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Common Errors

The laws are very complex regarding QDRO's. Here are some common errors...

The area of domestic relations law is complex at best. It can be overwhelming at times. The area of employee benefits is but one of many areas of knowledge the astute practitioner must master. Failure to understand all of the complexities and nuances in this area lead to increased legal fees at best and loss of benefits at worst. The following is an example of some common mistakes made in the process of identifying and assigning benefits to a non-participant spouse. This list is not meant to be exhaustive.

H – Participant
W – Non-participant former spouse

  1. Failure to discover all plans.
    Many employers sponsor a variety of plans, both qualified and non-qualified. They may be defined contribution, defined benefits or cash balance plans. Example: 
    W’s attorney obtains an authorization from H regarding retirement benefits. W’s attorney requests information from the Employer’s benefits department. The benefits department complied with the request, informing W’s attorney that H was a participant in two qualified plans. H is an executive and was additionally a participant in two non-qualified deferred compensation plans and a golden handcuff plan where substantially all of the requirements for vesting had been performed prior to the date of divorce.
    W could have been denied benefits. Fortunately, H voluntarily notified W when he began receiving checks. It turns out he was not aware of non-qualified plans and had simply forgotten about the golden handcuff plan. Failure to discover in this case created additional attorney fees for both the participant and the former spouse. These plans are relatively easy to discover. Take the time. Non-qualified plans are normally administered by the sponsor’s compensation department. Seek the assistance of someone who is familiar with non-qualified plans.

  2. Failure to read and understand plan statements properly.
    Plan statements are presented in many formats. Defined contribution plan statements are generally relatively easy to read and comprehend. However, defined benefit and cash balance plans statements can sometimes be misleading. 
    H was a participant in the Houston Firefighters Pension Fund. He had been employed by the department for 19 years 11 months at the date of the mediation. W’s attorney agreed with H’s attorney that the amount presented on the plan statement was the value, $39,500. The plan statement presented an amount that was equal to the employee’s contributions plus earnings to date. The statement also presented H’s benefits stated as a single life annuity. The plan is a heavily subsidized plan. It turns out that H, having almost 20 years of service under the plan, could retire immediately and commence benefits payable over his lifetime. The actuarial value of the single life annuity was in excess of $305,000.

  3. Failure to prepare and file a timely QDRO (or similar order).
    Lots of things can happen when a QDRO is not timely filed. And most are bad. Failure to file a timely can result in the loss of benefits by an alternate payee. 
    H & W are divorced. H remarries to X. Prior to retirement, H dies. X is automatically the Qualified pre-retirement Survivor Annuity (QPSA) beneficiary. W receives no benefits.
    H & W are divorced. H remarries to X. H retires. H elects a Qualified Joint and Survivor Annuity (QJSA) form of benefit with spouse X. When H dies, W’s benefits terminate. X receives all of QJSA benefits. W’s benefits cease on the death of H.
    H & W are divorced. H retires and elects a single life annuity form of benefit. Lump sum benefit was available. W’s benefits are now payable over H’s life with no QJSA benefits to W. There are a lot of reasons to timely file a QDRO. Perhaps the most important is protect the alternate payee’s death benefits and to keep the participant from making an election that could defeat the alternate payee’s benefits or defeat the alternate payee’s right to determine the form of benefits he or she may elect.

  4. Failure to name Alternate Payee as the QPSA beneficiary.
    H & W are divorced. Neither H or W has commenced benefits under the plan. H dies prior to commencement of benefits. W gets nothing.

  5. Failure to provide for Cost-of-Living Allowances (COLAs) on federal and military systems benefits.
    COLAs are a valuable benefits in military and federal retirement systems. At an average rate of 4%, benefits can double in 19 years. 
    H & W are divorced. W is awarded a stated dollar amount of benefits at date of retirement. H receives $1,000.00 per month initially. W receives $1,000.00 per month initially. However, H’s benefits are subject to COLAs on the entire amount. In 20 years H is receiving $3,200.00 per month while W is still receiving $1,000.00 per month. COLAs can also be provided on retirement benefits while federal government employees and military member are still active. 
    COLAs will not be included when the award to a non-participant spouse is stated as a specific dollar award in military orders and in federal government orders when there is an award of a specific dollar amount and COLAs are not specifically addressed.

  6. Electing an "if, as and when" distribution for an alternate payee in qualified plan QDRO.
    There is no need or advantage to an alternate payee to delay commencement of benefits until the participant commences benefits. 
    H & W are divorced. W is awarded 50% of the accrued benefits as of date of divorce. However, QDRO is drafted to restrict the alternate payee’s distribution of the benefits to the time when participant receives benefits. Alternate payees under qualified plans may take benefits at the earliest date that a participant could begin commencement of benefits, notwithstanding the fact that the participant continues employment. Restricting the commencement of benefits unnecessarily delays the distribution of benefits. 
    H’s normal age is 65. H is eligible for retirement at age 55, with an actuarially reduced pension. W has option to commence benefits at H’s earliest retirement age, with actuarially reduced pension. H elects not to retire. W cannot commence benefits because QDRO restricts her commencement of benefits contingent upon H retiring. W dies at H’s age 64. W gets $-0-. 
    H’s normal age is 65. H is eligible for retirement at age 55, with an actuarially reduced pension. W has option to commence benefits at H’s earliest retirement age, with actuarially reduced pension. H elects not to retire. W commences benefits at age 55 (the QDRO allows her to do so). W dies at H’s age 64. W has received benefits for 9 years. 

