Preparing a bad QDRO will put you in trouble, and it takes ages to rectify the problem. Learn more from insights by a top QDRO expert.
An Interview with Tim Voit, QDRO Specialist
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Tim Voit is a financial analyst and the president of Voit Econometrics Group. Tim’s concentration is in preparation of QDROs, evaluation of retirement plans and securities litigation. He has been admitted as an expert in both the state and federal courts and is often called upon in legal malpractice suits to fix QDROs or to compute or minimize damages for insurance carriers. Tim has had several articles published on topics of QDRO and valuing pensions in several state bar journals, and in addition has lectured to attorneys for continuing legal education credit in several states. He is the author of Retirement Plan Benefits and QDROs in Divorce, published by the Commerce Clearing House.
Family Lawyer Magazine:
Let’s start with the book that you wrote, because that leads into a number of other questions. Can you tell us a little bit about what you wrote for the CCH, and perhaps why you wrote the book?
Well it’s broken into a couple of parts and valuation issues in divorce, with regard to retirement plans as well as qualified domestic relations orders, but there are other chapters related to discovery, liability issues, child support and qualified medical child support orders further in the back. It’s a 15 chapter book; I actually used it as a textbook in a class I taught for the International College. I also just completed another book on Federal Pensions and Divorce last year, and I have a few other ones in the working.
Was there anything in particular that prompted to you to write the book on QDROs?
Yes, about 99 per cent of QDROs are entered because of retirement plans are considered marital property. Some are just savings accounts for example, yet very few attorneys or courts realize that QDROs can be used to pay child support or child support arrears, not to mention alimony. Throughout the late 80s and 90s we were preparing quite a few child support QDROs and I had written an article on how to tap into the retirement plans to pay off child support – which is a $16 billion a year problem. There’s probably a trillion dollars sitting in 401Ks. And also I had it (the article) published in Business Week. That was many years ago, but CCH picked up on it and just asked us to write a book about it.
I developed an online course for International College, but that’s not as significant as the continuing legal education modules that I did for CCH. CCH is one of the largest publishers – their largest client is the Federal government – they publish tax guides and things like that. But I developed CLE modules just on QDROs themselves, and then also for a few continuing education programs for not only CPAs and attorneys, but HR benefits people as well for a firm in New York.
There are also tools available on your website for family lawyers. Can you tell me a little bit about what’s available there for when they need to value a pension or get information from clients to help them do that?
Well there’s a lot that is not of benefit for us, but it’s definitely a benefit to the attorneys and it’s being updated fairly soon. But in particular on discovery, there’s a question and authorization form that we developed over the years, because the forms in state books for discovery never really asked the right questions when it came to retirement plans, or financial assets in general. Our form will ask how many plans is this person involved in? Are there any frozen plans? Because keep in mind you can move 401Ks, but you cannot move pension plans. Or a company may freeze a pension plan and start a new one, and all the other spouse knows about is the more recent plan.
I always use an example: I have an attorney friend of mine who’s aunt and uncle got divorced, and I asked if his uncle had more than one plan. Sure enough back in the early 90s the company had frozen a plan and started a new one. Because of this, there was about $50,000 that would have been overlooked. But that’s one of the major malpractice issues, it’s not just survivor benefits and the death of a spouse or something like that, a lot has to do with lack of discovery. So this form is good because it will ask if it can be divided by a QDRO, about the amount of the benefits and about other plans the person may have accrued, or the company may have assumed. And if they don’t sign this authorisation upon the onset of a divorce, then you chop off the authorisation part, and attach the questions to a subpoena.
So do family lawyers often overlook the possibility that there may be money sitting in pensions that they don’t know about, or don’t do the proper work to find?
Right, and the whole point is, when it comes to any one of these liability issues, to keep the client from coming back in your office ten years from now, saying “where’s my money?” Or they may have heard from another individual at the same company that there were other plans, but this far better than just taking someone’s word for it or something they might put down on a financial affidavit.
So how did you get started drafting QDROs, what was the initial reasoning?
