Don’t Let Your General Judgment Language Impair the QDRO
Filed under:Divorce Services
By David Gault
Insufficient instruction in the Marital Settlement Agreement (MSA) or in the General Judgment (GJ) can cause a QDRO to deliver less than your client should have. QDROs address a number of important peripheral entitlements associated with the interest conveyed to the non-participant spouse, the “Alternate Payee”. It is the responsibility of counsel for the alternate payee to maximize the quantity and quality of the entitlements transferred, and the responsibility of counsel for the plan participant to minimize what his or her client forfeits in the process.
A QDRO is required to effectuate an award from an ERISA-governed retirement plan, be that a defined benefit pension plan or a defined contribution plan, such as a 401(k). Technically, the GJ can itself constitute a QDRO, but only if it contains all of the elements required by ERISA and the Internal Revenue Code applicable to QDROs. In practice, however, most QDROs are prepared in the form of a separate Order (in Oregon labeled a “Supplemental Judgment”).
It is generally conceded that due to the complexity of QDRO issues, competent QDRO drafting requires the services of a specialist. In Oregon, there appear to be about a dozen active specialists. Sometimes a specialist is consulted prior to entry of the GJ, but more often the specialist is handed an entered judgment. That judgment often contains language that either inadvertently, or by design, limits what the QDRO can do.
The more common condition is that the GJ or MSA language tends to be quite brief, with minimal detail about how the conveyed benefit is to be calculated or the rights or entitlements that accompany it. The perception of some attorneys is that there is no great need for specificity because the QDRO will address all of that.
Can the QDRO fill in the missing pieces and rectify any misdirection? The answer is yes, but only if both sides agree on the detail of that. It may take a new round of negotiation or even more litigation to cure a problem, and with no guarantee of success. Once the GJ is entered, counsel for the plan participant has the upper hand in a contest over an entitlement that the GJ was silent regarding. Certainly all would agree that it is both safest and easiest to get the features of the assignment settled before entry of the GJ.
So what does the GJ or MSA need to say about the retirement benefit conveyance? How detailed do you as a family law practitioner need to get in drafting your document? There appear to be three alternatives. The alternative we will label as Alternative #1 is the most expeditious, practical, and foolproof. Alternative #2 is nearly as good as #1, while #3 works, but in our opinion, is unnecessarily burdensome.
For whatever reason, the easiest approach does not get used nearly as much as it should. It is to simply have the QDRO drafted before entry of the GJ and incorporate it by reference right into the MSA or GJ. Any points of potential conflict will have been resolved and the task of technical writing will have fallen on the QDRO specialist, not the family law attorney. With this approach the only verbiage required in the GJ or MSA is to reference the QDRO.
The second approach is to briefly outline in the MSA or GJ the disposition to be made in the QDRO of certain key features regarding the alternate payee’s award. The QDRO will flesh out those issues more fully, but the “flesh out” will be directed by the MSA or GJ. If you are opting out of Alternative #1, the specific items you need to address in your MSA or GJ language are listed and discussed right after we next comment on the disadvantages of Alternative #3.
While the third potential approach is discussed at length in the leading text book on QDRO drafting, this writer views it as impractical. It would have you include in the MSA or GJ most of the detailed verbiage the QDRO will contain. For one, this approach represents a duplication of effort. Why would you go to the trouble of that much drafting only to have it repeated in the QDRO?
This approach also makes that section of your MSA or GJ unnecessarily long, adding five or more pages of text to your document. Additionally, it is drafting that the family law attorney is usually not qualified to do. A QDRO specialist could help with it, but if you have that person engaged, why not just order the completed QDRO, and incorporate it by reference.
Back to Alternative #2:
Although Alternative #1 would often be your preferred choice, there could be reasons why you are not prepared to file the QDRO concurrently with the GJ. Perhaps not all data needed for the QDRO is immediately available. Maybe your QDRO specialist is off on vacation. So when circumstances move you to Alternative #2, exactly what are the dispositive issues regarding the assignment needing to be addressed in your MSA or GJ?
