If your ex-husband, or soon-to-be ex-husband, worked at any time during the marriage for a company that had a pension plan or 401(k) plan, you had better become very familiar with the word QDRO. Similarly, if your “ex” now works for a company that sponsors a pension plan or 401(k) for its employees, this could be the gold mine that you have been waiting for if he owes you past-due child support or alimony. Your future economic security could depend on it. A few horror stories will help illustrate the point. If you decide not to read this entire book, make sure that you at least read the following three true stories. (Names have been changed to protect the ignorant.)
1. Horror Story No. 1
Take the case of Evelyn Schmidt. She had never heard of a QDRO either. In 2001, at the age of 62, she divorced David after a 30-year marriage. At that time, David worked for a large Fortune 500 company. He had been employed there for more than 25 years. Her divorce decree granted her 50 percent of David’s pension and 401(k) benefits through his employer. That’s right: the company has two retirement plans for David, not just one. One of them is a defined benefit pension plan that will pay him more than $3,000 per month for life when he retires, and the other is a 401(k) defined contribution plan. The pension plan is valued at $240,000. The total account balance in the 401(k) is $380,000.
According to the divorce decree that was entered by the court and signed by the judge, Evelyn was to receive half of David’s future pension annuity that was attributable to the years of the marriage. This alone would have provided her with more than $1,400 per month from the pension plan for her entire lifetime. She was also awarded half of his 401(k) plan in the amount of $190,000, plus investment gains or losses until the date of actual distribution.
As it turned out, Evelyn’s attorney never prepared a QDRO, even though her divorce decree granted her a share of the pension and 401(k) plan. In February 2002, David Schmidt died. The result? Evelyn will never see a penny from David’s retirement plans. Why? One simple, but catastrophic answer. A QDRO was never prepared by her attorney and submitted to David’s company for review and approval. After David’s death, Evelyn quickly took a copy of her divorce decree to the plan administrator. She showed them the applicable section of her divorce decree, which clearly indicated that she was awarded half of her ex-husband’s pension and 401(K) benefits. She even showed them the judge’s signature on the decree. The plan administrator’s response? “Sorry, but because we never received and approved a QDRO before your ex-husband’s death, you are not entitled to any benefits from the pension or 401(k) plan.” Does Evelyn have any recourse against her ex’s company? Unfortunately, the answer is no. Her only recourse may be a malpractice suit against her attorney for failing to draft a proper QDRO in her case.
2. Horror Story No. 2
Mary Owens was divorced from Bob in 1991. In their separation agreement, Mary was awarded $100,000 from Bob’s 401(k) plan through his employer. Mary thought that when Bob retired, she would receive her share of the 401(k) benefits from the plan. After all, the separation agreement was clear: $100,000 belonged to her. As the years went on after the divorce, Mary lost touch with Bob. She didn’t even know where he lived. Sometime in 1998, Bob quit his job and, unknown to Mary, cashed-out his entire 401(k) plan. When Mary contacted the plan administrator in 1999 to inquire about her share of the 401(k) benefits, she was told that Bob had cashed-out the plan when he quit last year. When Mary said that she was entitled to $100,000 from the plan, she was told that no QDRO was ever submitted to Bob’s employer for review and approval. As a result, when Bob applied for a distribution of his 401(k) benefits, the company had no choice but to pay Bob all of the benefits accumulated under the plan. Is Mary out of luck? Unfortunately, the answer is yes. Once the company made the total distribution to Bob in accordance with the terms of their own plan, it is certainly too late to submit a QDRO now. There are no more funds remaining in his account. A QDRO today would accomplish nothing. What are Mary’s options now? She could sue her divorce attorney for malpractice for not preparing a QDRO in a timely manner. Alternatively, she could pursue Bob, either directly or through a lawsuit, to reclaim her share of the 401(k) benefits. Either choice could prove to be difficult and expensive.
If Mary had only heard of the term QDRO, she would be $100,000 richer today. And to make matters worse, she also found out that if a QDRO had been prepared when she divorced in 1991, the company would have given her the $100,000 right away. They would not have made her wait for Bob to retire — many companies like to cash-out alternate payees under QDROs as soon as the QDRO is approved, even though the participant is not yet eligible for a distribution. In this manner, they do not have to maintain separate records for alternate payees and trace investment gains or losses over a period of time. Imagine, if Mary had received her $100,000 in 1991 through a properly drafted QDRO and invested it, it could be worth more than $200,000 today.
3. Horror Story No. 3
Susan divorced Jim in 1997. As part of their property settlement agreement, she was awarded 50 percent of Jim’s pension benefits through his employer starting when Jim retires. No QDRO was ever prepared and in 1999, unknown to Susan, Jim accepted an early retirement buy-out offer from his company, which pays him $4,000 a month for life. He also elected to receive his benefits in the form of a single life annuity, which means that on his death, all benefit payments will cease. It wasn’t until July 2002 that Susan found out about Jim’s retirement years earlier. When she contacted the plan to inquire about her 50 percent share of the pension, she was told that no QDRO had ever been submitted to the company. Susan contacted an attorney to draft a QDRO today that would give her 50 percent of Jim’s monthly pension benefits. Although it is certainly not too late to draft a QDRO (because Jim is still alive and receiving a pension), Susan will find out that certain restrictions are imposed on QDROs drafted after someone retires. For example, it is now too late for her to receive retroactive pension payments that date back to the time of Jim’s retirement almost four years ago. Remember, had a QDRO been drafted in a timely manner when they divorced, Susan would have started to receive her share of the pension in 1999, when Jim retired.
But more of a loss is the fact that it is too late to provide Susan with a guaranteed lifetime of pension income. Because Jim had already retired and elected a single life annuity, Susan can only receive her share of the benefits for as long as Jim is alive and receiving a pension. Once Jim dies, Susan’s share of the pension will also stop. Again, had a QDRO been prepared before Jim’s retirement, it could have provided Susan with a pension for the rest of her life. Now, she can only hope that her ex-husband lives a long life so that she can continue to get her half of the pension.
4. Congress Created QDRO Laws in 1984
When Congress created the QDRO laws in 1984, its intent was to provide a vehicle for former spouses of pension plan participants to receive their rightful marital portion of their ex-spouse’s pension benefits. After all, the pension was a marital asset subject to equitable distribution on divorce. So Congress decided that if the courts held that a former spouse was the co-owner of the pension, it was about time to provide a mechanism for companies to be allowed to pay a portion of a participant’s pension benefits directly to a former spouse as called for in the divorce decree. Before QDROs came into existence in 1984, a plan participant’s rights to his own pension benefits was paramount and untouchable. Once vested, the benefits were nonforfeitable. No one but the participant could receive the benefits. Not even creditors could go after a participant’s pension benefits during a bankruptcy proceeding. ERISA’s