EZ QDRO LAW Year in Review: Top Five ‘Local’ QDRO Blunders to Leave Behind in 2014

My Look Back at This Year's Most Common QDRO-Related Mishaps

Happy New Year! I thank each and every one of you for another wonderful year here at EZ QDRO LAW. I can only imagine what 2015 holds for us... you, me, and QDROs. (Blissful sigh).

BUT, since we still have a precious few hours of 2014 left, just like every other self-proclaimed Blogger, I cannot resist the opportunity to reminisce -- or as some may see it -- beat a dead QDRO horse. (I assure my readership, no horses were hurt for this post, only poor innocent QDROs.)

I stand in an enviable position with my career: I get to put on a cape every morning and swoop in to save the day (I truly love my job and the amazing attorneys I work with on a daily basis). In many cases, however, my Bat Phone does not ring until "after-the-fact." What I mean is that I am often only called once a property settlement agreement has been signed, or after a proposed QDRO has been submitted to the court and/or plan administrator for approval. In many of these cases, it is immediately evident to me that something is amiss. This is most easily detected on my end when the call starts with an attorney's solemn reading of a plan's denial letter.

It is clear that many of the QDRO-related problems I have been presented with this year are geographically linked. For instance, a state retirement system's mandated and unwieldy QDRO form (hello DOPO). Or a local S&P 500 company that distributes only one 'standard' QDRO model form, unless you know the secret knock. The problem is that the form is anything but standard in terms of applicability to most of its active employees and their former spouses.

Other problems that I’ve seen crop up this year are more universal in nature. In either case, I promise dear reader, there is not a single issue below that I have seen only once, twice, or three (plus) times this year. Most important is that these issues are local, in that they have rattled (even the most seasoned) practitioners right here in Kentucky and Ohio. So if you recognize yourself in this post, you are amongst friends and good company.

Now let's band together and put my Top Five to rest in 2014, along with the proliferation of creepy-vans-turned-food-trucks on Fountain Square, Kim Kardashian’s photos of you-know-what and Ellen DeGeneres’ Oscar photo tweet “breaking the internet” (yes, I looked at the former), Pharrell's hat (Smokey Bear called...), Alex from Target, Grumpy Cat, and Dumb and Dumber To (sorry AR).

Now, without further ado, and in no certain order:

1. Not Obtaining the COMPLETE Plan Account Statement

Too often I am asked to consult in a case where only the first page of an account statement is submitted. The problem? A participant’s total interest in a plan is the sum of the total vested account balance and any outstanding loan balance. However, many plan statements report outstanding loan balances as a separate line item from the total vested account balance. Commonly, the first page of an account statement only reflects the total vested account balance, which only represents the liquid balance in the plan.  

In a recent consultation case of mine, the attorneys memorialized an agreement wherein the parties decided to equalize their defined contribution accounts, and award a flat dollar amount to Husband from one plan. Great idea. Except one of Wife’s marital accounts had a loan, and that loan did not show up as an asset of the account on the first page of the statement. The result? The ‘total account balance’ appeared to be $100,000.00, but the account balance including the loan was actually $150,000.00.

This meant the Alternate Payee Husband was almost shorted $25,000.00 (his marital portion of the $50,000.00 loan that was taken out by Wife without his knowledge). 

In 2015: Always get the complete account statement.

2. Mixing Coverture

For attorneys practicing domestic relations law in both Kentucky and Ohio ‘mixed coverture’ is as local a dilemma as Skyline versus Gold Star. This is because these two states utilize very different approaches for determining the marital portion of a pension, and attorneys licensed in both states can easily get caught somewhere in the middle.

In Kentucky, the “cut-off date”, or assignment date, for calculating the alternate payee’s share of the participant’s accrued pension benefit is generally the date of divorce. In Ohio, the cut-off date is generally the date of retirement (or date of benefit commencement). 

A coverture fraction is used to represent the portion of the value of the accrued pension benefit attributable to the marriage. The numerator of the fraction represents the total period of time the employee-spouse participated in the plan during the marriage, and the denominator is the total period of time the employee-spouse participated in the plan as of the cut-off date.

