QDRO or Buyout: Preparing Today for a Secure Tomorrow

The two most valuable assets a divorcing couple divide are the marital home and pension assets, but it is not uncommon for a thrifty couple who lived in a modest home for a long time to discover that the husband's pension may be worth more than the marital home.

The non-worker spouse (we will assume the wife) may be tempted to opt for a buyout far more readily than a QDRO. The woman, faced with near-term problems like keeping a roof over her children's heads and food on the table, fails to consider the long-term problem of retirement income. This option may shortchange her, particularly if her marital contributions have been child rearing and homemaking, because it means that she will head into her so-called “golden years” without any retirement income other than Spousal Social Security.

Very often, divorcing couples, particularly those who divorce pro se, may settle on a buyout of the husband's pension interest without a pension professional placing a value on the plan. Moreover, legal fees may seem off-putting, particularly when the value of the pension seems low. But, because of the high stakes involved, the decision to draft a QDRO ' which gives the non-owning spouse income later in life ' or opt for a buyout ' which provides money up front ' demands good legal advice and the services of a professional pension appraiser.

Good Legal Advice

In order to serve their clients well, attorneys must be well grounded not only in the particulars of the pension plan(s) of the divorce case, but also in the subtleties of the Employee Retirement Income Security Act (ERISA), which is the federal law covering private pensions; and the Retirement Equity Act, which broadened the rights of divorced spouses. Retirement plans and pension rules are very complex, and dividing pensions challenges both attorney and client.

As experienced lawyers know, calculating the amount to be paid to each spouse is a challenging task that often goes beyond the simple completion of forms provided by a plan administrator. QDRO preparation and approval can take months, and it involves preapproval by a plan administrator, revisions, approvals by both parties, and final approval as a QDRO. At no point in this routine does any third-party intervene to make certain that the parties are, in fact, receiving the right amount.

In the back-and-forth of divorce negotiations, a lawyer can easily make mistakes that work against those who opt for a QDRO, including:

1. Failure to ask for the important information about a spouse's benefits and retirement soon enough. Pension plans vary greatly about the terms and conditions about when a pension can be paid under a domestic relations order.
2. Failure to prepare any pension order; this should be done at the time of the divorce. The death of a former spouse, his retirement and/or remarriage can reduce the benefits a former spouse otherwise would have received.
3. Failure to obtain information about every retirement benefit that might be marital property. Many employees have more than one pension plan at the same company. Some people have pensions from companies they no longer work for.
4. Failure to obtain information about all pension plan provisions. Benefits vary greatly, and some plans pay more than one type of benefit. For example, some include cost-of-living escalators, and others have provisions to encourage early retirement.
5. Failure to ask for survivor benefits or to mention that none are available, so that the death of a worker-spouse may terminate the benefits. A separate interest QDRO assures the recipient benefits even if the owner spouse dies before retirement.
6. Failure to explain how retirement benefits are usually divided under state law. State marital and community property laws often specify the division and distribution of retirement and pension benefits. Sometimes couples can use these laws as the basis of negotiation.
7. Failure to explain what a former spouse might do to reduce or eliminate benefits to the former partner. Sometimes a former partner may fail to apply for a pension, or waives his right to a pension, or becomes injured or disabled.
8. Failure to explain how remarriage might affect benefits. Some federal, state and local government employee benefits terminate if the former wife remarries.
9. Failure to explore the unusual legal requirements or loopholes that could result in the pension order being rejected by the plan administrator. Some plans are not required to accept any court order assigning benefits to a former spouse.
10. Failure to have the proposed pension order preapproved before being sent to the court. This means that the plan may have to be filed with the court a second time, if the administrator rejects it the first time.
11. Failure to make sure the final pension order is sent to the plan and accepted. Even when the payout of benefits is years away, the court order should be approved promptly.
12. Failure to explain Social Security benefits. These benefits are not marital property. A spouse married at least 10 years may be eligible to apply for them as a divorced spouse.

Moreover, in addition to defined-benefit and defined-contribution plans, family practice attorneys now must contend with a new type of retirement hybrid called a “cash balance pension plan” as well as the sometimes more daunting challenges of post-divorce pension enhancements.

The Choices

After the pension appraisers determine the present value of the pension, the spouses are in a position to make the first big decision: buyout or QDRO?

