The most valuable assets in a divorce are often the retirement accounts.
The three most common retirement assets are 401(k)s, pensions, and individual retirement accounts (IRAs). An IRA is rather easily divided.
Pensions and 401(k) plans, however, are governed by federal laws, and require a separate document from the divorce judgment, called a Qualified Domestic Relations Order (QDRO). The marital settlement agreement and the QDRO must be properly drafted to ensure the parties’ intent is achieved.
Because the company managing the plan is not a party to the divorce, the company cannot be ordered to take any action contrary to its plan rules. The person who approves the plan is the “plan administrator,” and the company document listing the rules is the “plan summary.” Therefore, before completing a marital settlement agreement or QDRO, the lawyer must ensure that the company can actually execute the order’s provisions.
Equally Divided Not Sufficient
Simply stating that the account will be “equally divided” is generally not sufficient. Both parties should enter the agreement with full understanding, so it is unwise to wait for the QDRO to list specifics. Issues that should be specified in the marital settlement agreement include:
Whether cost of living increases will be added to the ex-spouse’s benefit.
The valuation date of the benefits for division, and whether changes in the value between the date of divorce and date of actual division are including in the benefit.
Whether additions to the account after the year of divorce, but earned during the year of divorce, are divided.
If the plan permits a lump sum withdrawal, whether either spouse should be prevented from taking it. Such withdrawals often result in penalties or decrease in benefits.
Whether the recipient can transfer benefits through a will.
If the plan offers a survivor benefit, whether that benefit must be chosen, in what amount, and who will pay any related cost.
Should the ex-spouse be named as a beneficiary of the plan and if so, in what amount.
Must the ex-spouse wait until the employee spouse retires before obtaining benefits?
Can the recipient withdraw all or a portion of the benefit before retirement? Generally, there is a 10 percent penalty for early withdrawal of retirement benefits. However, if the withdrawal is connected to divorce, the penalty is waived. Prior to making an agreement on retirement allocation, the lawyer must be aware of the client’s intended use of the money.
Are there tax consequences for early withdrawal and if so, who is responsible?
Once the QDRO is drafted and approved by the lawyers, it should be sent to the plan administrator for approval.
Once approval is given, the order is sent to the judge for signature. Then the signed order is sent to the plan administrator for execution. The administrator must then provide some type of notice that the QDRO is received and executed. Only at that point can the lawyer and client be assured that the asset was properly divided.
Avoiding Post-divorce Litigation
Poorly drafted divorce agreements and/or QDROs are a constant source of post-divorce litigation. Sometimes the QDRO was never approved by the plan administrator or signed by the judge, or some other step in the process was missed. In some cases, the QDRO itself was never drafted. The client is thus at risk for losing valuable benefits.
It is also rather difficult to redraft and execute a QDRO many years later after the parties’ addresses, interests, and employment has probably changed.
Therefore, it is vital to do the work on the front end, and follow the process to its end, to protect yourself and the client.
This article was originally published on the State Bar of Wisconsin’s Family Law Section Blog. Visit the State Bar sections or the Family Law Section web pages to learn more about the benefits of section membership.