The Risk Manager, Winter 2001
A blossoming area of malpractice concerns failure to properly cover pension plans in divorceQualified Domestic Relations Orders. Frequently a pension plan is the most valuable marital asset to be divided. In today’s economy there are defined benefit plans, defined contribution plans, ERISA governed plans, 401(k)s, SEP IRAs, Simple IRAs, etc., etc. A plan may have a wide spectrum of investment options from little or no employee discretion on how funds are invested to plans that have as many as 37 different mutual funds for employees to select. Sylvia Hsieh covers in her article “Divorce Lawyers Are Still Making Big Mistakes With Pension Plans” important considerations in avoiding QDRO malpractice and some good risk management advice. (Lawyers Weekly USA, 2000 LWUSA 1061, 12/11/00). What follows highlights the article’s key points with some thoughts of our own.
Common QDRO Pension Plan Errors
- Failure to obtain the pension plan terms and conditions: Pension plan administrators make distributions according to legal requirements that determine what benefits and options are available for payment. Action should be taken immediately upon undertaking a divorce representation to acquire a complete copy of all pension plans of the parties. In addition to providing the information necessary for meaningful negotiations they should indicate whether there are any loans outstanding on a pension account. It then can be made clear who is responsible for repayment.
- Failure to consider death benefits: Under most plans death benefits and survivor benefits that continue after the employee’s death must be included in the QDRO for the spouse to receive them. Key questions to ask are:
- What benefits does a spouse have when the employee dies before retiring? After retiring?
- Should the QDRO provide for “shared interest” benefits which means that if the spouse dies first benefits revert to the employee; or “separate interest” benefits which means that benefits do not revert to the employee if the spouse dies first and could allow the spouse to elect someone else to receive the benefits?
- Failure to protect the spouse’s interest before the QDRO is qualified: During the divorce proceedings, but before the QDRO is final, there is the risk that the employee will take loans from the pension account, make early withdrawals, or close it -- all to the detriment of the spouse. Accordingly, an order freezing assets during this period to preclude the employee from dissipating pension assets is often advisable. Similarly, a temporary order covering death and survivor benefits should be obtained if it appears that there will be an appreciable period of time before the QDRO is final. It is essential that plan administrators be advised promptly of the divorce action and served with any orders protecting survivor benefits and freezing assets.
- Failure to consider other plan benefits: Plans often offer other types of benefits such as early retirement bonuses. The QDRO should specifically cover these benefits just like basic benefits to assure that the spouse receives a share.
- Failure to include all accounts: A complete inventory and asset evaluation of all pension plan accounts is an absolute necessity. The QDRO should be based on plan distribution options and consistent with those options indicate in detail from which accounts and in what proportion benefits will be paid.
- Failure to specify an accurate calculation date: The calculation date set for determination of benefits amounts should be selected taking into consideration when accounts are credited with contributions. Selecting a calculation date other than a plan’s annual or quarterly update of account assets can lead to an important reduction in benefits for a spouse. Note that some plans provide for a substantial employer contribution at time of retirement. Another calculation issue is how to treat increases or decreases in an account from the time the QDRO is in place to the time benefits are paid which can be years later. If the parties cannot agree on a date, the courts look to state law which can be the date of separation, divorce, or retirement.
Risk Management Actions
- Client interview – Discuss pension plans issues with the client at the inception of the representation. Do not simply accept the client’s explanation of what pension plan benefits are. Get the plan documents for your own evaluation. Explain what a QDRO is and the necessity to get it in place promptly.
- Draft the QDRO yourself -- especially if you are representing the spouse – Similar to structured settlements, the parties have differing interest in the timing and content of pension plan QDROs. Beware of using plan forms to draft the QDRO. They make it easy for the planadministrator to determine benefits, but may not include all the beneficiary options. If necessary, go to a pension QDRO expert for assistance.
- Notify the plan administrator early and often of the divorce action and developments – If the circumstances warrant, obtain and serve on the plan administrator temporary court orders freezing assets and preserving the spouse’s pension claims and survivor benefits until the QDRO is in place (some experts urge doing this in all cases). Get the administrator to confirm notification in writing.
- Get the plan administrator’s approval of the QDRO prior to court approval -- This simplifies everything and saves having to return to court to explain why the QDRO requires modification.
- Documentation and file retention – Document thoroughly discussions with clients and actions taken to address pension plan issues in divorce proceedings. Recognize that pension QDROs are like wills in that malpractice is usually not an issue until long after the divorce is final. Accordingly, retain files indefinitely or until you are certain that there is no further possibility of a claim.
A recent case over a claim for child support payments from an ERISA governed pension plan illustrates how complicated things get when an employee with a history of informal living arrangements died leaving a designated pension plan beneficiary and a former companion by whom he had two children. The court upheld the claim for child support payments over the designated beneficiary based on a detailed evaluation of how ERISA recognizes state QDROs. The case is noteworthy because it concerns child support payments not part of a divorce action. Key to the success of the former companion was that she had obtained a state court child support order, notified the plan of her claim, and was actively seeking a QDRO when the employee died ( Trustees of the Directors Guild of America-Producer Pension Benefits Plans v. Tise, U.S. Ct. App., 9th Circuit, No. 96-16799, 12/6/00).