The importance of the cut-off date, in terms of proper coverture, translates to what number should be chosen for the denominator of the marital fraction. In Kentucky, the denominator should generally be the total years the employee-spouse participated in the pension through the date of divorce. In Ohio, the denominator should generally be the total years the employee-spouse participated in the pension through the date of benefit commencement. The problem? Using the wrong denominator creates either a significant windfall or shortfall. 

In a recent Kentucky case, the attorney (whose office was located in Ohio) had drafted a QDRO to include a coverture fraction with a denominator reflecting the total years that the employee-spouse participated in the pension through the date of benefit commencement (as typical under Ohio law). However the cut-off date for calculation of the accrued benefit was the date of divorce (as typical under Kentucky law). 

This meant the Alternate Payee Wife was unwittingly stuck with a diminishing fraction as long as Participant Husband continued to work (as a denominator ‘grows’ in years, the represented fraction gets smaller), while the benefit level was fixed as of the date of divorce. Had the attorney instead used a denominator consistent with Kentucky law, the fraction would have been fixed as of the date of divorce, along with the benefit level, so that Wife would not have incrementally lost her rightful share of the marital portion of the pension each year Husband continued to work.

In 2015: Always make sure the cut-off date of the accrued benefit calculation and the denominator of the coverture fraction tie into the same assignment date (i.e., if the cut-off date is the date of divorce, the denominator should be participation through the date of divorce; if the cut-off date is the date of benefit commencement, then the denominator should be participation through benefit commencement) 

3. Not Thoroughly Vetting Mandated State Property Division Forms

Practitioners in both Ohio and Kentucky must struggle through a myriad of statutes and regulations to assign state government-sponsored retirement plans in divorce. Moreover, both states impose the use of mandatory forms, which cannot be altered in any way. The problem? When the rigidity of the mandatory forms cannot accommodate the intent of the parties. The real problem? When this is discovered post-decree.

Post-decree problems of this kind show up on my doorstep on a weekly basis. But for brevity's sake, here are just two recent consultations that come to mind:

• The parties agreed to assign a flat dollar amount from an Ohio Public Employees Retirement System (OPERS) defined contribution plan, to be awarded to the Alternate Payee immediately upon approval of the Division of Property Order (DOPO). However, such division is not permitted by the DOPO form when the Participant is participating in the defined contribution program. Instead, the Alternate Payee must receive payment as a percentage of the mandatory coverture fraction. The first problem here is that while the Participant is still employed, there is no way to freeze the denominator in order to ‘fix’ a dollar amount equivalent. The second problem is that the DOPO pays the Alternate Payee only when the Participant receives payment, and thus, immediate payment in this case is not an option.
  

• The parties agreed to divide a Kentucky Retirement Systems’ pension by utilizing the mandatory coverture fraction, but then further multiply the marital fraction by 25% to calculate the Alternate Payee’s award. However, such division is not permitted by the Kentucky form. Instead, when using a coverture fraction with the Kentucky form, the resulting percentage must further be divided by two (i.e., a 50%-50% split of the marital portion). The problem here is that while Participant is still employed, there is no way to freeze the denominator to in order to ‘fix’ a percentage equivalent. Therefore, in this case, there is simply no way to manipulate the Kentucky form in a manner as to comport with the parties’ intent.

In 2015: Always read the applicable state form before sitting down to negotiate. When in doubt, also read the controlling statutes and regulations. No shortcuts here, unfortunately.  

4. Blindly Downloading a Shared Interest Model QDRO

There are two basic approaches when drafting QDROs for defined benefit plans:  the Separate Interest Approach and the Shared Interest Approach. It is critical to understand the distinction between the two approaches, i.e., whether the duration of benefits is based on the alternate payee’s lifetime or the participant’s lifetime. Failure to appreciate this crucial distinction is the cause of many failed QDROs, and worse yet, accepted QDROs that do not carry out the parties’ intent (and best interests). For the alternate payee, it may even mean the difference between receiving a life annuity, and receiving nothing at all.

