Almost every divorce, whether the parties are low-net-worth or high-net-worth (HNW) individuals, involves dividing retirement assets. Failing to divide these retirement assets properly can result in significant, unanticipated, irreversible, negative downstream financial impacts. For this reason, most family law attorneys hire outside “QDRO counsel” to draft qualified domestic relations orders for their clients. This is a very specialized area of law that requires technical precision and more than a passing knowledge of this area of law. In addition, hiring and attorney who specializes in crafting QDRO’s is considerably less expensive than attempting to draft these orders in-house.
Retirement assets are classified as either qualified or non-qualified. Retirement plans that comply with the requirements and parameters of the federal Employee Retirement Income Security Act (ERISA) are considered qualified plans. Retirement plans that do not comport with ERISA are non-qualified plans. Some examples of non-qualified plans are individual retirement accounts (IRAs), stock option plans, deferred compensation plans, supplemental pension plans, and long-term incentive plans. ERISA-qualified plans include such plans as defined benefit plans (i.e., 401(k) plans), defined contribution plans, and many pension plans. The vast majority of all retirement plans are qualified plans.
Non-qualified plans are divided by creating a constructive trust. Essentially, the spouse in whose name the non-qualified plan is held, known as the participant spouse, is required, by court order, to hold the retirement account in trust for his or her spouse until such time as the retirement plan is eligible to be distributed to the spouse in whose name the non-qualified plan is held. Many, many pitfalls exist for the unwary and, for this reason, care must be taken in drafting these orders in such a way that an unscrupulous spouse cannot take advantage of the other spouse.
A few of the most common pitfalls made in dividing retirement assets are discussed in “Avoid Five Costly Mistakes in Dividing Retirement Assets During Divorce” by Connie H. Buffington, published at weathmanagement.com on February 1, 2016. This article also discusses in simple, understandable terms the tax benefits associated with ERISA-qualified plans (e.g., monies placed into a qualified plan do not incur taxes until the funds are withdrawn, and the funds in the qualified plan grow tax free until withdrawn).
If you are a HNW individual who is divorcing and you suffer from the naive impression that dividing retirement plans is a simple matter, you owe it to yourself to educate yourself. If you are an “alternate payee” spouse, which means you are the spouse seeking to demonstrate her interest in her spouse’s retirement plan(s), and your spouse is a HNW individual, your attorney has his work cut out for him.
Oftentimes employer’s will work with their key employees to hide key employee benefit plans. It is not unusual for corporations to create separate retirement plans and other employee benefit plans for key employees that have different plan administrators than those for non-key employees. Locating these plans and plan administrators can be extremely costly and time-consuming. While states like California have very strong disclosure and fiduciary duty requirements for divorcing couples, these protections are of little help if the participant spouse and his or her employer are motivated to hide one or more employee benefit plans. One of the best ways to discover the existence of a concealed employee benefit plan is to hire experienced QDRO counsel who may have uncovered a particular corporation’s key-employee retirement plan while working on another case.
In summary: (1) Ask your divorce attorney to retain an expert QDRO attorney for dividing any ERISA-qualified retirement plans; (2) Work with your divorce attorney in crafting effective orders for non-qualified retirement plans; (3) Work with the QDRO attorney in locating any concealed employee benefit plans; (4) Make sure your divorce attorney notifies opposing counsel of your spouse’s fiduciary duties and duty to disclose; and (5) Be prepared to expend significant funds on securing your rights and interests in the participant spouse’s secret employee retirement benefit plans.