They say it is all in the details, but avoid being overwhelmed by the complexities of QDROs by knowing what details to look out for.
By Veralynn Morris, Financial Planner
- A legal document required to divide retirement assets pursuant to divorce.
- A Domestic Relations Order that must meet both the legal and “Plan” requirements to be deemed as “Qualified” according to the “Plan” document and approved by the Plan Administrator.
- A document that must be presented to the Court and ordered by the Judge in accordance with the Divorce Decree while satisfying the “Plan’s” specific and approved language to succeed as “qualified.”
“The QDRO was prepared and reviewed several times by the wife’s attorney, signed by the Judge, but when submitted directly to the “Plan,” was rejected several times ending on the lawyer’s desk creating many hours of work and persistent client interaction resulting in the wife’s financial hardship and client complaints.”
It’s All in the Details: QDRO Draft Preparation
It’s a fact. As one who provides assistance with QDRO draft preparation for many attorneys, the term QDRO invokes extreme emotional response. And rightly so. The typical complaint goes something like this: “I have withdrawn from the case after winning an appropriate settlement for my client. What happens is that I get phone call after phone call from my client asking ‘when can I get my money?’ I’ve sent her to a QDRO specialist and then get the document back for review. I depend on the specialist, get the document to the Judge for the Order, send it in and its rejected. Sometimes several times. I don’t understand why these Plans don’t accept the Order. It mirrors the Divorce Decree. What else do they want?”
QDRO preparation is a two-part process – the law and the financial. An attorney will be successful in this area when he works with CDFA™ professional who is trained in the assistance of the draft preparation of QDRO and is also a skilled financial practitioner. The practitioner must be an expert in the area of pension and other non-qualified plans. Assistance with the draft preparation of QDRO also requires an expert familiar with the components of each Plan’s requirements and their Plan documents. All of these, even with the same company, can be extremely varied with different versions. All Plans are specific whether they are from private companies, government, municipal, educational, medical organizations, to name a few. Each Plan has its own criteria that must be followed.
Grammar, Language and Other Details
Some Plans will provide guidance; some will not. Some will provide Model Documents. Many times, the ‘pension’ language from several pension documents must be ‘merged’ into one document so that it meets language acceptable as ‘qualified.’ The Plan names must be exact. We successfully got a QDRO through the process where we had to provide the name of the plan as La Farge North America Inc. Notice there is no comma after “America.” To qualify under this Plan, if the comma was inserted, it would have been ‘disqualified.’ Furthermore, the participant was a ‘terminated’ employee. We had to insert ‘terminated’ not just ’employee.’ No reference to a ‘terminated’ employee situation was provided by their guidance. Based on the background of the case and asking the right questions, we knew where and how to insert that provision.
Recently we assisted in the draft preparation of a QDRO for Lockheed Martin. The Settlement Agreement simply stated, LOCKHEED MARTIN PENSION PLAN, (“The Plan”). The participant actually participated in two of the Lockheed Martin Pension Plans. The attorney, from the Pension Plan statements, did not realize that the participant would retire under two Plans. Both had to be named. There were survivor benefits associated with this case, each with different survivor benefit option percentages. One offered a 75% Survivor Benefit, the other, a 50% benefit. All of these ‘details’ had to be included and written in the precise language of the Plans.
We have experienced some Plans where they have required that the ‘legal’ language be modified in the Settlement Agreement. Legally appropriate, yes, Plan appropriate, no. We assisted the lawyer by providing the “Plan” language, the lawyer and the parties met in my office, corrected the document sent to the Court, and it was accepted as ‘qualified’ once it reached the Plan.
All attorneys, judges and clients are impressed that the criteria given in the above examples had been verified with a “Pre-Approval” process. During this process, the attorney is provided with each draft model for legal review and approval as we progress through the process.
Submission Follow Up
Even though an Order has been successfully submitted, there is still more work to do – the work that will provide that the Alternate Payee has received the benefits of the Order. It is not enough to submit a QDRO to a Plan that has been ‘preapproved.’ Confirmation from the Plan is critical. This requires follow up – early and often. Without the formal Letter of Acceptance, don’t assume that your client will receive the benefits in the Order. In 2012, we worked on an Order that was signed in 1998, submitted to the Plan and rejected. The paperwork got lost in the shuffle and when the wife went to collect her benefits, there were none. Luckily, the participant had not retired and had not begun withdrawals from the 401(k) nor liquidated the account. The attorney avoided a threatened grievance and litigation. One of the perils of a lack of follow up.
In QDRO – the key is the details. Doing the ‘leg work,’ reviewing the drafts and using the guidance provided by the Plan Administrators – with extensive and almost daily follow-up, gets us the “Pre-Approval.” Once the formal document is accepted by the Plan and the Participant and Alternate Payee are notified, there is still more that must be done to get to the final “Acceptance” letter.
Paying attention is key. Many attorneys do not have the manpower to follow up nor the specific expertise in the area of QDRO to safely accept the responsibility. There is significant exposure in this area. Using a financial professional who is a CDFA™ and an expert in the areas of QDRO and pensions is critical to your success and will give your client assurance that the benefits Ordered will be guaranteed and will be provided in the future.
Veralynn Morris is a Certified Divorce Financial Analyst™ and Financial Services Professional with Divorce Financial Solutions, and has more than 30 years of experience in the financial and investment industry offering financial planning and investment services to individuals and employers in areas of tax- and non-tax qualified pensions, profit sharing, executive compensation; focusing on plan design, investment growth, retirement projections, and their taxation. Visit the Divorce Financial Solutions, Inc. website: http://www.divorcefinancialsolutions.org/
Some of these can have serious consequences, so avoid these nine QDRO missteps.