One local very Large Company is kind enough to offer its QDRO Procedures and QDRO Model Forms on-line. However, the only QDRO Model Form provided on-line for the pension plan is for a Shared Interest QDRO. In fact, the company does not offer – or even mention – its Separate Interest QDRO Model Form, unless specifically requested.

The problem? Attorneys innocently download the Shared Interest Model Form without comprehending its consequences. Each and every time this Form is downloaded and utilized, if the participant is not in pay-status, and the terms have not been expressly and meticulously negotiated, both parties are prejudiced.

In two very similar consulting cases of mine, both involving the aforementioned Large Company, the parties argued over providing a Qualified Joint and Survivor Annuity (QJSA). That is, because the cost for the QJSA is realized through a benefit reduction. In both cases, the Participant did not want to receive a lesser benefit, and so resisted the award of any survivor annuity. The rub here is that a QJSA only applies with a Shared Interest QDRO. The irony here is that in most cases (where the participant is still actively employed), a Separate Interest QDRO is what is best for both parties, not a Shared Interest QDRO. 

Under a Separate Interest QDRO, the awarded benefit is be paid over the lifetime of the alternate payee. The alternate payee may elect his/her own form of payment and commence benefits at the earliest date allowed by the Plan, regardless of whether the participant has begun receiving benefits as of that date. Once the alternate payee begins receiving the benefit from the Plan, payments to him/her will continue even if the participant predeceases the alternate payee. Thus, a QJSA is not necessary to provide the alternate payee a lifetime of benefits because he/she would already be guaranteed a lifetime of actuarially adjusted benefits (once they commence).  

Further, a Separate Interest QDRO prevents undue burden on the participant because he/she would then be free to elect any form of payment available under the Plan with respect to his/her share of the benefits, including a single-life annuity without any reduction. If the participant were to remarry, he/she can elect a QJSA with a new spouse.  This is one of the advantages of the Separate Interest QDRO. It provides a lifetime of benefits for the alternate payee while at the same time permitting the participant to elect any form of benefits for his/her remaining share.

Neither attorney on either side of either case knew there was even such a thing as a Separate Interest QDRO (thanks to the Company’s nefarious policy of only providing the Shared Interest QDRO Model Form on-line). It is no surprise both cases resulted in unnecessary delay and attorney’s fees. One case needlessly persisted in litigation for over a decade. 

In 2015: Always keep your eyes wide open when downloading model forms.  Understanding the difference between a Shared and Separate Interest QDRO is a must. 

5. Not Just DO-ING IT

It cannot be overstated:  Get the QDRO filed with the Court and submitted to the Plan Administrator without delay.  Follow up.  Make sure the QDRO is approved. 

Just in this past year alone, on numerous occasions, I’ve seen divorced plan participants:

• Die without a designated beneficiary and before a QDRO was approved by the plan (in one particularly memorable case, only days after the newly-retained attorney for the alternate payee contracted my drafting services for a QDRO that should have been prepared years before);

• Quit and withdraw all account funds before a QDRO was entered with the court ;

• Retire and choose a single-life annuity before a QDRO was entered by the court (and thus, before a QJSA could be secured on behalf of the former spouse through the plan);

• Retire and remarry, and choose a QJSA with a current spouse before a QDRO was submitted to the plan (resulting in the inability to obtain survivorship protection for the former spouse from the plan).

In 2015:  JUST DO IT!  This isn’t bar-exam fiction, these are real cases.  These are the types of ill-fated scenarios that often cannot be corrected, resulting in significant loss for one or both of the parties, and great angst for their attorneys.  If you peruse some of my previous blog posts dedicated to what happens when a QDRO is filed decades after divorce, you will see the lack of good humor the higher courts in both Kentucky and Ohio have.  (If you are a glutton, which you must be because you somehow made it to the end of this post, see my previous blog posts dated July 20, July 29, and September 9, 2014).

Thank you for making it to the end, you can now move into 2015.

Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.