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Attorney Malpractice
Qualified Domestic Relations Orders


Troyan, Inc. believes it is asking too much of family lawyers when negotiating and preparing Domestic Relations Orders to expect them to dot every i and cross every t in formulating Property Settlement Agreements and Divorce Decrees that have ERISA implications. Ideally, every Family Lawyer should be conversant with ERISA, but it is unrealistic to expect all of them to be. Moreover, we do not think it was the intent of Congress to ask the impossible of family practitioners or to make a suit for legal malpractice the sole recourse of an ERISA beneficiary harmed by a lawyer's failure to navigate the treacherous shoals with which the modern state-federal law of employee benefits abounds.

ISSUE:
WHAT IS A REASONABLE LEVEL OF PERFORMANCE THAT A CLIENT MAY EXPECT FROM A FAMILY LAWYER REGARDING THE DIVISION OF EMPLOYEE BENEFITS UPON DIVORCE?

This Practice Aid seeks to cover the basic steps and procedures to be considered by the practitioner upon being retained in a divorce matter involving employee benefits. Throughout this Practice Aid we will use the term “employee benefits” rather than “pension benefits” in order to make clear to the practitioner that the scope of his or her assignment is considerably broader than the Titled Spouse’s “pension”. It is suggested that the practitioner consider the term “pension” a term of limitation. Plan Administrators may consider a request for “pension data” as limited to a participant’s Qualified Defined Benefit Plan. The result can be the innocent omission of vital benefits data. When dealing with employee benefits think in terms of a comprehensive “Employee Benefits Program” that includes any plan or arrangement for the deferral of compensation. As the compensation level of the Titled Spouse rises the practitioner must be mindful that the benefits package is likely to include Non-Qualified Plans and Arrangements.

COMMENTARY:
It is essential that the attorney being retained by either party be clear prior to preparing a Retainer Agreement as to the time and services that are required to properly render the services indicated herein. The inexperienced practitioner fails to anticipate the effort required in negotiating and finalizing the employee benefits aspect of the case. As this Practice Aid will opine, employee benefits are usually the largest or second largest marital asset. Generally, the Titled Spouse’s Employee Benefits Program will be the most complex marital asset. Be sure that your client is clear on both the costs to find and value an Employee Benefits Program as well as the costs to negotiate and draft the appropriate Domestic Relations Orders against Employee Benefits Programs.

THE SIGNIFICANCE OF DISCOVERY AND PENSION EVALUATIONS
YOU CANNOT VALUE AND DIVIDE EMPLOYEE BENEFITS THAT WERE NOT FOUND OR REVEALED IN THE DISCOVERY PROCESS.

The inexperienced practitioner performs minimal or no discovery regarding the Titled Spouse’s Employee Benefits Program. Too often an attorney representing the non-titled spouse relies upon a benefit statement provided by the Titled Spouse as the sole basis for resolution of the Employee Benefits aspect of the case. It is emphasized that the burdened attorney is the attorney representing the Non-Titled Spouse. It is the obligation of this attorney to find, value and allocate the Titled Spouse’s total Employee Benefits Program. The inexperienced attorney representing a Titled Spouse may in good faith accept an employee benefits statement as dispositive regarding the extent of the Titled Spouse’s Employee Benefits Program. This may not be good lawyering but this absence of Discovery on the part of the Titled Spouse’s attorney is unlikely to immediately place his or her client in harms way. This is not to imply that the knowing failure of such attorney or a client to make full disclosure may not result in subsequent adverse results. Of immediate concern is the fact that the interests of the Non-Titled Spouse may be fatally jeopardized by the attorney representing such Non-Titled Spouse to accept without question or further discovery an employee benefit statement provided by his or her adversary. DISCOVERY regarding the Titled Spouse’s full employee benefits package is an early and mandatory obligation of the attorney representing the Non-Titled Spouse. No responsible attorney representing a Non-Titled Spouse can effectively present his or her case absent the type of discovery elaborated upon in this Practice Aid. Discovery is essential whether the settlement mode is Immediate Offset* or Deferred Distribution**.

*IMMEDIATE OFFSET SETTLEMENT:


Step I.

