Avoiding QDRO Malpractice
During my tenure as a Plan Administrator, I saw firsthand the types of errors and omissions made by attorneys in negotiating pension terms and drafting Orders and heard Participants and Alternate Payees complain bitterly that the terms negotiated by their attorneys did not adequately preserve their benefits or did not reflect the intent of the agreement. The ten most common mistakes follow below:
1. Failure to Put Key Terms into the Separation Agreement.
Recent case law suggests that key components of the alternate payee's distribution must be set forth in the Separation Agreement or the alternate payee will not be entitled to these benefits in the subsequently-filed QDRO/DRO. In fact, it is generally best to include within the agreement a “mini DRO” to set forth the terms with specificity. Simply stating vaguely that “the pension will be subject to division using the Majauskas formula and a QDRO will be prepared” is an invitation to future litigation, because it does not address key issues such as: pre- and post retirement survivorship benefits, disability retirement of the Participant, depletion of the pension due to loan defaults, apportionment of the cost of survivorship benefits, and other issues.
If you fail to deal with these issues early on in the matrimonial action, your client may not be entitled to key benefits later. I am available as a consultant during the drafting phase of the separation agreement to ensure that these issues are properly addressed.
2. Delegation of the DRO/QDRO drafting to the Alternate Payee's attorney or Failure to Delegate Drafting to Either Party.
Many attorneys representing Participants leave the sole responsibility for drafting the DRO/QDRO to the alternate payee's attorney and often pay scant attention to the terms that the attorney places in the Order. Many Participants are not adequately counseled about the necessity of taking an active role in the QDRO negotiation process and are not provided with information regarding the terms of the Order at the time of its entry, only to find out at the time of retirement that the Order contains highly unfavorable terms.
Even worse, many separation agreements fail to state which party is responsible for submitting the Order. This places both clients at risk, because the DRO/QDRO may never get drafted at all, and the entire matter may fall through the cracks when the action is concluded. The member may die prior to the submission of the Order and an alternate payee's share of the pension may be completely lost.
3. Failure to Adequately Address Pre-and Post- Retirement Survivorship Issues in the Separation Agreement or QDRO/DRO
Survivorship protections should be set forth in the Separation Agreement and replicated in the QDRO/DRO with specificity following a careful review of the Plan's options. It is fairly common for attorneys to incorporate language providing for survivorship rights in the separation agreement, but due to oversight, omit such language in the actual Order. Many attorneys are unaware of the different options, including customized options which can be created within the Order to benefit an Alternate Payee or Participant, or to facilitate settlement of the action.
Attorneys should consider the following scenarios:
• Benefits payable to the former spouse if the member pre-deceases the alternate payee prior to retirement;
• Benefits payable to the former spouse if the member pre-deceases the alternate payee after retirement.
• The implications of the alternate payee predeceasing the member prior to or after the member's retirement.
Many attorneys are unaware of the various options available for post-retirement survivorship protection which can be drafted to benefit an Alternate Payee or Participant, or compromise solutions which might facilitate settlement of the pension issues. I can review the plan description to craft an Order or Agreement that captures the survivorship benefits potentially available to an spouse or Participant.
4. Failure to Adequately Explain the Terms of the QDRO/DRO to your client at the time of its negotiation or entry.
A QDRO/DRO is not a neutral document and may be drafted in numerous ways to preserve future earnings due to post-divorce promotions or salary increases, overtime compensation, and future disability of the plan participant. In similar fashion, many alternate payees may believe that the Order contains terms such as pre-and post survivorship benefits when these have not been included or they may believe themselves entitled to a benefit at a time or in a manner other than that provided by the plan.
Following the preparation of a QDRO or DRO, I can provide the retaining attorney with a letter of explanation and interpretation for you to review with your client to avoid misunderstandings later. I can also be retained to review an opponent's QDRO or DRO to ensure that your client's interests are protected to the extent possible.
5. Failure to Perform and/or Adequately Review Pension Discovery Information
Many attorneys fail to review or request all of the necessary information from the Plan prior to drafting or reviewing the QDRO/DRO. Without adequate discovery, you may be agreeing to terms that the Plan cannot provide to your client or you may be drafting Orders which will never be accepted by the Plan, causing you delay and embarrassment and your client additional expense.
I can assist you in obtaining, reviewing and analyzing this information prior to negotiation of the Separation Agreement or prior to drafting the Order.
6. Blind Reliance on the Plan's Model QDRO/DRO Forms
A frightening number of attorneys simply “fill in the blanks” of the Plan's model forms, or delegate this task to a secretary or paralegal without adequately considering whether other more advantageous distributions are possible. The model QDROs/DROs provided by the Plan are drafted with the eye toward ease of administration by the Plan, not your client. Other distribution schemes are often possible and should be carefully considered and evaluated.
