TOP 3 QDRO MISTAKES & HOW TO AVOID THEM
QDRO MISTAKE 1: WRONG METHOD OF DIVISION FOR RETIREMENT PLAN TYPE
The language in the settlement agreement and QDRO should be applicable to the type of retirement benefits being divided. There are two main types of retirement plans, namely 1) Defined Contribution Plans and 2) Defined Benefit Plans. 401(k), 403(b), and 457 deferred compensation plans are all types of “Defined Contribution Plans.” The benefits under defined contribution plans are based upon actual monetary contributions to the plan, and the investment performance of said contributions. Whereas, the benefits under defined benefit plans, commonly known as “traditional” pension plans, are paid as a monthly annuity based on a formula tied to the plan participant’s years of service credit, final salary, and age at retirement. Defined Benefit plan benefits are not solely based on monetary contributions.
The language dividing defined contribution plans should (and conversely, the language dividing defined benefit plans should not):
- Refer to the plan participant’s total account balance
- Express the former spouse’s (alternate payee’s) interest as either a dollar amount or percentage of the account, as of a particular valuation date (usually the parties’ date of separation)
- Address whether the alternate payee’s share should or should not be adjusted for interest or investment earnings
- Provide for a new account to be created in the Alternate Payee’s name
- Provide the option of an immediate distribution or rollover of Alternate Payee’s share
The language dividing defined contribution plans should not (and conversely, the language dividing defined benefit plans should):
- Reference the Time Rule Formula or coverture formula
- Reference the participant’s “accrued benefit”
- Provide for a “monthly” benefit
- Reference COLAs or early retirement subsidies
- Address survivor benefits
- Delay the alternate payee’s benefit commencement until the participant is eligible for retirement or actually retires
QDRO MISTAKE 2: QDRO PREPARATION TIMING
Ideally, the QDRO should be prepared as soon as the parties have reached a basic settlement regarding the division of the retirement asset. This will allow the QDRO to be filed concurrently with the Judgment of Dissolution, or even be incorporated into the Judgment. Otherwise, the QDRO should be prepared as soon to the time of divorce as possible. If a QDRO is not filed and any of the following events happen, the alternate payee may entirely lose his/her benefits:
- Participant terminates employment and takes a full plan distribution under a defined contribution plan
- Participant retires and begins commencement of benefits without notifying the alternate payee
- Participant dies without a QDRO in place securing survivor benefits for the alternate payee
- Participant takes a loan out which significantly reduces the account balance available for division pursuant to a QDRO
For more consequences related to QDRO timing, click here.
Another problem that is becoming more and more common when parties wait to draft the QDRO is that plans sometimes undergo a change in plan administrator. When a new plan administrator takes over, they will usually not perform any calculations regarding benefits accrued prior to their plan administration date. For example, if the parties’ date of separation was in 2005, but the plan administrator changed in 2007, the plan administrator will reject a QDRO with a valuation date in 2005 because they do not have records prior to 2007. This can present significant problems if the parties do not have their own plan statements for the time period from the date of marriage to date of separation; and will increase the expense involved in the QDRO as the parties may need to retain an actuary or accountant to perform a calculation to determine the community property interest in the benefits.
QDRO MISTAKE 3: BLINDLY TRUSTING THE MODEL QDRO
Some parties, or family law attorneys, will draft a QDRO by taking the plan’s “model” or “sample” QDRO and inserting the parties’ names with little or no other revisions. This should never be done unless the parties and/or attorneys clearly understand every single provision within the model QDRO, and are aware of the possible alternate provisions, based on the plan’s terms and the California law regarding marital property rights.
Most model QDROs are drafted to favor the plan participant; they are not drafted to divide the benefits as equally as possible. Model orders can heavily favor the participant with regard to issues like investment earnings and losses, and survivor benefits. Further, the model QDRO may have been drafted in a different state than where the divorce took place, which can have a huge effect on the division of benefits. For example, in California, the community property interest stops accruing on the parties’ date of separation; however, other states utilize other dates, such as the date of divorce filing, or the date of the entry of Judgment of Dissolution, both which may be years after the parties’ date of separation. Utilizing a model QDRO from another jurisdiction could have the effect of awarding the alternate payee far more benefits than he/she would legally be entitled to in California. Further, many individuals who draft their own QDROs are not able to format the QDRO correctly to be accepted by the court that handled their divorce. In California, QDROs must be signed by both parties and the judge; however, many model QDROs only leave space for the judge’s signature.
DO YOU NEED HELP WITH A QDRO?
If you have questions about the division of retirement benefits due to your California divorce or legal separation, or if you would like to get started on your Qualified Domestic Relations Order today, please call QDRO Helper at (619) 786-QDRO / (619) 786-7376. You can also request a new client package by sending an email to info@qdrohelper.com or by visiting the Get Started page. We proudly assist clients throughout the United States as long as the divorce or legal separation took place in California.
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