Conduct comprehensive Discovery to find the Titled Spouse’s total Employee Benefits Program

Step II

Compute the present cash value of each component of the Titled Spouse’s Employee Benefits Program

Step III

Compute the present cash value of the marital portion of Step II, based on your jurisdiction’s methodology.

Step IV

Assign to the Non-Titled Spouse his or her equitable portion of the Step III present cash value in exchange for a waiver of any rights to the Titled Spouse’s Employee Benefits Program.

QUERY:
Is Troyan, Inc. advising that a comprehensive pension evaluation of the Titled Spouse’s Employee Benefits Program is a necessary first step regardless of the settlement mode finally adopted. YES!

**DEFERRED DISTRIBUTION SETTLEMENT
Rather than an offsetting present cash value distribution to the Non-Titled Spouse, the parties agree that the Non-Titled Spouse will at a subsequent date participate in the distribution of employee benefits otherwise payable to the Titled Spouse. For the Non-Titled Spouse to receive all or a portion of the Titled Spouse’s Employee Benefits Program it is necessary to prepare a Qualified Domestic Relations Order regarding each such entitlement.

Once again, regardless of the settlement format eventually adopted the process begins with meaningful Discovery of the Titled Spouse’s full Employee Benefits Program.

CAUTION:
Do not use an Immediate Offset Pension Evaluation as the basis for a Domestic Relations Order. In virtually every situation it is not possible to mathematically equate a future monthly accrued benefit with a current present cash value. The Immediate Offset Pension Evaluation will give the practitioner a clear indication of the current worth of the Titled Spouse’s Employee Benefits Program. This worth enables the practitioner to determine if the Immediate Offset methodology is to be employed in the instant matter. If the practitioner elects to use Domestic Relations Order(s) then the only function of the Immediate Offset Pension Evaluation is the delineation of benefits found therein.

DISCOVERY THE NEGLECTED ELEMENT OF THE QDRO PROCESS
It has been the experience of Troyan, Inc. based on performing in excess of 55,000 employee benefit evaluations that there are times when a Titled Spouse forgets the scope of his or her entitlements. Occasionally, the Titled Spouse deliberately fails to disclose the full scope of his or her retirement benefits. THE FOLLOWING SCENARIOS ARE INTENDED TO REINFORCE THE NECESSITY OF COMPREHENSIVE DISCOVERY. The names of the employers in these illustrations have been changed, however the benefits discussed are real.

ILLUSTRATION # 1.
For example, assume the Titled Spouse is an airline pilot employed by Blue Sky Airlines. She provided her attorney with a statement regarding her:

BLUE SKY AIRLINES PILOTS RETIREMENT PLAN
Based on this statement the parties settle the pension part of the case. Had the attorney representing the Non-Titled Spouse performed discovery with Blue Sky he or she would have become aware of and valued the following additional plans:

BLUE SKY PILOTS MONEY PURCHASE PENSION PLAN (this plan replaced the Blue Sky Pilots Target Benefit Plan)

BLUE SKY PILOTS BRIDGE PLAN (a Non-Qualified Plan)

BLUE SKY PILOTS SUPPLEMENTAL ANNUITY (a Non-Qualified Plan)

BLUE SKY FAMILY-CARE SAVINGS PLAN (this is another Qualified Defined Benefit Plan)

Had the practitioner performed discovery he or she would have found, valued and distributed a retirement package of significantly greater value.

ILLUSTRATION # 2
The Titled Spouse need not be a professional to participate in a multiple benefit program. Consider a grass cutter. In the course of the action the grass cutter presented a statement indicating participation in the

ANNUITY PLAN OF THE GRASS CUTTER INDUSTRY
Based on this benefit statement the parties settled the pension part of the case. Had the attorney representing the Non-Titled Spouse performed discovery with the Grass Cutter’s Joint Cutting Board and with the G.B.E.W. he or she would have become aware of and valued the following additional plans:

PENSION, HOSPITALIZATION AND BENEFIT PLAN OF THE GRASS CUTTER INDUSTRY PENSION TRUST FUND (this is a Defined Benefit Plan)

DEFERRED SALARY PLAN OF THE GRASS CUTTER INDUSTRY (this is a Defined Contribution Plan)

ADDITIONAL SECURITY BENEFITS PLAN OF THE GRASS CUTTER INDUSTRY (this is a Defined Contribution Plan)

NATIONAL GRASS CUTTER BENEFIT FUND (this is a Defined Benefit Plan)

NATIONAL GBEW PLAN FROM DAYTONA, FL. (this is a Defined Benefit Plan)

Had the practitioner performed discovery he or she would have found, valued and distributed a retirement package of significantly greater value.

