Qualified Domestic Relations Orders Loose Ends of a Divorce
When representing clients in the process of divorcing, an attorney should be sensitive to retirement planning issues, including the availability of a qualified domestic relations order ("QDRO") which can divide assets from qualified pension, profit-sharing and 40 l(k) plans (as well as other qualified programs) between spouses. The participant of the plan can allocate assets to the recipient spouse (known as the "Alternate Payee"), usually in terms of a percentage of the benefit when payable.
The first challenge is identifying these assets and evaluating the value of the benefits. Thankfully, this is a job for the family lawyers representing the clients in the divorce. However, once the division is made, either by agreement or by judicial decision, the implementation of the agreement or decree through a QDRO is often the "loose end" of a divorce.
Attorneys who practice in the area of retirement benefit planning and have prepared plan documents (such as myself) or actuaries are often contacted by attorneys who handle divorce cases to either prepare or review QDRO's. Often, the fee for this service is divided between husband and wife; other times each side has his or her own "QDRO expert" to review the documents. In accepting this challenge, the professional must know if he or she is representing one side (the participant in the plan) or the other (the Alternate Payee) or if he or she is acting as a neutral party in the adversarial proceedings.
Although many QDRO's are straightforward, sometimes the wording of the agreement or decree leaves much to be interpreted. Divorce agreements or judicial decisions are drafted by professionals who may not know the "lingo" of the pension plan arena. There can a referral to "pension plans" which include profit sharing arrangements or 401(k) plans. Or not! It is sometimes necessary to have the attorneys for both parties clarify the intent of the document; and sometimes this may mean returning to court for the judge's explanation. AND REMEMBER: QDRO's are not necessary for the division of IRA benefits. If a client is entitled to a share of his or her spouse's IRA and that division has not been made, that transfer of assets can be done by a letter signed by the IRA owner to his or her custodian regarding the distribution to the Alternate Payee. The Alternate Payee can often expedite the matter if he or she establishes an IRA with the same custodian.
If you are working with clients who are in the process of divorcing and pension benefits are part of the division of the property, you should consider the following:
- What are the benefits covered? Defined benefit plans are very different in their terms from profit sharing plans and 401 (k) plans. Will your client (if he or she is the "Alternate Payee") be able to withdraw the awarded amount in a lump sum to roll over to his or her own IRA? Will he or she have to remain a participant in the plan? Is there the ability to name a beneficiary or do the benefits die with the Alternate Payee?
- Has the QDRO been processed? If not, you may wish to alert the divorce attorney to this issue. Often there can be a question as to which attorney is responsible for implementation of the QDRO. It is of course to the benefit of the Alternate Payee to make sure that this is done in a timely manner. However, I must say that I have seen QDRO's prepared years after the divorce is final; and at that time, the issue of being paid for services in connection with this matter is contentious.
- Finally, what estate planning considerations are there with this benefit? In many cases, the QDRO award has been rolled over to an IRA and the rules concerning distributions from IRA's apply.
It is important to be on the alert when working with clients who have recently been through a divorce. When interviewing them, you should remember to question them about retirement assets and the origin of those benefits.