Professional negligence. The word strikes fear deep in the heart of even the most experienced attorney. While attorneys do not intentionally set out to make mistakes that expose them to liability, many times a lack of knowledge causes inadvertent errors that lead to bigger problems down the road.

After ten years of working with attorneys and their clients to prepare Qualified Domestic Relations Orders (QDROs) and other retirement account division paperwork, I have seen, firsthand, some very common mistakes that are made. make when it comes to handling these complex documents. .

Omission of key terms in the separation agreement

One of the most common problems is that the Separation Agreement is too vague regarding the division of retirement assets. This often leads to costly post-trial litigation, sometimes years later. These problems can be avoided by clearly stating all relevant terms of any division of retirement assets within the body of the final Separation Agreement. Vague statements such as “XYZ pension will be divided between the parties and a QDRO will be prepared” are not enough. Key issues such as survivor benefits, valuation date, valuation method, etc. must be fully detailed in the Separation Agreement.

Not making a proper discovery

Another error prone area is that there is no clear understanding of what a plan will allow and more importantly not allow in terms of distribution. By obtaining and reviewing a complete copy of the plan’s governing documents early on, limitations and prohibitions can be identified before negotiations begin. I have seen many cases where, after lengthy and costly negotiations, the parties finally agree to split a certain account, only to discover when the QDRO is being prepared that the plan will not allow for the agreed terms.

Not submitting the order correctly

In most cases, a proposed QDRO will be submitted to the Plan Administrator for review. Unfortunately, this is often where the ball drops. Whether the Plan Administrator approves or rejects the proposed order on that initial review, the court will eventually sign a final QDRO. This final QDRO must be submitted to the Plan Administrator. If the final QDRO is not filed with the Plan Administrator, and followed up until the funds are distributed, the Alternate Payee may lose their rights under the QDRO. It is important to keep track of each QDRO until the distribution can be validated.

Improper Delegation of QDRO Drafting Responsibility

Many times, the attorney representing the plan participant will hand over the responsibility of preparing the QDRO to the alternate payee and their attorney. After all, it is the other party that wants part of the participant’s assets. However, this is short-sighted. Since a QDRO can be written to benefit or disadvantage either party, it is important that both parties and their attorneys actively participate in the preparation of the document.

In more than a few cases, the responsibility for preparing the QDRO is never formally assigned to either party. This puts everyone at risk, as the QDRO may never be prepared and eventually be completely forgotten. This puts the alternate payee’s rights at risk and, in some cases, they may never receive their share of the asset.

Not adequately explaining QDRO terms

Since the QDRO may contain terms favorable or unfavorable to either party, everyone should have a clear understanding of the exact details regarding how the account will be divided. Misconceptions lead to incorrect assumptions that can lead to dissatisfied customers in the future.

Confidence in plan formularies

While an alarming number of attorneys swear by the “fill in the blank” QDRO forms provided by some plans, this is a dangerous approach. These forms are created to make execution as easy as possible for the plan administrator, rather than focusing on the best interest of any one customer. As other distribution options may be available, it is important to fully understand all possibilities before relying exclusively on the Plan’s pre-printed forms.

Not understanding survival issues

Many attorneys are not familiar with the different options related to survivorship benefits and protections. As a result, the Separation Agreement may contain only generic language related to the right to survivor benefits. In some cases, this language is never ported to the actual QDRO, creating significant problems down the road.

Attorneys should consider all of the following potential scenarios when drafting language regarding survival options:

1. What will the former spouse/alternate payee be entitled to if the plan participant dies before retirement?
2. What will the former spouse/alternate payee be entitled to if the plan participant dies after retirement?
3. What happens if the former spouse/alternate payee dies before the plan participant?

Incorrectly parsing present value

When a pension plan is the primary asset in a filing status, it may not even be necessary to do a present value calculation, since the division of the asset is the only issue at stake. However, when the marital estate includes many assets, the pension plan being only one, the correct calculation of the present value of the pension plan becomes more important.

The present value calculation is performed by an actuary using a basic plan risk formula, an applied discount rate, and the application of a mortality table. The resulting value will be influenced by additional factors that are specific to the plan and the participant. These include the existence of prior QDROs, early retirement benefits, compensation history, likelihood of disability, etc.

All of these factors are important to consider when advising a client whether to seek an immediate offset of the value of the pension with other marital assets or to accept a deferred distribution when the plan participant retires.

Inadequate understanding and explanation of tax implications

Money distributed from a qualified plan to the alternate payee’s spouse is subject to regular income tax, unless transferred to an IRA. However, the original distribution is not subject to the 10% early withdrawal penalty, even if the alternate payee is under age 59½.

However, if the alternate payee rolls over everything and then withdraws some of the money from their new IRA, the early withdrawal penalty may apply. In many cases, the alternate payee will do exactly this to cover attorney fees or other debts. It is important for the alternate payee to understand when and how the penalty is applied so that they can make informed decisions before the original distribution occurs.