Most divorcing clients have a significant amount of marital property tied up in defined benefit (ie: pension) or defined contribution (ie: 401K) plans. The Employee Retirement Income Securities Act of 1974 (ERISA) was enacted to protect the interests of participants in employer-sponsored retirement plans. In order to be able to assign all or a portion of an ERISA plan to an ex-spouse with no tax consequence, a Qualified Domestic Relations Order (QDRO) must be prepared to satisfy certain federal and state requirements. However, be advised, not every employer plan falls under ERISA governance (such as federal and state plans), and in fact, some plans exist that are not divisible at all.
For family law professionals who want to avoid problems and make sure they are not exposed to liability, it is critical to have adequate discovery, involve a retirement plan expert early on in your case, and begin the pre-approval process while property settlement negotiations are occurring. Without a complete understanding of the plan specifics it is impossible to have successful negotiation dialog between the parties. Do not wait until after the divorce is final to begin the process; otherwise post-divorce disputes and unresolved division issues may occur.
As soon as employer retirement plan assets are identified, four items should be obtained:
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A current employee benefit statement. For defined contribution plans this will show the current value of the plan, if the participant is vested; if there are any after-tax benefits; if the plan is a Traditional or Roth 401(k); and whether there are any outstanding loans. For defined benefit plans this will show the total benefits earned, the vested accrued benefit or the earliest date the benefit will be come vested, and an explanation if other payments will be subtracted when benefits are calculated.
- A copy of the Summary Plan Description.
- A copy of the Plan’s written divorce procedures.
- A draft/model of the Plan’s QDRO.
These documents will show the exact Plan type and whether the Plan has any unique division issues, like whether or not the plan offers survivor benefits, if the plan terminates upon the participant employee’s death, or if some/all of the assets are unable to be divided. A QDRO cannot compel a plan to provide benefits not provided under the plan. If the proposed division violates any of the technical plan provisions it may not be honored. If necessary details are not discovered until after the settlement agreement has been signed by the parties it could cause amendments, re-filings and re-approvals. Not only is this a waste of valuable time and additional processing and legal fees, but the delay could result in a loss of benefits to the non-employee spouse.
Beginning the QDRO process on employer retirement plans while settlement negotiations are occurring is critical to applying the necessary language in the couple’s property settlement agreement. Let’s look at some reasons why waiting to begin the QDRO process until post-divorce is a recipe for disaster.
Very specific language is often required: Because the “devil is in the details,” to avoid misinterpretation and delays include the full and complete Plan name and Plan type. This is especially important if multiple retirement plans exist between the parties. Avoid general statements such as “parties will divide the retirement plan equally” or “wife is to receive half of husband’s retirement plan.” Rather, you want to incorporate very specific details of how the division will occur. Clearly identify the marital portion; state a clear date of division;, detail if a specific dollar amount or a percentage amount that will be awarded; and address how gains/losses and loans amounts will be handled (for defined contribution plans only).
Need to properly protect the non-employee spouses interest: If there is no QDRO on file, the Plan Administrator has no way of knowing that a divorce has occurred and no legal way to act on the terms in the property settlement. While waiting for the QDRO, a variety of unknown variables could occur:
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The employee could retire. With defined benefit plans, under the parties property settlement terms, the employee may be required to elect a specific payment option and death benefit for the non-employee spouse. Without the QDRO on file, the Plan will not be aware of what was agreed to and if, for example, the employee elects a different option without a survivor benefit, or names a different beneficiary, the non-employee spouse could be denied benefits.
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The employee could die: Without a qualified pre-retirement survivor benefit (QPSA) in place the non-employee spouse runs the risk of losing all benefits.
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The employee could remove money from the Plan: If the employee quits or gets fired they could liquidate the account without the other party’s knowledge. If the original Plan Administrator gets the QDRO after this occurs, the document is meaningless. If the employee spouse has already spent the money and no other assets exist to award, there may be no solution. The employee spouse could transfer the assets to another financial institution making the language in the settlement agreement and the original QDRO null and void, and a new QDRO may be needed. The employee could take out a loan (defined contribution plans only) diminishing the amount available to award to the non-employee spouse.
You want to be sure to have language in your agreement stating who will be drafting the necessary documents and a timeframe when this will occur. It is best to have the QDRO done simultaneously with the divorce or as soon as possible after the divorce is finalized, because many Plan Administrators may take a considerable amount of time to review a draft DRO. Also processing by the courts may take time. If your client is the alternate payee, his/her benefits are not protected until a signed court Order has been approved and processed by the Plan Administrator. You want to be sure your client’s interests are protected until the final order is approved by the Court and by the Plan Administrator.
