9 Tips to Drafting a More Seamless Divorce Decree When Splitting Retirement Plan Assets

An individual’s retirement plan, along with the primary residence, is one of the most valuable assets that most people own. However, many professionals who work on divorce matters do not fully understand how to divide these important assets. In fact, to some the term QDRO is a four-letter word akin to something that rhymes with tuck.

Hopefully, the list below can provide you with some items to consider the next time you are assigned with the onerous task of drafting divorce decree language that requires a retirement plan division.

1. Understand the plan being divided.

Part of the challenge with retirement plans is that they do not have uniform features. Thus, it is vital that you have a baseline understanding of the type of plan that you are working with. Is it a defined benefit, defined contribution, or governmental plan? Are you working with an ERISA or non-ERISA plan? Is it a qualified or non-qualified plan? What are the types and forms of benefits that are available under the plan? How about vesting schedules or special circumstances? Can the plan even be divided by QDRO or a similar type of court order?

When it comes to defined benefit plans, will you be using a shared or separate interest approach? How will investment gains, losses, loans, and forfeitures be addressed in a defined contribution plan?

2. Discovery.

It is important that you are aware of all the current and prior retirement plans that the parties own. Failing to discover these plans can cost your client thousands of dollars in an equitable distribution. In addition to discovering all the retirement plans, you will want to request certain documents from each plan. These documents include, but are not limited to, the plan document, summary plan description, and QDRO procedures. (See our post titled: The Documents You Need to Request in Discovery for more information on discovery).

3. Involve a QDRO practitioner early in the process.

If reading numbers 1 and 2 gave you a headache, do not worry, you are not alone. However, that feeling is illustrative of why it is so important to get a qualified QDRO practitioner involved in the process as early on as possible.

4. Be specific.

Have you ever read or drafted a decree that says something to the effect of “Wife shall receive 50% of the marital share of the Husband’s retirement account X?” Have you ever heard or said, “we can just let the QDRO attorney figure it out?” These statements are loaded and will leave many questions that will still need to be answered.

As far as the language is concerned, it is vague at best. What exactly does the marital share mean? Is there a pre- or post- marital share, and if so, how will it be calculated? In addition, you will need to provide a clear valuation date. This can be the date of divorce, separation, filing, or a stipulated date.

You would not draft a parenting plan without accounting for holidays, school breaks, or identifying which days of the week that each parent is to receive their child(ren). Similarly, when dealing with retirement plans, it is crucial that you are specific in drafting this language.

5. Death.

Many plans have language that determines the types and forms of benefits that are available at death (e.g., qualified pre-retirement survivor annuity or qualified joint and survivor annuity). It is important to account for what happens to the plan assets upon the death of the plan participant or alternate payee, both before and after the date of retirement. Will the assets payable to an alternate payee revert to the plan participant? Will annuity payments continue to be made to the decedent’s estate? How do beneficiary designations impact which option can be selected?

6. Taxes.

Uncle Sam will certainly be interested in receiving his share of any retirement plan distributions. Generally, retirement plan distributions are included in the gross income of the plan participant [i]. However, when an alternate payee who is a spouse or former spouse receives a distribution via QDRO, the alternate payee steps into the shoes of the plan participant and will be taxed as the distributed [ii].

As such, the alternate payee should also be awarded a proportional share of the cost basis [iii]. If the QDRO is used to collect child support, the plan participant will still be responsible for paying the taxes on the distribution [iii]. Id. However, if the plan will not allocate the taxes to the plan participant, you will need to gross up the alternate payee’s award to offset the additional tax burden and ensure the alternate payee receives the correct amount as child support.

Further, the Internal Revenue Service imposes a 10% tax on early distributions that are made from a qualified retirement plan [iv]. However, this 10% penalty is waived when the distribution is made to an alternate payee pursuant to a QDRO [v].

Be sure that your marital settlement addresses how the parties will pay these taxes and allocate the basis.

7. Fees and drafting.

Many plans charge QDRO processing fees. These fees can range from a couple hundred to a couple thousand dollars. This fee is in addition to the fee that the QDRO specialist will charge to draft the order. If you do not determine who will be responsible for paying these fees and make the appropriate offsets, you will likely have an unhappy client when they find out about this extra expense.

8. Use of a QDRO to collect child support or alimony.

It is widely known that QDROs can be used to divide retirement plan assets as part of a marital settlement. However, QDROs can also be used to provide for child support or alimony to a spouse, former spouse, child, or other dependent of a participant [vi]. This is a powerful, yet underutilized, feature of QDROs and related orders, especially when it comes to collecting arrearages.

9. Timing of distributions.

This is more of a practice management than a drafting tip, but it is important, nonetheless. The plan document will determine when distributions can be made from the plan. Examples of distribution timelines may be at separation of service, reaching normal retirement age, or another specified date. Consequently, it may be several months or even years before the plan will be able to release the funds to your client.

When retirement plan assets are being distributed by a QDRO, your client will probably ask you when they will receive the money or at least when can it be rolled over into another retirement plan. This is especially true when you represent the alternate payee.

Please, please, please do not tell your client that they will receive the funds immediately. In addition to the variables stated above, the plan’s QDRO procedures will likely allow for an appeal period of any QDRO determination, and funds will not be distributed while the appeal window is still open.

Further, some plan documents or employee benefit handbooks may explicitly state the timeframe when distributions will be made. If you find yourself advising a client that the funds will be made available quickly, you may find yourself in hot water.

 I hope this list has given you some food for thought as you move forward in drafting divorce decree language when retirement plan assets are being divided as part of the settlement. Future blog posts will go into more specifics about drafting pitfalls for both defined benefit and defined contribution plans.

Marques Lang, CPW Member, attorney and financial professional, has worked on more than 6,000 QDRO cases, in addition to presenting QDRO-related content at statewide conferences, bar association events, and local law firms. He is also the author of Marital (un)Bliss: How to Successfully Divide Retirement Plans in Divorce.

Sources:

[i] 26 U.S.C. § 61(a)(10).

[ii] 26 U.S.C. § 402(e)(1)(A).

[iii] I.R.S. Pub. No. 575, Pension and Annuity Income (2019).

[iv] 26 U.S.C. § 72(t)(1).

[v] 26 U.S.C. § 72(t)(2)(C).

[vi] 29 U.S.C. § 1056(d)(3)(B)(ii)(I).