Five QDRO Mistakes to Avoid

In many marriages, retirement accounts make up the majority of assets for the couple. In long-term marriages especially, these accounts can involve values in the six or seven figures, making division between the spouses a key to each parties’ long-term financial security.

However, dividing the accounts effectively often presents a stumbling block in the #divorce process. Much post-divorce litigation involves mistakes contained in Qualified Domestic Relations Orders (QDROs). These mistakes are often not discovered until the alternate payee seeks out his or her share of the plan participant’s account.

However, QDROs do not need to be difficult. A bit of education and relying on the services of a QDRO expert can help avoid some of these most common #QDRO mistakes.

Misunderstanding the Plan Type

Often times, a divorce will proceed with both sides simply referring to the parties’ “retirement plans.” Without specifying or understanding the specifics of each plan, potential issues can arise down the road. It is important early on for every retirement plan to be clearly identified not only by the correct name but also by the type of plan it is – qualified or non-qualified; defined contribution, defined benefit or cash balance; IRA; etc.

Not Setting a Clear Division Date

This is one area where there is no room for ambiguity. Unless one party is receiving a specific dollar amount that is not going to be adjusted for plan earnings or losses, a clearly defined division date is required! While many divorcing parties assume that the date of divorce is the date of division for any involved retirement accounts, myriad post-divorce litigation specifically involving QDROs tells a different story. Always clearly identify the date for division within the final Divorce Agreement. Failing to do so opens the door to arguments over when the account is actually to be divided – the date of filing, the date of separation, the date the agreement was signed, the date the court signed the final judgment, etc.

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.

Not Recognizing Earnings and Losses

While a well-drafted QDRO should always identify a specific date for division of a retirement account, often times the parties fail to consider what happens to the actual value of the plan over time. Usually, there is a delay of many months (or years) between the specified date of division and the date the plan is actually divided by the plan administrator. During this delay, significant fluctuation in the plan’s value can occur. Depending on which party you represent, this can be a good – or bad – thing for your client.

Every QDRO agreement must specify how any earnings and losses that occur between the date of the award and the date of division should be treated. If not, then one of the parties is going to be disadvantaged when the division finally occurs. For example, if you make no provision for adjustments to the award for earnings and losses, then the plan participant bears all risk of a falling account value. Likewise, the alternate payee will not be entitled to any increase in the value of the account.

In either scenario, one party comes out the loser. The easiest way to avoid this is to agree that the awarded amount (whether fixed or a percentage) will be adjusted for earnings and losses. In this way, neither party’s interest will be affected regardless of how long it takes to finalize a division.

Not Following Through on 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.

If you have a QDRO in your future, visit our website to learn more about these retirement account division tools and the services we provide.