New QDRO Costs To Be Factored In Divorce
By: Kathleen B. Vetrano, Esquire and Sarinia M. Feinman, Esquire
King of Prussia, PA and the Philadelphia Main Line
Be prepared for an irate telephone call from a client whose retirement plan was divided by Qualified Domestic Relations Order (“QDRO”) because the plan administrator assessed costs to the participant. On May 19, 2003, the Department of Labor (DOL) issued Field Assistance Bulletin 2003-3, permitting a plan administrator to deduct a “processing fee” from a participant’s defined contribution plan account, such as a 401(k) or profit sharing plan, for processing a QDRO. This is not the case for defined benefit plans, such as pensions, as they are still protected and cannot be accessed by plan administrators.
To divide a participant’s retirement plan, a divorcing couple must submit a QDRO to a plan sponsor in order to divide the funds and retain tax benefits. Prior to the issuance of this new bulletin, since employers are responsible for administering the QDROs under the Employee Retirement Income Security Act of 1974 (ERISA), one individual in particular was not targeted with the costs for the processing of the plan. In fact, employers could choose between paying the costs themselves and splitting them among all plan participants. Today, for those participants who are getting divorced, they are no longer limited to paying for the cost of their attorney, but they are also being charged by their employers for the plan’s legal and accounting costs associated with splitting up their defined contribution plans in equitable distribution.
We will see this cost assessment first with larger companies that have altered their retirement plans to charge individual participants accounts’ for the cost to process the QDRO. However, as more businesses become aware of this new policy, they are likely to do the same.
With the amendments to the Divorce Code of 2005, a new factor, §3502(a) (10.2), must be considered in equitable distribution: the expense of sale, transfer or liquidation associated with a particular asset, which expense need not be immediate and certain. It is imperative to identify this cost of transfer from the plan administrator before the marital estate is divided. In addition, prudent attorneys may want to present evidence on the costs for the attorneys to prepare and implement the QDRO. Clients who are the participants in the defined contribution plans subject to QDROs need to be prepared for the assessment of these costs before they are imposed. Furthermore, cautious attorneys may opt to modify their form agreement or “in court agreement checklist” to add for cost allocation or sharing. Specifically, if the attorney represents the participant, there may be a desired provision for prompt reimbursement or offset, within the agreement or checklist. Thus, in order to alleviate the growing problem of unanticipated costs and fees incurred disproportionately, after the agreement is signed or the court has ruled, care should be taken to address them early to ensure an “equitable” distribution for both parties.
Kathleen B. Vetrano, Esquire practices family law at Vetrano & Vetrano, a law firm in King of Prussia. She is a fellow of the American Academy of Matrimonial Lawyers and of the International Academy of Matrimonial Lawyers. She has chaired the elder law committee of the ABA’s family law section since the committee’s inception in 1994. Ms. Vetrano is also co-founder of the Collaborative Family Law Affiliates and trains lawyers in the collaborative process for divorce.
Sarinia M. Feinman, Esquire is a partner at Vetrano|Vetrano & Feinman LLC, King of Prussia, Pennsylvania, limiting her practice to family law.
View this Bulletin at http://www.dol.gov/ebsa/regs/fab_2003-3.html.
Act 175 effective January 29, 2005