Sometimes a client’s expectations are different from the eventual outcome. Following are some problem areas, including a few simple illustrations of QDROs gone wrong, with pointers to help you avoid a malpractice claim.
By Timothy C. Voit, Financial Analyst
1. Why not to retain another attorney to prepare a QDRO
In an actual case two attorneys, one attorney who represented the husband in the divorce, and the attorney hired to prepare the QDRO, agreed and signed off on a QDRO that led to the alternate payee spouse receiving twice as much as the amount intended (in the hundreds of thousands of dollars). The wrong date of segregation (of the account) was used and when gains and losses were applied it was misunderstood by both attorneys as to whether or not gains and losses should have applied, and if so, as of what date. The attorney retained to prepare the QDRO washed his hands of the case and pointed the finger at the attorney who hired him. This problem was eventually resolved by submitting an amended order, prepared by none other than a non-attorney QDRO specialization firm.
2. Examine the background of who you retain to prepare the QDRO
Does their educational background make them an expert in QDROs? Do they have more than 15 years of QDRO experience? Why over 15 years? Because QDROs often do not mature, or go into effect for 15 or more years. You would therefore know if the firm had prepared faulty QDROs from the past.
3. Confusing what can be done in the private sector with what is done with governmental retirement plans
The term “QDRO” pertains to the private sector and is a product of the Retirement Equity Act of 1984, as an amendment to ERSIA of 1974. Government plans include the military, federal, railroad (through the Railroad Retirement Board), state, and municipal plans. These plans are exempt from ERISA and therefore exempt from QDROs. However, most (except municipal pensions) accept the functional equivalent of a QDRO to carve out a portion of the pension as marital property, alimony or for child support.
What has evolved over the past 20 to 25 years is that in the private sector it is customary to prepare and submit to the plan administrator a separate interest QDRO, meaning an alternate payee spouse receives their share of the pension based on their lifetime, as opposed to the plan participant spouse’s lifetime. The pension plan, designed to pay out a monthly pension amount over a lifetime, is different, than say, a 401(k) comprised of an account balance. The separate interest in effect guarantees the alternate payee their awarded share over their lifetime, regardless of whether or not the plan participant spouse lives or dies.
Pre-retirement survivor benefits, however, may need to be included in the verbiage of the QDRO to secure the alternate payee’s share prior to their commencement. Also, keep in mind separate interest is not possible with a government pension. Here, the spouse can only share in the monthly pension amount at the time the participant spouse retires and only for the lifetime of the plan participant.
A further distinction is that under a separate interest an alternate payee spouse can receive their share at any time after the earliest retirement age of the participant spouse, regardless of whether or not the participant spouse retires. This, however, is not true of government pensions. The spouse must wait until the participant spouse retires to receive their share and they can only receive their share at the time of retirement.
4. The words, “if, should, or if any” cannot be overused in a settlement agreement or QDRO
When trying to achieve an equitable distribution of a retirement plan asset you do not want to specify an age at which a spouse is to receive their share. Rather, point out that the spouse is to receive their own separate independent interest if possible with benefits commencing at the time of the other spouse’s retirement, or earlier if permitted by the terms of the plan.
Tim Voit is a recognized expert, financial analyst and founder of Voit Econometrics Group Inc. He is the author of Retirement Benefits & QDROs in Divorce, and Federal Retirement Plans in Divorce – Strategies and Issues. www.vecon.com