The coronavirus pandemic could give estranged couples something else to fight over: shrinking retirement accounts stuck in a bureaucratic limbo between courts and plan administrators.
Retirement account-splitting agreements known as qualified domestic relations orders (QDROs) stalled by the Covid-19 outbreak must be amended post-quarantine, attorneys say, to make up for the losses benefits-seeking spouses are suffering right now.
QDROs typically take months to make their way from state courthouses to the plan administrators who then divide the corresponding retirement savings between participants and the alternate payee, usually a former spouse. In some cases, spouses that are separated but not legally divorced can get a QDRO if plan rules allow it.
The court orders apply to qualified retirement plans other then individual retirement accounts.
QDROs that have stalled anywhere along the way in recent weeks offer no protection, benefits lawyers warn, against the balance-shrinking might of tumultuous stock prices and the $100,000 in emergency withdrawals authorized by the recent stimulus bill.
Those most at risk, according to Mudita Chawla, a family law attorney at Chemtob Moss Forman & Beyda, LLP in New York City, are filers whose paperwork doesn’t factor in the potential appreciation or depreciation of assets in dispute.
“There’s going to be a lot of post-judgment litigation about what the alternate payee is entitled to,” Chawla said of the recalibration required once the QDROs process resumes. Those renegotiations could happen in or out of court, and will likely involve some plan administrators, she predicted.
The emergency access Congress gave workers “financially affected” by Covid-19 to their retirement dollars can’t be blocked by an alternate payee with an unfinished QDRO, warned Louise Nixon, CEO and founder of California-based QDROCounsel. That means if a participant pulls money out now, the non-withdrawing spouse loses out on a fuller lifetime benefit.
“You can only divide money that’s still in the account,” she said.
Advocates at the nonprofit Pension Rights Center said they aren’t aware of hard data regarding the number of QDROs executed per year, but they encourage anyone due retirement benefits to claim them.
By The Numbers
Chawla said QDROs built around a negotiated sum, such as a $100,000 payout, rather than a percentage of the accrued assets may have to go back to court to recoup pandemic-related losses.
“The value of these accounts is dropping drastically. We don’t know if they’re going to go back up,” she said of the harsh reality facing stock-heavy retirement plans.
Two ways Chawla said QDRO filers could proceed include:
- Pure violations: QDRO filers argue that they didn’t receive the exact figure (such as $100,000) specified in their court-authorized agreement, so the filing must be adjusted accordingly or resubmitted.
- Fine-tuning: QDRO filers still going through the process would ask to renegotiate the terms or seek mediation to account for potential benefits wiped out during quarantine.
If the financial hit has been particularly devastating, Chawla said a case could be made for seeking assets outside the participant’s retirement accounts to make alternate payees “whole.”
“If you’re expecting $250,000 to get you through the rest of your life, where else is that money going to come from?” she said.
Plan administrators could get dragged into these battles to verify the “intent” of pending QDROs, according to Chawla.
“The plans aren’t and shouldn’t be in the middle,” she said. “But I can see that happening because there might be no other alternative.”
Nixon described a QDRO she filed in January as perfectly illustrating how quickly everything has fallen apart.
The two parties agreed to split a set amount of money. The account has shrunk by half since then. And inoperable courts make it impossible to fix the ongoing damage.
“Now there’s not enough money in the account to pay her,” Nixon said, adding, “Nobody counts on a global pandemic when they’re writing these documents.”
Steven Abel, founder of Abel QDROs in New York, stressed that evaporating account balances hurt both parties in QDRO cases. He said weaving gains or losses clauses into the court orders can help filers better control their financial stake. But a bear market is still going to take its toll.
Time, and neglect, are far bigger threats to potential QDRO beneficiaries in his opinion.
Abel estimated that maybe 25% of divorce cases that would benefit from filing a QDRO actually do so. Even those that are aware of the issue, often let things slip. As evidenced by the QDRO cases Able said he’s filed decades after couples officially divorced. “There are those who need them and agree to them but still don’t do it,” he said.
That lack of follow through can be costly.
“One day you wake up and the money’s gone,” Abel said of the worst case scenario.
If nothing else, Nixon said this crisis has spurred indecisive parties to take QDROs more seriously.
“People are making sure to get things lined up so they can file once this is over,” she said.