In this regard, care must be taken in making sure that the buyout accurately reflects the value of what is traded off. In her book, Survival Manual to Divorce, Carol Ann Wilson describes how a wife took a $12,000 baby grand piano, but passed up her chance for half of her husband's $2,300 per month defined benefit pension, which had a present value of $250,000. “[S]he could have exchanged her half of Frank's pension upfront for $125,000 worth of another asset ' . Or she could have waited until Frank retires to obtain her share of the marital portion of his benefit. What seemed to have been a few thousand dollars on the surface proved to be a costly mistake in the end,” Wilson wrote.

Considerations other than the value of the pension may influence the decision. For example, a childless professional couple may decide to take the pension division off the table, agreeing that both spouses will keep their own pensions. A middle-aged homemaker, however, may be very concerned that she faces the prospect of retirement without a pension, and opt for a QDRO.

Basically, however, the decision to go for a buyout or a QDRO has benefits and liabilities for both the pension owner and the nonworking spouse.

For the pension owner, a buyout means he enjoys all the benefits earned because of future increases in salary and continued years of service. For the non-owning spouse, a buyout provides cash in hand now. On the other hand, for the pension owner, deferred distribution via a QDRO avoids argument over the discussion and analysis involved in the pension appraisal. For the non-owning spouse, deferred distribution via a QDRO means the non-owning spouse may share in future salary and years of service earned by her former husband.

QDRO Basics

The procedures for obtaining a QDRO may vary from jurisdiction to jurisdiction, but a few basics must be held in mind.

The terms and conditions of the QDRO must be set forth in the marital settlement or divorce decree. At a minimum, the decree should delineate the amount or percentage of the benefit to be assigned from the worker-participant and identify the plan(s) from which the benefits are to be assigned. In addition, other material facts must be established in the document, such as whether the alternate payee is to be named as surviving spouse for purposes of a joint and survivors annuity, when the benefits are to be divided and whether any post-retirement subsidies are to be included.

Obtaining an approved QDRO ' one that is in place and approved by the plan administrator ' can take anywhere from a month to as long as a year or more, so a note of common sense caution here: The worker-participant has no incentive to expedite the preparation of a QDRO, and the alternate payee receives his or her share only if and when the QDRO is prepared and executed. Hence, it is in the interest of the alternate payee to move forward with the QDRO as soon as possible (although it is very common to wait before doing so). Needless to say, cooperation between the former spouses is highly desirable because the cost of litigation dramatically increases the expenses associated with QDRO preparation.

Rarely may a single QDRO be used for two or more retirement plans ' for example a 401(k) and a defined benefit plan ' and one QDRO cannot be used to cover two or more different employers.

Sometimes, a plan administrator provides a model form, which can be useful because it reduces the time to review the form for approval. Such forms must be used with care, however; the forms may not deal properly with the terms and conditions to which the participant and the worker have agreed. This “plain vanilla” form follows the law, but includes no extras that may be a consideration in particular pension distribution.

The practitioner must determine if the plan administrator pre-approves QDROs. Preapproval means that the substance of the QDRO complies with the rules and regulations covering QDROs and the pension plan. QDRO approval is very important. A veto by the plan administrator can stop the process, and the alternate payee has no recourse but to start all over again.

The plan administrator is not responsible for the accuracy of the distribution of pension benefits. It is quite possible that the plan administrator could approve a QDRO that incorrectly distributes pension benefits because of a mathematical error made by the practitioner of one or the other spouses.

In writing a QDRO, God and the devil are in the details. A QDRO reflects what the spouses agree to regarding the division and distribution of pension benefits. The QDRO, normally written coincident with or after the divorce is final, is based on the language of the marital settlement agreement. For this reason, it is a good idea that the practitioner who writes the QDROs ' often the attorney of the alternate payee working from the appraisal of a pension appraiser ' makes certain the agreement does what the parties wish it to do relative to the pension and its distribution. Despite this, it is not uncommon for the separation agreement to be unclear about the name of the retirement plan, the method used in allocating benefits, and even the date used in valuing the account balance. Such ambiguities invite difficulties in the preparation of a QDRO.

Theodore K. Long, Jr. is the president of Pension Appraisers, Inc. which operates QdroDesk.com and PensionAppraisalDesk.com.

One of the most complex and difficult decisions a divorcing couple faces is the division of the pension rights accumulated during the marriage.

Some 84 million Americans work for companies that maintain ERISA-covered retirement plans that are divisible by QDROs, which guarantee the non-worker spouse (the non-owner) a share of the pension. Or the couple can opt for a buyout (sometimes called an immediate offset), by which one spouse trades away pension rights for another asset.

