Not dealing with all the critical issues during negotiations can cause post decree disputes and lead to unnecessary costs to the client and delays in the transfers being achieved. Or, worse yet, the Alternate Payee could lose rights to the intended portion of the account if the Participant dies, lose out on distribution if the Participant quits their job and takes distribution, lose investment gains on the account, lose rights to name a beneficiary upon their own death, or lose rights to direct own plan investments.
Best practice is to have the QDRO drafted and signed at the same time as the Separation Agreement or MOU, so that the QDRO can be referenced in the document. If you are not able to do this, then what are the critical items that should be in the separation agreement or MOU?
- What is the exact name of the plan and which organization is the sponsor? Recently we were asked to prepare QDROs, and the Alternate Payee ‘s attorney nor the parties actually knew what the retirement plans were or which organizations they were with. Since the Participant of the Plans was unrepresented and being uncooperative, it took longer than necessary for us to find exactly which plans the Participant was in.
- What is the date the plan is to be divided by the Plan Administrator? Is it the date the divorce decree is entered, or some other date (date of separation, date the MOU was signed)?This is normally called the Assignment Date and is critical information for us to have since contributions may have been made, funds may have been taken out, loans may have been executed, or the market increased or decreased in value.
- How is the Plan to be divided? Is it a specific amount, a percentage of the net account balance, or a percentage after separate property has been set aside?
- What is to be included in the divisible amount? You should specify that it is the Total Account Balance including all amounts maintained under all of the various investment funds, accounts and subaccounts established for the Participant. Also, you should include that the Total Account Balance should include all monies contributed to the Plan after the assignment date but attributable to periods prior to that date.
- How are we to treat any loan that might be on the account in relation to the division? If the Alternate Payee is getting a set amount, then there should not a problem: the Participant continues to take responsibility for the loan. However, if the Alternate Payee is being awarded a percentage, is the percentage based on the gross amount of the account (including the loan as an asset), or the net amount of the account (after the loan is subtracted from the gross amount)? So, if there is $100,000 in the account and a $20,000 loan, then are we to assign to the Alternate Payee, for example, 50% of $100,000 or 50% of $80,000? The default is to subtract the outstanding loan as of the assignment date from the Total Account Balance before calculating the Alternate Payee’s assigned share of the benefits. Typically, the loan was used for marital purposes, and should be taken into account elsewhere in the division of assets and liabilities. The other thing to check is to make sure that the loan is not so great that there will be insufficient funds in the account to maintain the required ratio between account balance and loan once the Alternate Payee has been received his or her funds. Most plans require that the Participant is able to borrow no more than 50% of the account value up to $50,000.
- Is the Alternate Payee to receive gains, earnings and losses on his or her portion of the account from the date of the division? The norm is that both parties will each receive the earnings, gains and losses that occur on their portion of the division between the assignment date and the time that the Alternate Payee can actually have access to the account. But, best to specify this in your separation agreement.
- Who pays the costs charged by the Plan to review and administer the QDRO, if any? Are these to be divided equally by the parties, or are the costs to be divided some other way? The norm is for the parties to divide any cost equally, and it is taken out of the account balances.
- What happens if the Participant dies before the QDRO has been prepared and signed by the Court? You should include that the Alternate Payee is to be specified as the surviving spouse of the Participant for any survivor benefits payable under the Plan to the extent of the full amount of the benefits that the Alternate Payee is to receive as specified in the division. This protects the Alternate Payee from losing his or her share if the Participant dies before the QDRO is signed by the court and executed by the plan.