ILLUSTRATION # 3
DISCOVERY REGARDING A MID-LEVEL EXECUTIVE

This illustration highlights what can happen when discovery regarding a mid-level or senior level executive is incomplete. Assume the Wife was a mid-level executive with Werck and provided counsel with a copy of her benefit statement for;

RETIREMENT PLAN FOR THE SALARIED EMPLOYEES OF WERCK & CO., INC.
Had the attorney representing the Non-Titled Spouse concluded that this statement was sufficient the following parts of the benefit package might not have been discovered.

WERCK & CO., INC. EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN

WERCK & CO., INC. SUPPLEMENTAL RETIREMENT PLAN (this is a Non-Qualified Plan)

WERCK & CO., INC. DEFERRAL PROGRAM (this is a Non-Qualified Plan)

WERCK & CO., INC. EXECUTIVE INCENTIVE PLAN (this is a Non-Qualified Plan)

WERCK & CO., INC. ANNUAL INCENTIVE PLAN (this is a Non-Qualified Plan)

WERCK & CO., INC. STOCK OPTION PLAN. To value this plan requires extensive discovery as Stock Option Plans are often “merged” into newer plans. For example with Werck:

1981 INCENTIVE STOCK OPTION PLAN

1981 NONQUALIFIED STOCK OPTON PLAN

1987 INCENTIVE STOCK PLAN (replaced the 1981 plan)

1991 INCENTIVE STOCK PLAN (replaced the 1987 plan)

COMMENTARY:
At this point it should be clear to the practitioner that prior to preparation of a Property Settlement Agreement it is essential that Comprehensive Discovery with the Titled Spouse’s current, prior and concurrent employers be properly conducted. Absent such discovery it is most unlikely that the attorney representing the Non-Titled Spouse has properly represented his or her client. Regarding mid-level and Highly Compensated Executives, Troyan, Inc. suggests use of an experienced pension evaluation firm, skilled in the area of Executive Compensation.

THE NEXT STEP IN THE QDRO PROCESS IS ANALYSIS OF THE DATA AND VALUES ESTABLISHED AS A RESULT OF DISCOVERY.
It is at this stage that the practitioner will formulate a preliminary strategy to determine if the settlement mode that most advantages his or her client is Deferred Distribution and the preparation of one or more Domestic Relations Orders or Immediate Offset.

Data Acquired During the Discovery Phase of the Case.

All “vested deferred” benefits from a prior employer’s Qualified Defined Benefit Plan(s).

All undistributed account balances from prior Defined Contribution Plans, e.g. 401(k), Thrift, Saving Plan(s).

All loans or distributions from prior Defined Contribution Plans.

From the Titled Spouse’s current employer:

His or her monthly accrued benefit(s) from all Qualified Defined Benefit Plan(s)

Account Balances from all Individual Account Balance Plans, e.g. 401(k), Thrift, Saving Plan(s).

Regarding Non-qualified Plans:

Stock Option Plans

Restricted Stock Plans

Excess Benefit Plans

Executive Compensation Plans

For the most highly compensated individuals a good place to begin discovery is with the firm’s Proxy Statement.

Regarding Non-Qualified plans the above list is not complete. If a matter arises regarding a highly compensated executive it is suggested that you contact Troyan, Inc.

Upon completion of this part of the process respective counsel will have knowledge of each plan in which the Titled Spouse has an interest and the monthly accrued benefit from each Defined Benefit Plan and the Individual Account Balances in each Defined Contribution Plan.

