Contributing Author: Dianne Schechter
If you are about to be divorced or legally separated and one of the assets to be divided is a retirement plan, then you most likely need a qualified domestic relations order (“QDRO”) (pronounced “qua'-dro”).
A QDRO is a separate court order that is drafted specifically for the account of the retirement plan-Participant-Spouse to be divided and is often times necessary to enforce the award. If the retirement plan is offered through the military or civil service, you cannot receive your former spouse's interest in the retirement benefit that was awarded to you without a QDRO or similar court order. Moreover, the QDRO must state with particular detail about how the retirement benefit is divided and it must be consistent with the terms of the retirement plan itself.
Often times clients will go with “QDRO specialists” (not lawyers, or accountants, or actuaries), who usually lack academic credentials or they simply use the model QDROS supplied by plan administrators. It is typically not wise to use a model QDRO provided by the plan in lieu of preparing the QDRO from scratch. It may very well cost you thousands of dollars in the long run if a mistake goes undetected until the benefits are already allocated. For the most part, only an attorney who has extensive experience in the area of employee benefits law will be qualified to prepare your QDRO.
Below are the top five reasons why you should hire a qualified attorney to prepare your QDRO rather than copying a model:
- When you blindly follow the model QDRO, you rely on work done by the retirement plan's attorney, who is mainly concerned with his/her duties towards the plan. The plan's attorney has no obligation to protect your interests. Only your QDRO attorney will properly modify the QDRO to address and protect your best interest. Plan administrators usually create a model QDRO to control the plan's administrative expenses by streamlining the QDRO review and approval process. It is much easier and cost-effective for the retirement plan provider to review a QDRO that uses the same pre-established model than to review word-by-word a QDRO prepared in an alternate format.
- Most model QDROs are drafted with default language choices preselected for the parties. If you are only filing-in the blanks of a model QDRO that provides only default language, you will miss golden opportunities to tailor the QDRO to best serve your interests. It is up to the QDRO preparer to explicitly modify the terms of the model to overturn those pre-determined language choices whenever the default language plays against your best interest. For example, if it is easier and less expensive for the plan administrator to process a QDRO in which the alternate payee does not have a right to earnings and losses (for example, less cost in calculating and allocating those earnings and losses on a pro-rata basis), then the terms of the model QDRO will likely contain that outcome in its default language. Similarly, default language is usually found in provisions related to the treatment of outstanding loans, certain death benefits, beneficiary designations, and other issues.
- A model QDRO does not take into account the specific terms of your marital settlement agreement (“MSA”). Your interests are not well served if the model QDRO terms vary from those in the MSA. Although plan administrators may pick up on discrepancies between a QDRO and the divorce decree, these inconsistencies are often overlooked. Years later, when the retirement benefits are distributed, any conflicts may come back to haunt you as you realize that you will not receive the benefits you once expected.
- It is quite common to see MSAs that do not say much about the division of retirement assets. MSAs often times fail to even accurately name the retirement plan(s) to be divided. Also, many aspects of the division of retirement benefits (such as earnings and losses, survivor benefit rights, death benefits guarantees, beneficiary designation rights, just to name a few) are left undecided and not specifically unallocated between separating or divorcing parties. As a result, the QDRO itself is the only remaining opportunity to control how the division of retirement assets will be implemented. If a model QDRO is not tailored properly, either the default language will apply (whether it serves your best interest or not) or options offered through alternative language in the model QDRO will be left unresolved, causing delays in the QDRO approval process and likely delaying your entitlement to your retirement benefits.
- Model QDROs usually allocate tax consequences by default, assigning to each party the obligation to pay taxes on their respective benefit portions. You may not be aware that parties can negotiate a different allocation of taxes. This is another important reason why you are strongly advised to retain a qualified attorney familiar with the preparation of QDROs to tailor the terms of the model QDRO to meet your specific needs. For example, if the QDRO is for child support purposes and the child is named as the alternate payee to the retirement benefits, you may want to increase the assigned benefit amount to account for the tax withholding that will take place. Also, if you have stipulated certain other payments to be offset against the benefit assigned to the alternate payee, you need to take into account the tax consequences of those arrangements. These special circumstances would not be contemplated in a model QDRO.
It is well worth it to hire an attorney with considerable experience in the preparation of QDROs to prepare (or review) your QDRO. The benefit of retaining your own attorney (the proper protection of your interests) far outweighs the potential cost of failing to receive the benefits you previously intended or agreed to. Either party to the QDRO is at risk of losing substantial benefits when the QDRO is not properly written. Preparing (or reviewing) these documents in connection with a divorce, has to do more with retirement plan/employee benefits law than family law. Little words make a BIG difference in the world of QDROs and a QDRO attorney with the correct level of experience working with retirement plans is well qualified to write a QDRO properly. You owe it to yourself to keep control of your money and of your assets to be divided with your former spouse.
If you are currently going through the process of a divorce or legal separation, or are thinking about filing for divorce or legal separation, and either you or your spouse is a participant in a retirement plan, contact one of our highly qualified attorneys for a free consultation regarding either the preparation of your QDRO or the review of a QDRO previously prepared.