Dividing a pension plan during a divorce generally requires a Qualified Domestic Relations Order (QDRO) that’s approved by the plan administrator and issued as an order signed by a judge. Most plan administrators will provide the form they require for drafting a QDRO, so have your client request these forms early in the divorce process. Some attorneys draft their own QDROs while others use contract firms to draft pension plan orders. No matter how you handle this task in your office, you should be aware of the common mistakes made in drafting QDROs so you can avoid them before they cause problems for your clients. The most common QDRO errors include:
Who Drafts the QDRO? Dividing pension plans is often left to the end of a divorce proceeding, and if the divorce agreement doesn’t specify who is responsible for the drafting, the QDRO can get neglected. Don’t let this happen–get agreement up front on who will do this important work.
Using the Right Name. The most frequent reason a QDRO is rejected by the plan administrator is because an attorney used the wrong name to describe the plan. The administrator cannot divide the pension unless the QDRO contains correct information. Something as simple as using “and” rather than an ampersand (“&”) in the name of the plan may get your QDRO rejected.
Can the Pension Be Split? Another frequent error is drafting a QDRO for a plan that can’t be split. For example, supplemental benefit plans and some multiple pension plans can’t be divided. If a pension can’t be divided, other comparable assets must be transferred to the spouse as compensation. Be sure to correct for taxes due when pension funds are withdrawn.
What Type of Plan Is It? There are three basic types of pension plans: Defined Contribution Plans, Defined Benefit Plans, and Cash Balance Plans. In a Defined Contribution Plan, such as a 401(k), the worker makes contributions to the plan and uses these funds to supplement his or her income at retirement. There is no guarantee of how much money will be available in this type of plan. A Defined Benefit Plan, on the other hand, promises the worker a guaranteed monthly payment at retirement. Finally, a Cash Balance Plan has features of both the other plans. Make certain you request the proper forms from the pension administrator so the language used in your QDRO will be appropriate for the particular plan involved.
What Part of the Pension is Marital Property? Make certain the QDRO specifies the numerator and denominator of the marital coverture fraction. Remember, the numerator is the number of months the parties were married while the pension plan was in effect, and the denominator is the total number of months the worker participated in the plan. For example, if the individuals were married for ten years and the worker participated in the plan for twenty years, the marital coverture fraction is ½.
Cut-off Date for Marital Rights. Make certain the QDRO specifies the cut-off date when marital rights in the pension plan stop. This date is usually the date of divorce, but can be any date agreed by the parties or ordered by the court.
Equalizing Multiple Plans. When the divorcing individuals own multiple pensions, attorneys often try to simplify the QDRO by combining all the pension plans and transferring an equalizing amount from the multiple pension plans into a single account for the divorced spouse. This works only if the parties provide statements for all the accounts on the date stipulated in the agreement. Also, the attorney must make clear how the equalizing calculation is to be performed.
Unique Pension Plan Issues. Depending on the type of pension plan involved and how the funds are invested, the QDRO may need to specify how gains and losses are divided, how survivor benefits and COLAs are handled, and whether the pension plan participant can exercise certain options at retirement. If these issues are not specified in the divorce agreement, the drafter decide these issues in his or her client’s favor.
Whether you draft your own QDROs or farm them out to a specialist, you need to be aware of these common QDRO errors so you can avoid them. Make certain the divorce agreement specifies who is responsible for drafting the QDRO, use the correct name of the plan, make certain the plan can be divided, request a copy of the QDRO form from the plan administrator so you use the proper language to describe the plan in your QDRO, make sure the numerator and denominator of the marital coverture fraction are correct, specify a cut-off date for marital rights in the pension, make clear how you plan to equalize the division when there are multiple pension plans, and address any unique issues in each plan, such as how gains and losses are divided and how survivor benefits and COLAs are handled.