The procedures to place a present value on Executive Compensation are somewhat more complex, however such discussion is beyond the scope of this Practice Aid. Nevertheless, the experienced practitioner recognizes that while Stock Options can be made to appear complex to evaluate and assign in divorce, this need not be the case.

CAUTION:
The vast majority of employers will not accept or Qualify a Domestic Relations Order against a Non-Qualified Plan. This is not to be interpreted to mean that Non-Qualified Plans cannot be assigned in divorce. For advice regarding negotiating and drafting against Non-Qualified Plans contact Troyan, Inc..

DRAFTING ADVISORY REGARDING DEFINED BENEFIT PLANS.
The content of a Domestic Relations Order is determined by the content of the underlying operative instrument, i.e. the Property Settlement Agreement or the Final Judgment of Divorce. Central to the practitioner’s awareness on this topic is the fact that:

The terms of the Domestic Relations Order cannot vary from the provisions of the underlying instrument. All parties are bound by the underlying instrument. The underlying instrument is the controlling document. Be clear; a Domestic Relations Order is an instrument of communication it is not an opportunity to renegotiate a previously agreed upon Property Settlement Agreement.

Troyan, Inc.’s experience after preparing more than 13,000 Domestic Relations Orders is that too few practitioners recognize the significance of preparation prior to crafting the Domestic Relations Order portions of the Agreement. Often, the Agreement is entered into after days of protracted and exhausting negotiations. Alternatively, settlement is the outcome of protracted exchanges between counsel, each under great pressure from their clients to complete the negotiations. Such negotiations tend to produce Agreements not fully anticipated by either attorney at the outset of the negotiations. At the culmination of this exhausting process, attorneys must put the settlement on the record or race to draft an Agreement. Such circumstances are commonplace, however, stress and the need for haste are not valid defenses for a challenged attorney. Be prepared! Work closely with your QDRO attorney. Try to avoid agreements that have not been examined by your QDRO attorney. The experienced practitioner must be prepared to effectively delineate his or her clients positions in such manner that the client is not subject to unanticipated and unfavorable outcomes. The inexperienced practitioner incorrectly focuses on the Order rather than the Property Settlement Agreement. The time to negotiate and implement a client supportive strategy is when the underlying instrument is prepared. It is too late beyond this point! In the analysis that follows the key components of the underlying instrument are developed. These components are the provisions that will be inserted directly into the Domestic Relations Order, which upon Qualification by the Plan Administrator becomes the Qualified Domestic Relations Order.

CAUTION:
The reader will observe that the above text suggested that you work closely with your QDRO attorney. Be cautious about relying on a non-lawyer to prepare or advise you regarding the preparation of a legal document. The professional standards of an attorney who retains a non-lawyer to prepare a legal instrument may be subject to question. Should a dispute arise with your client and it is established that you relied upon “legal” advice and documents prepared by a non-lawyer your position is likely to be weakened.

Essentials of the Underlying Instrument. The key elements of the negotiation and allocation of benefits. Types of benefits to be separately negotiated and assigned.

The practitioner recognizes that there are two separate and distinct components to the assignment of Retirement Benefits that must be specifically and dispositively addressed in the Property Settlement Agreement (or Final Judgment of Divorce when the assignment is decreed by the court).

A.Retirement Benefits Payable Over the Lifetime of the Participant Spouse (living benefits)
B.Death and Survivor Benefits

From items “A” and “B” above it is to be noted that there are two separate and distinct elements to the term “Retirement Benefit”, that are to be covered in detail in the Property Settlement Agreement and or Decree of Divorce. If the practitioner fails to separately and distinctly define the Alternate Payee’s interest in each of the two forms of benefit the probability of loss of entitlement and subsequent client dissatisfaction is enhanced. For ease of discussion and identification “A” above will be termed “Living Benefits” and “B”, will be limited to distributions subsequent to the death of the Titled Spouse. Note that the death of the Titled Spouse may occur before or after retirement.

CAUTION:
To achieve the desired assignment of benefits to an Alternate Payee it is essential for the practitioner to understand that the term “Retirement Benefits” as interpreted by a Plan Administrator will not be deemed to include the assignment of Death or Survivor Benefits. Again for emphasis, such failure to specifically provide for death and or survivor benefits will result in the likely loss of such benefits by an Alternate Payee. This mandate that the practitioner focus on the necessity of specifically addressing these separate and distinct components in the Property Settlement Agreement cannot be overstated.