As a former DRO administrator, I can draft a QDRO/DRO that contains enhanced protection for your client, yet will be found acceptable to the plan.
7. Failure to Adequately Analyze a Present Value Calculation
A present value calculation can be a useful tool in determining whether it is best for the parties to agree on an exchange of other marital assets in exchange for the non-employee spouse's waiver of pension benefits. However, many attorneys fail to properly analyze the basis for the actuary's calculation. A present value calculation is generally based on the actuary's analysis of the risk associated with the plan being valued, the discount rate applied (the higher the discount rate the lower the present value) and the mortality table used. Other factors also come into play in determining the validity of the present value calculation which are particular to the plan and to the participant, such as the possibility of early retirement subsidies, future cost of living adjustments, the member's compensation history, the likelihood of the member suffering a disability, and prior QDROs/DROS, to name a few.
It may be more advantageous for the parties to agree on an immediate offset of other marital assets in exchange for a waiver of pension benefits, or, conversely, agree to a deferred distribution at the time of the member's retirement. It is important to carefully consider these factors before advising your client to accept an immediate offset or a deferred distribution. If the pension is the only significant asset in the marital estate, a present value calculation may not even be necessary, as there will be no reason for an alternate payee to accept any settlement other than a deferred distribution.
I am familiar with the various methods used by actuaries to arrive at a present value calculation, and can assist you in determining whether the calculation is a reasonable reflection of the pension's worth at the time of the divorce action, in addition to preparing you to challenge your opponent's pension expert, should the issue come to trial.
8. Defined Contribution Plans: Failure to Provide for Spouse's Earnings on the Segregated Balance from the Valuation Date to the Date of Distribution
In a Defined Contribution Plan, the payment of benefits to an Alternate Payee may be delayed by months or years before being distributed to him or her. It is extremely important to specify whether the Alternate Payee will be allocated any interest, dividends, investment gains or losses, between the valuation date (usually the date of commencement of the divorce action) and the actual date of distribution. When seeking information from the DC plan regarding calculation of investment gains or losses, be sure to determine whether the plan is calculating the actual investment experience of the account, or is arbitrarily assigning a rate of return, as this may greatly impact the distribution to the parties. A QDRO for a Defined Contribution Plan which sets forth a fixed dollar amount for the Alternate Payee's share, plus, for example, 6% interest accrued until the date of distribution places all of the risk (or conversely, the reward) of investment gains or losses on the Participant. If the value of the Defined Contribution account falls dramatically during this period, the Participant will bear all of the risk of loss, because the Alternate Payee's share will remain the same. It is generally preferable for the Alternate Payee to make her withdrawal from a Defined Contribution Plan as early as he/she possibly can and roll this amount into an IRA or, at the very least, the Order should be drafted such that her share is segregated by the Plan and the Alternate Payee be provided the right to receive information from the plan, make investment decisions and designate a beneficiary for receipt of benefits in the event of her death.
9. Failure to Understand and Counsel your Client on the Tax Implications of a Plan Distribution
Money distributed from a qualified plan to the non-employee under a QDRO is subject to ordinary income taxes, assuming it is not rolled over into an IRA, but is not subject to the ten percent early withdrawal penalty even if the non-employee is younger than 59 1/2. However, divorcing spouses often roll such distributions directly into an IRA. If they later take out money from the IRA, for example, to pay attorney’s fees or other debts, the early withdrawal penalty could then apply. The non employee should be careful to set aside any money from a QDRO plan distribution needed for such projected expenses before rolling the remainder into an IRA.
10. Failure to Timely File the Order or, Even Worse, Failure to File the Order at All
This is by far one of the most egregious mistakes an attorney can make in the QDRO/DRO process. Many attorneys will submit a Proposed Order for plan review and never submit a final Order, even if one has been entered! Some attorneys will not submit an amended Order if the Order originally submitted was rejected by the Plan. An unqualified or rejected Order provides no protection to your Alternate Payee client. Many attorneys wait months or years before filing the final Order with the Plan during which time the Participant may die, remarry, re-divorce (in which case another QDRO/DRO might be filed before yours), or may make irrevocable retirement elections which cannot later be changed. These may affect all or part of the Alternate Payee's interest. An attorney should calendar every QDRO and DRO such that reminders are sent to the Plan on a monthly basis until the Order is accepted or qualified. Moreover, if the Participant is approaching retirement or is seriously ill, a restraining order or interim QDRO may be served on the Plan to protect the Alternate Payee's benefits during the pendency of the divorce and/or qualification process. The attorney should follow up with the Plan to ensure that the proper beneficiary designations have been made in accordance with the Order.
© 2007 Carolyn D’Agostino, Esq. All rights reserved. Please do not reproduce this material, in whole, or in part without prior permission of the author. The information contained herein should not be construed as legal advice nor should any attorney/client relationship be implied from the receipt of such information.