QDRO Mistakes Top 10 - Part 2

Working through a divorce can be a very complex process, especially when retirement assets are part of the equation. While some divorce attorneys may go through the early years of their careers without having to deal with division of these potentially complicated assets, most will have to deal with a QDRO at some point.

For the inexperienced, a QDRO can be a minefield of mistakes. However, some of the most common errors can be avoided with just a bit of education. In Part One of this series, we discussed some of these mistakes. Here are a few more.

Failing to Address 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 Considering The Risks Before Settling On A Fixed Amount

Much like failing to address earnings and losses, agreeing to a non-adjustable, flat amount awards of a retirement account can create huge problems for the plan participant in the event of a market downturn. For example, say a plan participant has a 401(k) valued at $200,000 at the time of divorce and he or she agrees to transfer $100,000 to the other spouse. Yet, by time the QDRO is finalized and division is imminent, the 401(k) value has plummeted to only $90,000 due to deteriorating market conditions. The plan participant is now faced with transferring 100% of the 401(k) plus additional funds to the alternate payee to satisfy the exact language of the Divorce Decree. Once tax implications are factored in, the plan participant will actually have transferred more than the divorce agreement required.

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.

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.