Qualified Defined Benefit Plans and the Assignment of Living Benefits to an Alternate Payee.

There are two widely accepted methods that may be employed to effect a division of Living Benefits as regards ERISA, Federal, Military, Railroad, State/Municipal Retirement Plans of the Defined Benefit type. Depending upon the law of your jurisdiction and the skills of the practitioner you will opt for one of the methods discussed.

OBSERVATION:
It has been Troyan, Inc.’S experience that each jurisdiction’s case law format is not always used by adroit practitioners. On occasion the relative sophistication of the practitioners determines the allocation language and format.

Suggestion:

When any doubt exists as to how a Plan Administrator could interpret language suggested by your adversary, consult with your QDRO attorney, prior to accepting such language.

Each of these methods involve the use of a marital fraction. In a 1983 article Troyan termed this fraction “Coverture Fraction”. All fractions have both a numerator and a denominator. The two forms of the Coverture Fraction are:

1.Traditional Coverture Fraction (Time-Line Method)
2.Fixed Dollar Coverture Fraction
The numerator of each of the above Coverture Fractions measures the period of time the parties were married and the Titled Spouse was accruing benefits up to the jurisdiction’s End of Marriage Date, e.g. Date of Filing, Date of Complaint, Date of Separation. The denominators of the fractions are very different, producing significantly different benefits for an Alternate Payee. Prior to determining which denominator format to apply the practitioner should understand the term “Referencing Benefit”.

REFERENCING BENEFIT: Traditional Coverture Fraction (“Time Rule”)

The actual benefit payable to the Titled Spouse at his or her benefit commencement date. Normally, this will be the point of retirement of the Titled Spouse.

REFERENCING BENEFIT: Fixed Dollar Coverture Fraction

The total accrued benefit of the Titled Spouse as of the benefit determination date. The determination date for this referencing benefit includes but is not limited to any of the following:

•Date of Filing of Complaint
Date of Separation
Date of Divorce
Any Date Agreed to by the Parties.
The informed practitioner quickly realizes that the Traditional Coverture Fraction (“Time Rule”) will in virtually every scenario favor an Alternate Payee, while the Fixed Dollar Coverture Fraction will in virtually every scenario favor the Titled Spouse.

PLEASE NOTE:
Troyan, Inc. has prepared a series of illustrations and expanded discussion of the operation of the Coverture Fraction. Attorneys using our services who are interested in these detailed illustrations and analysis may request same in writing on your letterhead from Troyan, Inc..

THE ATTORNEY’S RESPONSIBILITIES DO NOT END UPON RECEIPT OF A LETTER OF QUALIFICATION FROM THE PLAN ADMINISTRATOR!
It is essential that the practitioner examine the text of this qualification letter to confirm that the Plan Administrator’s interpretation of the language of the QDRO is consistent with that of the attorney. Confirm that your intent and the Plan Administrator’s interpretation are consistent. Do not assume such consistency. To file this letter from the Plan Administrator without full examination of its contents may result in unanticipated surprise when distributions to the Alternate Payee begin.

Finally the attorney must advise the client that this process does not end with the Qualification of the Order. The sole interest of the parties is the distribution of benefits. Since this will be a future event you cannot at the time of divorce advise an Alternate Payee as to the correctness of distributions that may take place many years in the future. Plans are merged, terminated and go into Trusteeship (as a result of underfunding they are taken over by a govt. agency). There are likely to be future tax ramifications. It is not unthinkable (especially in closely held plans) that the Titled Spouse simply removes the money and leaves the state. These are issues that must be made known and explained to an Alternate Payee. You may wish to advise your client that at the time of receipt of either lump sum or annuity distributions that he or she retain the services of an appropriately qualified expert able to confirm the correctness of such distributions. Your sign-off letter should be comprehensive to the extent that any subsequent claim by a client of not being informed of such contingencies may be rebutted by such sign-off letter.