Malpractice. The information strikes fear thorough in the heart of already the most experienced lawyer. While attorneys don’t deliberately set out to make mistakes that open them up to liability, often times a without of knowledge causes unintentional errors that rule to bigger issues down the road.
After ten years of working with attorneys and their clients to prepare Qualified Domestic Relations Orders (QDROs) and other retirement account division paperwork, I have seen, first-hand, some very shared mistakes that are made when it comes to dealing with these complicate documents.
Omitting meaningful Terms in the Separation Agreement
One of the most shared problems is that the Separation Agreement is too vague in regards to division of retirement assets. This often leads to costly post-judgment litigation – sometimes years down the road. These problems can be avoided by clearly setting forth all the applicable terms of any retirement asset division within the body of the final Separation Agreement. Vague statements such as “the XYZ pension will be divided between the parties and a QDRO will be prepared” is not sufficient. meaningful issues such as survivorship benefits, date of valuation, method of valuation, etc. should be spelled out in complete in the Separation Agreement.
Failing to Conduct Proper Discovery
Another area inclined to mistakes is that there is not a clear understanding of what a plan will – and, more importantly, will not – allow in terms of dispensing. By obtaining and reviewing a complete copy of the plan’s governing documents early on, limitations and prohibitions can be identified – before negotiations begin. I have seen many situations where, after lengthy and costly negotiations, the parties finally agree to divide a certain account, only to find out when the QDRO is being prepared that the plan will not allow for the agreed-to terms.
Not Properly Filing the Order
In most instances, a hypothesizedv QDRO will be submitted to the Plan Administrator for review. Unfortunately, this is often where the ball gets dropped. Whether the Plan Administrator approves or rufuses the hypothesizedv order in that initial review, ultimately a final QDRO will be signed by the court. This final QDRO must be submitted to the Plan Administrator. Failing to file the final QDRO with the Plan Administrator – and following up until the funds are distributed – can consequence in the Alternate Payee losing his or her rights under the QDRO. It is important to follow by on every QDRO until dispensing can be validated.
Improper Delegation of QDRO Drafting Responsibility
Often times, the attorney representing the plan participant will turn over responsibility for preparing the QDRO to the alternate payee and his or her lawyer. After all, it is the other party who wants part of the participant’s asset. However, this is short-sighted. Since a QDRO can be drafted to favor or disadvantage either party, it is important that both parties and their attorneys take an active role in preparing the document.
In more than a few situations, the responsibility for preparing the QDRO is never formally stated to either party. This puts everyone at risk, since the QDRO may never be prepared and ultimately be forgotten about altogether. This puts the alternate payee’s rights at risk and in some situations he or she will never receive their proportion of the asset.
Failing to Properly Explain The QDRO Terms
Since the QDRO can contain terms either popular or unfavorable to either party, everyone must have a clear understanding of the exact details related to how the account will be divided. Misconceptions rule to incorrect assumptions that can rule to unhappy clients down the road.
Reliance on The Plan’s Forms
While an upsetting number of attorneys blindly rely on the “fill in the blank” QDRO forms provided by some plans, this is a dangerous approach. These forms are produced to make execution as easy as possible for the plan administrator, instead of focusing on the best interest of either client. As other dispensing options may be obtainable, it is important to fully understand all the possibilities before relying exclusively on pre-printed forms from the Plan.
Failing to Understand Survivorship Issues
Many attorneys are unfamiliar with the different options related to survivorship benefits and protections. As a consequence, the Separation Agreement may contain only generic language relative to survivorship benefits entitlement. In some situations, this language never gets transferred to the actual QDRO, which creates meaningful issues down the road.
Attorneys should consider all of the following possible scenarios when drafting language relative to survivorship options:
- What will the former spouse/alternate payee be entitled to if the plan participant dies prior to retirement?
- What will the former spouse/alternate payee be entitled to if the plan participant dies after retirement?
- What happens if the former spouse/alternate payee dies before the plan participant?
Incorrectly Analyzing Present Value
When a pension plan is the dominant asset in a marital estate it may not already be necessary to do a present value calculation, since division of the asset is the only issue at play. However, when the marital estate includes many assets – with the pension plan being just one – correctly calculating the present value of the pension plan becomes more important.
The present value calculation is conducted by an actuary who uses a basic formula of plan risk, an applied discount rate and application of a mortality table. The resulting value will be influenced by additional factors that are specific to the plan and the participant. These include the existence of prior QDROs, early retirement subsidies, compensation history, likelihood of disability, etc.
It is important to consider all these factors when advising a client whether to pursue an immediate offset of the pension’s value with other marital assets or instead accept deferred dispensing upon the plan participant’s retirement.
Inadequately Understanding and Explaining Tax Implications
The money distributed from a qualified plan to the alternate payee spouse is unprotected to ordinary income tax, unless it is rolled over into an IRA. However, the original dispensing is not unprotected to the 10% early withdrawal penalty, already if the alternate payee is younger than 59 1/2.
However, if the alternate payee rolls everything over and then later withdraws some of the money from his or her new IRA, the early withdrawal penalty may apply. In many situations, the alternate payee will do exactly this to cover attorney fees or other debts. It is important that the alternate payee understands when and how the penalty is applied, so as to make educated decisions before the original dispensing occurs.