Often, both parties have their own pensions, and each may be entitled to share the marital portion of such pension. Generally, however, the husband's benefits are larger than those of the wife, who may have no pension at all or much smaller benefits because of years out of the work force.

The two most valuable assets a divorcing couple divide are the marital home and pension assets, but it is not uncommon for a thrifty couple who lived in a modest home for a long time to discover that the husband's pension may be worth more than the marital home.

The non-worker spouse (we will assume the wife) may be tempted to opt for a buyout far more readily than a QDRO. The woman, faced with near-term problems like keeping a roof over her children's heads and food on the table, fails to consider the long-term problem of retirement income. This option may shortchange her, particularly if her marital contributions have been child rearing and homemaking, because it means that she will head into her so-called “golden years” without any retirement income other than Spousal Social Security.

Very often, divorcing couples, particularly those who divorce pro se, may settle on a buyout of the husband's pension interest without a pension professional placing a value on the plan. Moreover, legal fees may seem off-putting, particularly when the value of the pension seems low. But, because of the high stakes involved, the decision to draft a QDRO ' which gives the non-owning spouse income later in life ' or opt for a buyout ' which provides money up front ' demands good legal advice and the services of a professional pension appraiser.

Good Legal Advice

In order to serve their clients well, attorneys must be well grounded not only in the particulars of the pension plan(s) of the divorce case, but also in the subtleties of the Employee Retirement Income Security Act (ERISA), which is the federal law covering private pensions; and the Retirement Equity Act, which broadened the rights of divorced spouses. Retirement plans and pension rules are very complex, and dividing pensions challenges both attorney and client.

As experienced lawyers know, calculating the amount to be paid to each spouse is a challenging task that often goes beyond the simple completion of forms provided by a plan administrator. QDRO preparation and approval can take months, and it involves preapproval by a plan administrator, revisions, approvals by both parties, and final approval as a QDRO. At no point in this routine does any third-party intervene to make certain that the parties are, in fact, receiving the right amount.

In the back-and-forth of divorce negotiations, a lawyer can easily make mistakes that work against those who opt for a QDRO, including:

1. Failure to ask for the important information about a spouse's benefits and retirement soon enough. Pension plans vary greatly about the terms and conditions about when a pension can be paid under a domestic relations order.
2. Failure to prepare any pension order; this should be done at the time of the divorce. The death of a former spouse, his retirement and/or remarriage can reduce the benefits a former spouse otherwise would have received.
3. Failure to obtain information about every retirement benefit that might be marital property. Many employees have more than one pension plan at the same company. Some people have pensions from companies they no longer work for.
4. Failure to obtain information about all pension plan provisions. Benefits vary greatly, and some plans pay more than one type of benefit. For example, some include cost-of-living escalators, and others have provisions to encourage early retirement.
5. Failure to ask for survivor benefits or to mention that none are available, so that the death of a worker-spouse may terminate the benefits. A separate interest QDRO assures the recipient benefits even if the owner spouse dies before retirement.
6. Failure to explain how retirement benefits are usually divided under state law. State marital and community property laws often specify the division and distribution of retirement and pension benefits. Sometimes couples can use these laws as the basis of negotiation.
7. Failure to explain what a former spouse might do to reduce or eliminate benefits to the former partner. Sometimes a former partner may fail to apply for a pension, or waives his right to a pension, or becomes injured or disabled.
8. Failure to explain how remarriage might affect benefits. Some federal, state and local government employee benefits terminate if the former wife remarries.
9. Failure to explore the unusual legal requirements or loopholes that could result in the pension order being rejected by the plan administrator. Some plans are not required to accept any court order assigning benefits to a former spouse.
10. Failure to have the proposed pension order preapproved before being sent to the court. This means that the plan may have to be filed with the court a second time, if the administrator rejects it the first time.
11. Failure to make sure the final pension order is sent to the plan and accepted. Even when the payout of benefits is years away, the court order should be approved promptly.
12. Failure to explain Social Security benefits. These benefits are not marital property. A spouse married at least 10 years may be eligible to apply for them as a divorced spouse.

Moreover, in addition to defined-benefit and defined-contribution plans, family practice attorneys now must contend with a new type of retirement hybrid called a “cash balance pension plan” as well as the sometimes more daunting challenges of post-divorce pension enhancements.

