Flat dollar amounts from defined contribution plans to a spouse has created agonizing results when account values fall during a financial downturn. If you negotiate a flat dollar amount, you need to understand this risk and only agree to it if there are sufficient funds to handle an award even if the account value drops significantly. Attorneys will generally document the fact that these risks have been explained to a client when there is an insistence that a flat dollar amount method is used. It is good practice with any retirement account to insist that the employee spouse transfer the funds into a stable value fund while the divorce and QDRO are pending.
If this option is available, this is the best way to preserve the amount of the account, at least until the QDRO has been executed.
- finding cell phone numbers for free 53 55;
- Division of a Pension 401k or IRA in a Louisville Divorce!
- how to find out someones middle name!
- how to get birth certificate au.
There is normally a delay of several months from the agreed upon date of division and when the funds in a defined contribution plan are actually divided. This means the amount in the account on the agreed upon date of division could be substantially different that the amount in the account when the plan funds are actually divided.
One spouse or the other could take a hit depending on if there are earnings or losses that take place during that interim period. If there is no specification as to what happens to earnings or losses that is built into the terms of the QDRO, it can lead to litigation. If a spouse agrees on a specific dollar amount or percentage of the account as of a certain date, with no adjustment for earnings and losses, then the employee spouse is going to bear all of the potential risk of the value falling.
Even if the account is not actually divided for several years, each spouse will still get exactly what he or she would have received if the account had been divided on the agreed upon date of division. Ideally, a QDRO should be prepared as soon as both sides have reached a basic settlement agreement regarding how the retirement funds should be divided. If this is not possible, it should be filed as soon as possible after the divorce is finalized. If this does not happen in a timely manner the alternate payee is putting themselves at risk to lose his or her benefits under a number of scenarios:.
Another problem that can come up is when a plan changes administrators when parties wait to draft a QDRO. When a new plan administrator takes over, they will usually not perform any calculations regarding benefits accrued prior to their plan administration date. This can create significant problems if the parties do not have their own plan statements for the time period from the date of marriage to date of separation. It means that they will need to retain an actuary or accountant to perform a calculation to determine the community property interest in the benefits.
This should never be done unless an attorney and the client fully understand every provision in the document based on the laws of the state where the QDRO is executed. This is because most model QDROs are drafted to favor the plan participant at the expense of the alternate payee.
Model orders can heavily favor the participant with regard to issues like investment earnings and losses, and survivor benefits. A model QDRO may have also been drafted in a different state than where the divorce took place, and that can definitely have an impact on how benefits are divided. For example, in California, the community property interest stops accruing on the date of separation.
But other states may use other dates. This might be the date of divorce filing, or the date of the entry of Judgment of Dissolution, both which may be years after a date of separation. Loan balances on defined contribution plans are often overlooked when preparing a QDRO and settlement agreements. What makes things more complicated is that in most plans, an outstanding loan is considered an asset that should be added to the total balance to determine the full value of the account.
But most plans cannot award any portion of a loan balance through a QDRO. If there is a concern that the employee spouse will attempt to remove funds from the account through a loan or recklessly alter the investments in the account, or take other actions to reduce its value before the QDRO can be completed, an attorney should notify the plan administrator that a QDRO is being prepared and to ask the account to be placed on hold.
It may be possible to submit a skeleton QDRO which is just a place holder that is submitted as a draft to trigger the hold under the terms of the plan. In all cases, it is good practice in every case to list the most current account balance so that everyone has the same understanding of what the balance is at the time of the agreement. As silly as it may seem, one of the most basic functions of drafting a QDRO is sometimes overlooked. When it is not specifically spelled out who is going to draft the QDRO, it can and does very easily fall through the cracks and never gets done.
Each attorney may assume the other is drafting the document and vice versa, and then as time passes it is completely forgotten. They only care that their client will get their money because their name is already on the account. This is completely wrong thinking. A claim could be put in that could decimate an estate long after the fact. It should be made clear that one side will prepare the QDRO and the other side will have the opportunity to review the document before submission.
This assigns duties to both sides making it less likely that it will be forgotten. Plan Administrators can charge more if their QDRO form is not used or if it is rejected for any reason after submission. It will also allow for full disclosure because those fees can be incorporated as part of the QDRO agreement. There are some instances when a settlement agreement does not adequately address pre- and post-retirement surviving spouse coverage.
How Is a 401(k) Split in a Divorce?
This is especially important for defined benefit plans where a number of issues can make this the most complicated part of preparing an airtight QDRO. Attorneys should at least consider whether the alternate payee is to be treated as the surviving spouse if the employee dies before the transfer under the QDRO is completed. For a defined contribution plan, this can be as simple as making it clear that the alternate payee is entitled to receive the funds to be awarded regardless of when the participant dies. In defined benefit plans, the surviving spouse benefit is substantially affected by whether the employee spouse dies before or after the start of benefit payments.
Both situations must be addressed in the QDRO. In many defined benefit plans, the alternate payee will receive no benefits if the participant dies before payments begin. Even if a rock-solid QDRO has been drafted, it does zero good if you do not actually follow through with the elements of the plan.
Do not ever close out a QDRO without obtaining some kind of verification from a plan administrator that the QDRO has been received and will be implemented accordingly. Some approval letters from the plan simply state that the QDRO has been received and approved as qualified. It is very important to read any correspondence carefully and compare them with the text of the actual QDRO. Errors can and do happen. These errors are often substantial and can affect surviving spouse benefits. Looking for more great divorce financial tips? Here are a few of our favorite guides and resources:.
Jason Crowley is a divorce financial strategist, personal finance expert, and entrepreneur. A leading authority in divorce finance, Jason has been featured in the Wall Street Journal, Forbes, and other media outlets. You can email him at jason survivedivorce. Please leave this field empty.
Pensions and Retirement Funds in a Divorce | Kentucky Justice Online
Contributions by: David Ruegg, Esq. Matt Schwartz John Madden Nov. What is a QDRO? How are pensions and retirement plans divided in a divorce? This means they must be divided equitably in a divorce. What information does a QDRO need to contain? For these orders, there are three general sets of compliance rules that must be followed: The requirements of the individual plan The domestic relations laws of the state where the QDRO is being executed i. These retirement plans can be divided by orders similar to a QDRO. What is the difference between a defined benefit plan and a defined contribution plan?
What are the steps involved in the QDRO process? Plan administrators will often request changes and insert their own language. Usually, these changes are minor and not a cause for alarm. How long does the QDRO process take from start to finish? Technically yes, but … The stakes are usually high when dealing with retirement accounts and unraveling the legalities and requirements of a QDRO can be complicated. Chances are they will have a standardized form you can use.
Can one QDRO handle all of the retirement accounts in a divorce? Will I have to share my entire pension or retirement plan in a divorce?
Be sure to check the particular laws regarding this subject for your state. Is there a statute of limitations for filing a QDRO? There is no specific statute of limitations that apply to how long you have to file a QDRO.