That occurred probably about 25 years ago, an attorney had asked us if we knew anything about QDROs and it was shortly after QDROs came out, that was pursuant to the Retirement Equity Act of ’84. I have an identical twin brother, whose Master’s thesis was on the valuation of pensions in QDROs and divorce, way back then, and that’s how we got started, and it just escalated from there. Back then it was considered a niche to be in this business, now it seems like the markets getting kind of saturated.
From your point of view it’s a little bit more complicated than simply filling out a form, you’ve got to have a little more expertise because there are some family lawyers who do their own QDROs. Do you think that they’re setting them up for problems in the future sometimes?
Well sure, these are ticking time bombs because if they’re going to farm it out, look for someone that has a lot of years of experience because if the QDRO was drafted 20 years ago, we know that those people have retired, they’re receiving their benefits, there’s no problems. You brought up they do their own QDROs they might use boilerplate or model QDROs provided by the company. But you know they have to keep in mind that there’s 50 different states, whose domestic relations laws all define marital differently.
California is a lot different than Florida, and the reason why I bring that up is because the model QDROs are usually based on the domestic relations laws of the state where the company is located, and you want to be aware of those things. The other thing you mentioned, and I taught a class on this, I used to be able to explain that a slight change in verbiage can mean tens of thousands of dollars, so having a background in accounting and finance, actuarial science, economics, really means a lot when it comes to QDROs because you can determine the financial consequences of each and every paragraph. Not having that or having a background, even the attorneys, if they have an undergrad in sociology or something like that, are not going understand necessarily the financial consequences of each of these paragraphs and what it means. So yes, I wouldn’t just take boilerplate language and I think we will probably get more into that in a little bit.
So are QDROs all that you do, or does your firm do other things as well?
QDROs are a significant part right now, but we’ve done securities analysis for litigation, its investment analysis for litigation, damages, calculations, things like that. I also do damage calculations for QDRO malpractice, and you mentioned in the intro that yes I do get retained in legal malpractice cases to fix QDROs and compute the damages for the carrier, so they have a starting point where to negotiate for damages. I also used to arbitrate cases for the NASD, the federal government.
So you mentioned about being retained for malpractice cases by insurance carriers to fix QDROs or compute damages, do you see very much of that?
I see problem QDROs or potential malpractice, if not every day, at least once a week, no question about it. I had a case a year ago where two attorneys who hold themselves out as experts in QDROs, ended up not only preparing a bad QDRO, but spent an awful lot of time trying to rectify the problem. One attorney represented the husband in a divorce, and the other was retained to prepare the QDROs, which goes to show that one attorney retaining another doesn’t get them off the hook, in terms of liability.
Both attorneys signed off on a settlement agreement, and the QDRO was signed off by the attorney, but the husband had $250,000 transferred from his 401K to the wife, when apparently she was only to receive $120,000. So we were called to prepare a QDRO to reverse transaction which was successful. But it’s funny, those same attorneys seem to think only attorneys should prepare QDROs, which seem to be their marketing angle. But like I said, it’s important to have a background in accounting, economics, actuarial science – something like that – to understand the significance of the gains and losses issue and all of that.
Is the assumption that a 401K QDRO is simple true?
Well it should be. We could spend an hour just discussing the pitfalls of 401K QDROs, but there does seem to be a lack of understanding how and when gains and losses are applied, or the actual segregation of an account by shares or units. Very few times is it actually by dollars. And this has evolved over the last 25 years, where years ago you could award a dollar amount and that’s what the alternate pay would receive, but now it’s common place to award a proportionate share of the underlying investments, equal to that dollar amount, or the percentage if that is what is awarded. So you have to be aware of that, as well as the effect of loans. In the case I mentioned with the two attorneys, it was just them not understanding how awarding the percentages as of a certain date effects and gains the losses issue. So you have to know something about how the 401K works, and what might mean one thing to one plan, means something else to another plan, or plan administrator, so they’re not all the same.
Another thing I wanted to bring up is one spouse being awarded 50% of a marital portion of the other spouse’s 401K. Most, if not nearly all 401K administrators will not calculate marital portions, so the calculation of the marital portion has to be done by one of the parties, or they will have to agree on a percentage. This is because they’re not going to tie up their staff computing contributions and the earnings, whether it’s gains or losses on those contributions between two points in time.
