How can I avoid QDRO problems when drafting my MSA?

Divorce can be a difficult transition—emotionally, financially, and legally. But the process can be even more complicated when retirement accounts are involved. Simple mistakes in the drafting of an Marital Settlement Agreement (“MSA”) can lead to years of litigation, the loss of benefits, tax liability, and simply delays that can delay benefits. These mistakes can cost you money and peace of mind. That’s why careful drafting of an MSA is essential. Here are just a few (there are many more!) tips to keep in mind:

1. Be sure you have a complete and accurate list of retirement accounts. You and spouse may think you each have just one 401(k). However, it’s very possible that there’s an old 401(k) from a former employer and an IRA. So, it’s worth taking the time to write out a complete list of your retirement accounts, taking the time to go back and investigate everything. Then include that information in your MSA (even listed out in a table). It’s also important to identify each plan formally. “Wife’s 401(k)” may not be sufficient. You’ll want the formal name which will read like “ABC Corporation Employee Savings Plan” or “ACME Company Profit Sharing Plan.”
2. Craft clear formulas when dividing Defined Contribution plans. Defined contribution plans are plans that seem like bank accounts, such as 401ks, 403bs, and so on. They are like a pot of money that you and employer pay into which grows over time. When you retire, you can take some or all of it. When dividing defined contributions plans, you will use a formula. If that formula is simple, such as “Husband gets 50% of Wife’s 401k,” your QDRO draft will probably have a lot of questions. The key is to get a robust formula which is very clear. It should address: the date of valuation, the amount or percentage of the transfer, whether investment experience is included or excluded, and (especially if the transfer is a percentage) whether loans are included or excluded. You will probably want to consult with a QDRO drafter to be sure your formula is as you intend it.
3. Craft clear formulas when dividing Defined Benefit plans. Defined benefit plans are plans which will pay out an amount every month once you’ve retired. These are the traditional “pensions” which used to be more common (although there are still plenty of them around). When dividing them, “Husband gets 50% of Wife’s pension” will probably not be sufficient. Usually, the issue is that the pension was partially earned (the years of employment) prior to marriage and will continue to be earned after the divorce. For this reason, the courts have developed a tricky formula called the Bangs formula (named for the original case in which it was first established.) Again, you will probably want to consult with a QDRO drafter to be sure your formula is as you intend it.
4. Address all the benefits when dividing Defined Benefit plans. The second issue that comes up when dividing defined benefits plans is accounting for all the benefits that the plan provides. The monthly payment when you retire is certainly the primary benefit but there are many ancillary benefits. These include survivor benefits, early retirement subsidies, cost of living adjustments, supplement and temporary benefits, disability benefits, death benefits, and variety of lump sum payout benefits. There could be others. For this reason, the key to dividing a defined benefit plan is to obtain plan summaries and draft QDRO language from the Plan; these documents will usually make clear what benefits are available and how you and your spouse might divide them. Again, you will probably want to consult with a QDRO drafter early to be sure you are addressing all the benefits that are available.
5. Decide who will draft your QDROs early and consult with them early. As mentioned above, one of the smartest moves in any divorce involving retirement assets is to bring in a QDRO drafter early—ideally before the MSA is signed. A seasoned drafter can review proposed MSAs to confirm that the proposed language can lead to an acceptable and effective QDRO, spot pitfalls, and ultimately save the parties a great deal of money and headache. Early involvement also ensures that the QDROs will be ready faster so that there are fewer lingering disputes. In other drafts, it’s critical to work with a QDRO drafter and to draft the MSA for the QDRO.

At Weinberg & Schwartz, we are routinely consulted when MSAs are being drafted. If you’re drafting an MSA with divided retirement benefits, please do not hesitate to contact us. We’re happy to help!