    Same facts (except the terms of the QDRO), different results. 
    H’s normal age is 65. H is eligible for retirement at age 55, with an actuarially reduced pension. W has option to commence benefits at H’s earliest retirement age, with an actuarially reduced pension. H elects not to retire. W cannot commence benefits because QDRO restricts her commencements of benefits contingent upon H retiring. W becomes chronically ill or disabled at age 56. H holds all of the cards. In some circles, this might be considered somewhat embarrassing for attorney or financial advisor who rendered this kind of advice.
    All of this can be prevented if the commencement of W’s benefits is not tied to Participant’s commencement of benefits.

  7. Failure to provide for earnings on defined contribution plan balances.
    H & W are divorced. For some reason, QDRO is not prepared and filed with the plan administrator. Plan does not provide for earnings on the alternate payee’s segregated balance (General Electric (unless separately stated) Conoco, DuPont). Stock market surges. Alternate Payee does not participate in market. May result in economic losses. Some plans require that the QDO state that an alternate payee’s interest is subject to earnings, if that is the intent of the parties.

  8. Using the estimated retirement annuity instead of the accrued normal retirement annuity.
    A number of plans will produce statements that estimate a participant’s benefits. In some cases these statements are not real clear. A plan statement will sometime include a statement that estimates a participant’s benefits assuming that the participant is continuously employed until retirement. 
    H works for Mobay Chemical Corporation. The plan provides annual statements for the participant’s and includes an estimate of benefits at retirement assuming the employee is continuously employed until retirement. Attorney uses the estimated retirement annuity. W is awarded 100% of that amount. H retires in another 15 years. W gets all of retirement benefit because actual retirement benefit was less than the estimate. H works additional years for nothing.

  9. Confusing qualified and non-qualified plans.
    Non-qualified plans do not have the same characteristics as qualified plans. Under most non-qualified plans, a former spouse cannot be assigned a benefit because the plan do not normally allow for assignments. Do not assume just because a spouse is employed that a pension is assignable. H works for a local government. H & W have cash and securities equal to the amount in a non-qualified governmental plan. H talks W into receiving the balance in the plan since he cannot get while he is employed. H, W, their attorneys and the mediator agree that that is the best course. Nobody called to inquire if the plan benefits were assignable. It turns out they were not. H now has all of the cash and securities. W has nothing except H’s promise to pay her when he receives a distribution. W is not real happy.

  10. Failure to follow up on status of QDRO.
    H &W are divorced. QDRO is prepared and filed with the plan administrator. The plan administrator notifies both attorneys and the parties that the order was not acceptable to the plan and must be revised to comply with the requirements of the plan and IRC section 414(p). Nothing happens. 10 years later H retires and begins receiving all of the benefits. H does not pay W’s benefits under the terms of the Order. Enforcement is necessary to collect arrearages and enter QDRO. This case promises to be litigated for a long time.

  11. Failure to know how to read and understand QDRO language.
    H & W are divorced. H prepares a QDRO which gives W 100% of the QPSA if H is not remarried on H’s date of death and a pro rata share if he has remarried. W’s attorney does not know how to interpret the QPSA language. Insists on including the plan’s sample language, which only gives W a pro-rata share. H dies shortly thereafter. Benefits, which could have assisted in the care of the parties’ minor children, are forfeited to the plan.

  12. Limiting awards to alternate payees to a participant’s vested benefits.
    Often times a plan’s model or sample QDROs will include a statement that the benefits awarded to the alternate payee’s are a percentage of the participant’s vested benefits. There is no requirement that an alternate payee’s benefits should be limited to only the vested portion. 
    H & W are divorced. H is a participant in a non-contributory profit sharing plan with 5-year "cliff vesting". H has been employed at company for four years. None of the profit sharing plan is vested. However, one year later the entire balance will become vested. H gets it all.

  13. Failure to consider deferred employer discretionary profit sharing contributions.
    A lot of profit sharing plans and most ESOPs make the employer’s contribution after the close of the plan’s year, sometime months later. The contributions are based on the participant’s qualifying compensation. The employer’s contribution is an "accruing" benefit during the year. This benefit is easy to miss. 
    H & W are divorced on September 30, 199X. W is awarded 50% of H’s profit sharing plan balance as of September 30, 199X. H’s Profit sharing plan balance on September 30, 199X is $100,000. On December 31, 199X H’s employer will make the 199X yearly profit sharing plan contribution. H’s portion of the employer discretionary profit sharing plan contribution will be $10,000, $7,500 of which had accrued during the plan year. H gets all of the 199X employer discretionary profit sharing plan contribution. Sample plans QDROs rarely, if ever, address this item.

  14. Using a plan’s sample QDRO if you represent an alternate payee.
    Sample QDROs rarely include all of the plan’s benefits or options. Most, but not all sample QDROs, are heavily biased in favor of the participant.

  15. Valuing a defined benefit plan and offsetting with other assets.
    Determining the value of defined benefits plans, where the annuity is contingent upon the life expectancy of the participant, does not appear to rise to the level of a science. There are numerous "acceptable" methods of valuing these plans. Using the same factors, it is possible to arrive at values that differ by as much as 40%, simply by using different methods. In any case where a defined benefit plan is valued, one party can believe that the plan is overvalued and the other can believe that it is undervalued. Several things can take place, most are bad.

    H is a participant in a defined benefit plan which was valued at $100,000. W is a participant in a defined contribution plan with a balance of $100,000. H takes DBP. W takes DCP. H & W divorce. One year later H dies, unmarried. H’s estate gets $-0-. One year later W dies. W’s estate gets $100,000+.