They change plan administrators, or they change the custodian of the funds, so they don’t always keep records going back many many years. So if the attorneys put down that the spouse is awarded 50% of the marital portion and walk away, they leave that alternate payee trying to figure out how to get a QDRO done. When nobody will do the calculations, again a plan is not going to do the calculation.
Right so they need somebody like you to do that calculation?
Well someone that’s absolutely familiar with how to allocate the gains and losses from quarter to quarter. Whenever you are talking about marital, it doesn’t matter what type of plan it is, attorneys need to ask for something on the date of marriage. And truly the burden should be placed on the person with the 401K, because it’s not so much trying to figure out the marital portion, if that person wants the premarital portion excluded, that’s why they emphasis 50% of the marital portion. The spouse with the 401K has access to all the account statements, so they should show what the premarital portion is worth, so it can be excluded. That would just save a lot of people an awful lot of grief, and get this QDRO process finished as quickly as possible.
The most common thing is survivor benefits. If you don’t get the QDRO done at the time of the divorce or before, and the spouse with the pension dies, that money is gone. It’s going to be forfeited to the plan or paid to somebody else. Many people think QDROs need to be done after divorce, but they don’t. The Internal Revenue Code defines alternate pay as spouse, former spouse or dependent.
Client expectations is another one. I would advise attorneys against saying anything definite to a client in terms of what they can expect unless they know for sure; meaning you always want to use, “should the plan allow for this”, “if the plan allows for an immediate distribution.” An immediate lump sum distribution to a plan administrator means within the next year, because retirement plans are long term assets you could say. So immediate to them is within the next year, so if you’re going to assign all the debt over to the one spouse, you don’t want to do it without knowing exactly when a plan can make a distribution to an alternate payee.
So you also taught a 15 week course on the subject of QDROs, what is addressed and who attends?
Well partly paralegals, family lawyers, but yes what you have to wonder, is there 15 weeks’ worth of material? Well one of the students who I actually hired, asked if there was an advanced course on this because there were so many more issues that could have been explored. So there is an awful lot of information, a lot of issues to be addressed, calculations, and like I said understanding the financial consequences of each of these, of the paragraphs within an order, whether it’s a QDRO, or a QDRO like order, an order relating to the military, railroad or federal government, all of them very different.
And what are QDROs typically used for?
Well typically for marital property, because retirement plans are considered marital assets, and I say that because when you think about the retirement plans in this country, most of them divide the retirement plans as marital property. The reason congress and the individual states view retirement plans as marital assets, is that they are really no different than a savings account, because it is money that otherwise would have went into the family household, got diverted to another account and just happens to be in one of the spouses names. So it’s income that otherwise would have went into the family household, got diverted to a separate account, whether it’s a pension fund or a 401K. I would say 95% of QDROs are used to divide the accounts as marital property. Probably 4%, to 5% for alimony and 1% for child support, which to me is surprising.
That could be accessed at least in some cases to pay for those outstanding amounts right?
Oh absolutely. I had a case with a woman in Alabama: four kids, husband took off to a different state. She couldn’t get any help, and fortunately for her he went to work for a large company in Georgia, and child support on four kids over ten years amounted to about $160,000. But you’ve got to remember the plan is required to withhold 20%, so now we get into tax issues and things like that. Taxes are always assigned to the person that’s receiving the distribution. The exception to that is for child support, where the plan participant spouse gets hit with the tax liability. So in that particular case, the husband got hit with $40,000 tax liability, on a $200,000 distribution and netted $160,000 to the former spouse, which had to cover the child support for 10 years.
Wow, that was a great win for that person who got the money, and a very sad day for the fellow who gave up the money.
I guess you could say that, but there’s many more examples. One was a bank executive incarcerated for embezzlement. Because retirement plans are protected and nobody can touch them, he thought he would get out of prison and have his 401K. But we were able to just draft the QDRO for the attorneys so that they could always just keep tapping into that 401K to pay current child support obligations.
So can you draft QDROs for attorney’s fees?