The Choices

After the pension appraisers determine the present value of the pension, the spouses are in a position to make the first big decision: buyout or QDRO?

In this regard, care must be taken in making sure that the buyout accurately reflects the value of what is traded off. In her book, Survival Manual to Divorce, Carol Ann Wilson describes how a wife took a $12,000 baby grand piano, but passed up her chance for half of her husband's $2,300 per month defined benefit pension, which had a present value of $250,000. “[S]he could have exchanged her half of Frank's pension upfront for $125,000 worth of another asset ' . Or she could have waited until Frank retires to obtain her share of the marital portion of his benefit. What seemed to have been a few thousand dollars on the surface proved to be a costly mistake in the end,” Wilson wrote.

Considerations other than the value of the pension may influence the decision. For example, a childless professional couple may decide to take the pension division off the table, agreeing that both spouses will keep their own pensions. A middle-aged homemaker, however, may be very concerned that she faces the prospect of retirement without a pension, and opt for a QDRO.

Basically, however, the decision to go for a buyout or a QDRO has benefits and liabilities for both the pension owner and the nonworking spouse.

For the pension owner, a buyout means he enjoys all the benefits earned because of future increases in salary and continued years of service. For the non-owning spouse, a buyout provides cash in hand now. On the other hand, for the pension owner, deferred distribution via a QDRO avoids argument over the discussion and analysis involved in the pension appraisal. For the non-owning spouse, deferred distribution via a QDRO means the non-owning spouse may share in future salary and years of service earned by her former husband.

QDRO Basics

The procedures for obtaining a QDRO may vary from jurisdiction to jurisdiction, but a few basics must be held in mind.

The terms and conditions of the QDRO must be set forth in the marital settlement or divorce decree. At a minimum, the decree should delineate the amount or percentage of the benefit to be assigned from the worker-participant and identify the plan(s) from which the benefits are to be assigned. In addition, other material facts must be established in the document, such as whether the alternate payee is to be named as surviving spouse for purposes of a joint and survivors annuity, when the benefits are to be divided and whether any post-retirement subsidies are to be included.

Obtaining an approved QDRO ' one that is in place and approved by the plan administrator ' can take anywhere from a month to as long as a year or more, so a note of common sense caution here: The worker-participant has no incentive to expedite the preparation of a QDRO, and the alternate payee receives his or her share only if and when the QDRO is prepared and executed. Hence, it is in the interest of the alternate payee to move forward with the QDRO as soon as possible (although it is very common to wait before doing so). Needless to say, cooperation between the former spouses is highly desirable because the cost of litigation dramatically increases the expenses associated with QDRO preparation.

Rarely may a single QDRO be used for two or more retirement plans ' for example a 401(k) and a defined benefit plan ' and one QDRO cannot be used to cover two or more different employers.

Sometimes, a plan administrator provides a model form, which can be useful because it reduces the time to review the form for approval. Such forms must be used with care, however; the forms may not deal properly with the terms and conditions to which the participant and the worker have agreed. This “plain vanilla” form follows the law, but includes no extras that may be a consideration in particular pension distribution.

The practitioner must determine if the plan administrator pre-approves QDROs. Preapproval means that the substance of the QDRO complies with the rules and regulations covering QDROs and the pension plan. QDRO approval is very important. A veto by the plan administrator can stop the process, and the alternate payee has no recourse but to start all over again.

The plan administrator is not responsible for the accuracy of the distribution of pension benefits. It is quite possible that the plan administrator could approve a QDRO that incorrectly distributes pension benefits because of a mathematical error made by the practitioner of one or the other spouses.

In writing a QDRO, God and the devil are in the details. A QDRO reflects what the spouses agree to regarding the division and distribution of pension benefits. The QDRO, normally written coincident with or after the divorce is final, is based on the language of the marital settlement agreement. For this reason, it is a good idea that the practitioner who writes the QDROs ' often the attorney of the alternate payee working from the appraisal of a pension appraiser ' makes certain the agreement does what the parties wish it to do relative to the pension and its distribution. Despite this, it is not uncommon for the separation agreement to be unclear about the name of the retirement plan, the method used in allocating benefits, and even the date used in valuing the account balance. Such ambiguities invite difficulties in the preparation of a QDRO.

Theodore K. Long, Jr. is the president of Pension Appraisers, Inc. which operates QdroDesk.com and PensionAppraisalDesk.com.