When spouses divorce, often one of the biggest assets is a pension or 401(k) plan at a spouse’s workplace. To divide this asset, a Qualified Domestic Relations Order (a “QDRO”) must be prepared. It must be approved by the plan administrator and signed by the judge. QDROs can be very complex and technical orders that require retirement plan knowledge and drafting expertise distinct from family law practice. I have been asked to facilitate the preparation of a QDRO only to find there were mistakes made when writing up how these assets will be divided in the Marital Settlement Agreement. Some of these mistakes were very costly to my client and fixing the error was not possible. My involvement early in the process can help avoid the following common mistakes.
Legal Plan Name
It is important to include language in the parties’ Marital Settlement Agreement that clearly identifies each individual account to be divided by QDRO by its legal plan name and not by its third-party administrator. Each plan has a unique identifying legal plan name. Third Party Administrators can change throughout the life of the plan.
Defined contribution plans (such as a 401(k) plan) and defined benefit plans (pension plans that pay a benefit at retirement not tied to a specific account balance) are vastly different retirement plans and have different implications when trying to divide them. Knowing the plan type and the benefit to be divided can substantially affect how you may choose to negotiate a settlement and using language appropriate for the type of plan being divided in your Marital Settlement Agreement will ensure the parties QDROs will be drafted appropriately and in accordance with your settlement intentions.
Gains and Losses
Generally, gains and losses can only be awarded in a QDRO dividing a defined contribution plan. Always including language addressing how gains and losses will be treated after the date the account is divided (usually the date of separation or divorce) is a good practice and will clarify the actual award intention.
When determining the amount to be divided by QDRO, it is important to consider the impact of any outstanding loan balance in the plan participant’s account. Often, the loan benefited both spouses during the marriage. An outstanding loan may be considered to be an asset in the participant’s account, but the obligation to repay the loan stays with the participant and cannot be transferred to the other spouse (the “Alternate Payee”). Your Marital Settlement Agreement language should clearly indicate whether the value of the participant’s outstanding loan will be included or excluded in the participant’s account balance to be divided.