Well the short answer to that is no, because QDROs can only be used for child support, alimony or for property division, not attorney fees. Now that’s not to say attorneys can’t get their money indirectly through a QDRO distribution. For QDROs, there’s a huge distinction between the private sector, federal government and the military. The federal government and the military require a copy of the settlement agreement or judgement to go along with any order dividing the retirement, of the pension.
The private sector, all they need is the QDRO itself, I always suggest don’t send in a copy of the judgement of settlement agreement, because you’re going to invite the plan administrator to meddle in the divorce process, or the settlement arrangements. But yes, you definitely want to avoid mentioning in the QDRO itself anything about attorney fees. But we have other suggestions. One of which is to get paid to the alternate payee in care of their attorney, or paid to the alternate payee but directed to a trust account for that alternate payee. But it has to be paid to the alternate payee. The attorneys can still get their fees indirectly. It’s just that if you draft the QDRO that says attorney fees, it will no question be rejected outright.
And by helping their clients get access to money that sitting in a QDRO, that would presumably free up cash that they could also pay their bill with, so that’s another indirect result of helping right?
Well right, also because the QDRO distribution, if they’re taking directly from the plan itself, it’s exempt from the 10% tax penalty. I always see that verbiage in settlement agreements about the spouse being awarded X amount of dollars and they’re responsible for taxes and penalties. If you roll it over and take it out then you get socked with the tax penalty, but if you take it directly from the plan it’s exempt from tax penalties. That’s section 72T, 72T, 2C to be exact, of the Internal Revenue Code.
So who has the final say, or the upper hand with regard to QDROs?
Well there were three major players involved with the development of QDROs: that was the IRS, the Department of Labor, and the individual plan administrators. The IRS is responsible for tax, and the Department of Labour is responsible for enforcement – so if you have an uncooperative plan administrator you want to talk to the Department of Labour – but really who has the upper hand is the individual plan administrators because they’re the ones that actually qualify the domestic relations order. They have to approve of the language in the QDRO.
The reason for that is because there are thousands of different plans, with preferences to what they want to see in the order. They all have different terminology. They have different benefit options, or payout options, or distribution options.
Are there any other issues that you encountered that you think that family lawyers who are listening to us should be aware of?
Yes. We kind of bridge a gap between what the court is ordering, or the intent of the parties, or what the attorneys want for the parties, for their clients. We bridge a gap between that and what the plan will allow. Some courts have ruled what’s not provided in a settlement agreement or final judgement, is or should not be used in a QDRO that’s entered subsequent to that. But more often than not, attorneys or the courts understand what is a normal form of benefit as opposed to something that is accrued outside of the marriage or marital period.
Like what kind of benefits?
Like cost of living adjustments. Some might argue that if it’s not in the settlement agreement or judgement, it should not be included in the QDRO itself. But hold on, cost of living on a monthly pension is part and parcel of the benefit itself, it’s funded as part of the benefit. All you have to do is ask if the plan participant spouse terminated employment on the day of divorce, would they receive a COLA or not. The answer is yes, so it’s not a post marital benefit, it’s part of the pension benefit, and you will find cost of living adjustments on pensions, mostly with government and military plans. You don’t see them so much with the private sector but it’s something to be aware of. But that’s just one example of how it gets kind of confusing, what is part of the pension benefit, versus what is post marital.
And so when you talk about crunching the numbers and having a background in retirement plan benefits, it sounds to me like that’s a must when it comes time to prepare a QDRO?
Well, I had a case with an attorney, who again holds himself out to be an expert, but there were two trials where he didn’t understand this issue. And that was only one of three issues, in front of two different judges, two different counties, within a two week span. Because he didn’t understand the whole concept of what’s really part of the pension benefits he lost those trials.
Tim Voit is the author of Retirement Benefits & QDROs in Divorce, a CCH publication, and Federal Retirement Plans in Divorce – Strategies and Issues, available through www.vecon.com. Mr. Voit’s firm provides retirement plan valuations and specializes in the preparation of QDROs. Mr. Voit has been admitted as expert in the courts of several states as well as in federal court and is a nationally recognized expert.www.vecon.com
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