of marital coverture, the QDRO should fully define the calculation of the fraction. Typically, the numerator of the fraction is calculated from the later of the date of the marriage to the cut-off date for marital property rights. However, the denominator of the marital coverture fraction can be calculated through the cut-off date or through the date of retirement, if the worker is still participating in the plan.
Failing to Address Critical Issues Specific to the Plan
Gains and losses on DC plans, survivor benefits and COLAs on DB plans, and conversions on CB plans are just a few examples of issues that need to be addressed. If not, the party responsible for having the order drafted can make decisions skewed in his or her own favor.
Bungling the “Equalization” of Multiple Plans
When spouses have several plans, lawyers sometimes try to save money by combining the values of all of the plans and transferring an equalizing amount to one account. This can work – if the parties provide statements for each account on the specific date set forth in the agreement and include how the calculation is to be completed.
Failing to Stipulate Who is Responsible for Drafting the QDRO
Hard as it may be to believe, some separation agreements fail to assign responsibility for drafting the QDRO. QDROs are often the last items completed in a divorce. Frequently, clients have discharged their respective attorneys and either do not know the QDRO hasn’t been done or do not know that a QDRO needs to be done. This crucial task can easily fall through the cracks.
Theodore K. Long, Jr. is a nationally recognized expert in all issues relevant to valuing and dividing retirement benefits in divorce. He is the founder and president of Pension Appraisers, Inc., which has served family law attorneys and their clients nationally since 1989. www.QdroDesk.com
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