The list applicable to a QDRO for a defined contribution plan (a “DC plan”), such as a 401(k), is different than a list applicable to a defined benefit pension plan (a “DB plan”). You need to have a clear understanding of which of those two categories of plans you are dealing with. The class of plan may be obvious on its face, or if in doubt, you could request a copy of the Summary Plan Description (SPD), a document ERISA requires be made available to every plan participant.
Tips for GJ or MSA Language — DC Plans
1. Cite the true and precise name of the Plan from which the award flows.
2. Provide the specific dollar amount or percentage awarded, or if either is dependent on data not immediately available, provide a formula or description of how the award is to be quantified.
3. Cite the effective date of the assignment.
4. Include a statement that the award shall be drawn pro rata from among the various investment accounts composing the Participant’s holding in the Plan, including those of a post-tax character if such exist.
5. Include instructions regarding whether the award is to be adjusted for earnings and losses between assignment date and date of distribution. The parties may have an overriding intention that a known and fixed sum be distributed to the Alternate Payee. More commonly, however, it is intended that the Alternate Payee is to have both the benefits and burdens of changes in the award value from the assignment date forward.
6. Include direction regarding how outstanding plan loans made to the participant are to be treated. A participant loan is just another investment within the account of the Participant. Liability for participant loans cannot be transferred to the Alternate Payee, but there is a question as to whether the award is to be determined based on the total account balance gross of the loan versus net of the loan. Usually if the loan proceeds had flowed to and benefitted the marital estate, only the account balance net of the loan would be viewed as a marital asset. If the loan post-dated the marital separation and benefitted only the Participant, often the assignment would be based on the gross account balance, which includes the loan. Be careful, however; a few plans report a participant’s account balance with the loan excluded.
7. If you represent the Alternate Payee, include anti-circumvention language barring the participant from taking actions that defeat or compromise the award.
8. Provide for continued jurisdiction.
Tips for GJ or MSA Language — DB Plans
1. Keep in mind that in most DB plans you are describing the disposition of a portion of an “accrued monthly benefit”, not a portion of an account balance.
2. Provide the true and precise name of the Plan.
3. State what portion of the accrued benefit is to be payable to the alternate payee. For pensions already in payout status, you would express it as a percentage or specific dollar amount. When retirement is still ahead, you may need to provide that the alternate payee’s share of the benefit is to be determined by application of a coverture fraction to the Participant’s accrued benefit at time of retirement. While awarding the non-participant spouse half of the accrued benefit as it stands at date of divorce can be done, it does not conform to Oregon law as ruled in cases such as Kiser.
4. If the pension is not yet in payout status, specify whether the QDRO is to carve out a “separate interest” for the Alternate Payee payable over the Alternate Payee’s lifetime, versus a sharing of the Participant’s benefit that ends with the Participant’s death. In most cases, the alternate payee would want a separate interest. If the benefit is already in payout status, usually an award of a shared benefit is the only option available.
5. Very important — If retirement is still ahead, specify that the QDRO is to provide preretirement survivorship protection for the Alternate Payee.
6. If the pension is not yet in payout status and for some reason the award is to be of the “shared payment” type, then provide the Alternate Payee with survivorship protection by requiring election of a joint and survivor form of benefit at retirement with the Alternate Payee named as beneficiary. There are only a few circumstances where a shared benefit might be preferable to a separate benefit. One of these is when the participant’s death is anticipated shortly after retiring.
7. Provide that the QDRO is to include a provision for a sharing of any early retirement subsidies and supplements, if applicable.
8. Specify that the Alternate Payee is to share in any post-retirement COLAs, if applicable.
9. Include anti-circumvention language barring the Participant from taking actions that would defeat or compromise the award.
10. Provide for continued jurisdiction.
About the author: David Gault is a CPA, QDRO Specialist, Certified Divorce Financial Analyst, and a retired shareholder with Jones & Roth, CPAs in their Eugene office. David continues with the firm on a part-time schedule primarily drafting QDROs and consulting regarding pension division issues.