Big Divorce Mistake #10: Mishandling the Pension QDRO & Elections

What happens to retirement funds in divorce? What are some of the QDRO mistakes to avoid when dividing retirement plans in divorce? Qualified Domestic Relations Orders are called “QDROs.” The surviving spouse election must be handled correctly.

The Forensic Accounting Deskbook by Miles Mason, Sr. JD, CPA, published by the ABA Family Law Section

For a much more detailed discussion, see The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, Second Edition, authored by Miles Mason, Sr. and published by the ABA Family Law Section.  This updated edition of one the ABA’s most popular resources explains the practice of forensic accounting and business valuation and how to apply it in family law cases. It provides a practice-focused introduction to the core financial concepts in divorce, such as asset identification, classification, and valuation, income determination, expenses, and more.

See Mason’s complete list of the 10 Big Divorce Financial Mistakes.

VIDEO TRANSCRIPT:

Tracy Coenen:             So can you explain to us, Miles, what a QDRO is and how it’s used in a divorce?

Miles Mason:              This is going to be just very summary. QDRO is a Qualified Domestic Relations Order. Some parts of the country also call it a Q-DRO. Anyway, we call them QDROs. What it is, it’s a document that is a court order that the parties work on together. Generally one party will draft, and you’ll send it to the plan administrator who administers the plan, whether it be a 401k, or traditional pension, or some other kind of hybrid, for preapproval.

Once it’s been preapproved, then a court may enter it as an order. Then it’ll be sent back to the plan administrator for administration. That will divide and create two separate interests, where there was one interest, now there’s two, and two individual names.

Now, in order to create the QDRO and valuation, a lawyer in the legal team, and I include the client, the forensic accountant, and the lawyer, all as part of the team. There are five main documents you need. First you need the Summary Plan Description. It’s the most important. It could be a 10 to 75 page document listing all the important parts about the plan.

Second, you need an Annual Benefit Statement telling you how much money is in the account, or how much benefit is accrued, or what’s the salary and the formulas in order to create the amount that’s going to be determined, as far as what that defined benefit is in the future. The Annual Benefit Statement will give you some numbers to work with.

Also, you need a sample QDRO form that not every plan administrator’s going to have, but sometimes they sit down to do it, and then some plan administrators have also created written instructions for the QDRO for it to be drafted. Those are very, very helpful because the plan administrator says it has run into problems in the past, and they put it in the instructions, how not to mess up.

Then, finally, the plan document itself. A lot of times we can get an electronic file version of it. Now the plan document might be a thousand or more pages long. But in the case that you run into a problem where the Summary Plan Description doesn’t give you the information you need, or there’s a very technical issue with a particular plan, or a term that you need to find, you may need the text of the plan itself. And so I highly recommend getting that.

Again, we talked a little bit earlier about the process. You want to draft. One party is going to draft it, the Qualified Domestic Relations Order, share it with the other side, get an agreement that that’s what the QDRO should look like.

But what’s key in that process is: what are the elections? And one of the key elections is something called the Survival Benefit Election, which is what happens if the participant, the employee, dies either before any benefits are paid out or after.

There are specific elections with each plan, and terms used within each plan. That’s what makes it such a nightmare, is that each plan may use words that are very similar to another plan, but may have different definitions. So each plan can define that differently. You need to know what that election needs to be both at time of settlement and at time of drafting the QDRO. That makes it very interesting and difficult.

But ultimately, you’re going to get it presented at a court, get it entered as an order, and that’s sent out to the plan administrator. Ultimately, after it’s been administered, then the client, if it’s a lawyer and a forensic and they are working together, we’ll get a letter back from the plan administrator saying that had been administered, and hopefully at the time benefits are supposed to be paid out, it’s actually paid out.

Thank you to Tracy Coenen, CPA, CFF for inviting me to join her in this video series. Tracy is a nationally recognized forensic accountant practicing in Milwaukee and Chicago.