Avoiding Common QDRO Mistakes - Part 2

Retirement accounts make up the majority of most long term marriage’s assets. Knowing that, it is likely that every divorce attorney will come across the need to have a #QDRO prepared for a client at some point in their career.

Going into the QDRO process without an understanding of common mistakes is a mistake in itself. If you know what to avoid, you can get the QDRO drafted without creating future issues for your client. We covered some other common mistakes recently, here are some more to know about.

Ignoring Surviving Spouse Issues

Surviving spouse benefits are, by far, one of the most complex areas of QDRO work, yet they are often one of the areas most often ignored by attorneys. Clearly defining the status of the alternate payee following the death of the plan participant, especially for defined benefit plans, is paramount.

When a defined contribution plan is involved, it is usually sufficient to include language in the QDRO stating that the alternate payee receives benefits regardless of when the plan participant dies. However, when working to divide a defined benefit plan, the alternate payee’s benefits are significantly affected by the timing of the plan participant’s death – before or after the start of benefit payments. Both scenarios must be addressed in the QDRO.

In many defined benefit plans, the alternate payee will receive no benefits should the plan participant die before payments begin, unless the alternate payee is specifically designated as the surviving spouse under the Qualified Pre-Retirement Survivor Benefit (QPSA) clause of the plan. There are many more nuances that must be considered when it comes to surviving spouse issues, so it is important to discuss all possible scenarios with your QDRO professional.

Incorrectly Equalizing Multiple Plans

When a divorcing couple has several defined contribution plans, it is natural for the parties and their attorneys – in an effort to save money – to try and offset the value of one plan against the other in order to only need one QDRO or avoid a QDRO altogether. While in some cases this may be possible, it is often implemented incorrectly which ultimately costs the parties more in the long run. 

One of the biggest mistakes when multiple defined contribution plans are involved is failing to require that the parties exchange current account statements as of a specific date. When no date is specified, the parties are working with a moving target in terms of determining how much any equalization payment should actually be.

Likewise, failing to set forth exactly how the equalization calculation should be made is another common mistake. While it sounds simple, many agreements fail to spell out the exact calculation method, leading to potentially costly litigation down the road.

Finally, if a retirement asset is a defined benefit plan it can never be equalized, because these plans are not set up with specific dollar values. These type of plans always require a separate QDRO for each to effectively divide. 

Ignoring Loan Balances 

Another common mistake is forgetting to calculate loans that exist against any retirement account. While you cannot always tell from an account statement whether a loan exists, it is important to find out before making any calculations. In most plans, a loan is considered an asset and the value of the loan should be added to the account’s total value for purposes of property division. 

How the parties decide to treat any existing loans depends on the purpose of the loans and is subject to negotiation during the divorce.

Not Assigning Responsibility For Preparing The QDRO 

An alarming number of divorce agreements fail to specify who has responsibility for preparing the QDRO. While the agreement may indicate that a QDRO is needed, if neither party is specifically required to follow through with preparation, the QDRO often never gets drafted or completed. Every settlement agreement should clearly spell out who is responsible for drafting and presenting the QDRO to the Court and Plan Administrator.

Likewise, it is important to specify who will pay the costs related to the QDRO, and make sure whoever is responsible understands the costs involved, including any that may be issued by the Plan itself.

Failing To Implement The QDRO

In a surprising number of divorces, although a proper QDRO may have been prepared and signed by the Court, the final QDRO never gets submitted to the Plan Administrator. In a few cases, even though a signed and valid QDRO is submitted to the Plan Administrator, for one reason or another the account never gets divided. 

It is important to follow up with every QDRO and receive written confirmation that the account was actually divided. Failing to do so can lead to litigation years – even decades – down the road, when an alternate payee realizes he or she is not going to receive the funds to which he or she is entitled. 

To learn more about QDROs or the many related services we provide, please visit our website.