Hernsberger QDRO Law - November 2019
November 2019
QDRO Law Experts for Your Law Firm
401(k) Checklist 5 KEYS TO NEGOTIATE LIKE A PRO
U se this handy tool to maximize your client’s recovery the next time you negotiate the division of a 401(k). There are five variables you must address for every 401(k). Just walk through this checklist and consider the different options. Analyze how each variable creates a different result and you’ll be able to come up with a negotiating strategy. Type of Division Award the spouse a fixed dollar amount or a percentage of the account balance. But keep in mind that earnings, loans, the valuation date, and the possible plan administrator fee will significantly impact the award. The biggest problems arise when parties try to divide only the community property portion of a 401(k). Most plan administrators will not calculate the community property value for the parties. Instead, the parties must calculate it themselves by subtracting the value of the account on the date of marriage from the value of the account on the valuation date. If the records are not available or too difficult to obtain, many times the parties will simply negotiate the approximate value of the community property. Valuation Date Negotiating a valuation date can be deceptively simple. Under Texas law, for instance, the valuation date must be any date during the marriage. In most cases, it will be the date of divorce or mediation. Sometimes, it will be the date the parties separated. It can be deceptive because the valuation date strongly impacts the amount of earnings the spouse may receive. The more time that passes between the valuation date and the date that the funds are distributed to the spouse, the more impact the award or nonaward of earnings will have on the spouse. But, most of all, don’t leave money on the table because you overlooked a critical variable.
Earnings Earnings, gains, and losses can be applied to the spouse’s award from the valuation date until the award is segregated into a temporary account in the name of the spouse. The parties can also negotiate that no earnings, gains, or losses will be awarded to the spouse. This creates a significant problem if the spouse waits a long time after the divorce to submit the QDRO. The amount the spouse receives will be substantially less than if earnings, gains, and losses had been awarded.
If the QDRO is silent with respect to earnings, gains, and losses, the spouse’s award will not include them.
Loans Outstanding loans have the biggest impact on the spouse’s award of any variable.
The parties have two choices.
They can subtract the value of the outstanding loans before calculating the spouse’s award. This option maximizes the employee’s portion. The spouse’s portion of the 401(k) is reduced.
Or they can not subtract the value of the loan before calculating the spouse’s award. This option maximizes the spouse’s portion because it is not reduced by any portion of the loan.
Keep in mind that the spouse can never be ordered to pay a 401(k) loan. Only the employee can repay the loan. And the employee must repay the loan through payroll deduction.
PlanAdministrator Fee Plan administrators are allowed to charge a fee for processing a 401(k) QDRO. In most cases, the fee can be assessed equally between the parties or entirely against the employee or the spouse.
Fees range from $350 to as high as $1,500.
In our experience, attorneys rarely negotiate this expense.
–Judge Stephen Hernsberger
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How to Get RichWithout Hurting the Planet As awareness about the global impact of climate change rises, consumers have started to vote with
In 2009, Interface created and sold over 83 million square yards of carpet without negatively impacting the planet or losing revenue. Anderson chronicles his journey from point A to point B in his book, “Business Lessons from a Radical Industrialist.” According to Inc. magazine, Anderson, who passed away in 2011, was considered “the greenest CEO in America.” His company mastered sustainable innovation, and its patents, products, and processes are revealed in his book, which is as much a guide for entrepreneurs of the future as it is for those of the present. One reader on Amazon reviewed the book as “Inspiring,” writing, “If only the world had more Ray Andersons. The fact that he turned a company reliant on the use of petrochemicals for the production of its core product into [a company] with sustainability as its core ideology and was able to improve his profits is outstanding. Any and every company can learn something from this book.” If you’re trying to lessen your business’s impact on the planet and tap into a market of environmentally conscious consumers, “Business Lessons from a Radical Industrialist” is the place to start.
their dollars for companies that offer greener, more sustainable products and practices. Slowly, that groundswell has caused businesses to shift their priorities and take steps to track and reduce their environmental impact. But long before the green movement began in earnest, there was Ray Anderson — one man who decided to flip the script. company Interface, Inc., and no more environmentally aware than his contemporaries. But when his customers started asking about the environmental impact of his carpets, he dropped into the rabbit hole of environmental research and emerged a changed man. He had a new goal for his $1 billion company: It would take nothing from the earth that the planet couldn’t replace. In 1994, Anderson was 60 years old, the CEO of the modular carpet
QDRO Case Studies: G ary Briscoe is an executive for a large oil company in Houston. He has several large retirement plans. Among the plans are a pension, 401(k), stock options, tax-deferred savings, and a few others. Gary and his then-wife, Doris, divorced in 2011. Doris was awarded 50% of the community property of each of the retirement plans. Unfortunately, no QDROs were prepared. Three years later, in 2014, Doris hired another lawyer to collect her retirement benefits. Doris’ new lawyer drafted QDROs for the pension and the 401(k) and promptly submitted both QDROs to the court for signature. Without batting an eye, the judge signed both QDROs. Doris immediately filed each of them and mailed the plan administrator to request Doris’ money. Gary was not aware of any activity until the plan administrator notified him that they were going to distribute the funds to Doris in 30 days unless Gary filed a formal protest. Gary reviewed the QDROs and was shocked to discover that they did not limit the award to the community property. The QDROs overpaid Doris by millions of dollars. When a QDRO Is a Void Judgment
The Goal
Our goal was two-fold: Suspend the distribution of funds, and have the QDROs vacated.
The Approach
Judge Hernsberger promptly filed an objection with the plan administrator and a motion to vacate with the trial court based on section 9.102 of the Texas Family Code. The court has no authority to issue a QDRO after its plenary power has expired. The court cannot regain the authority to enter a QDRO unless the procedures described in the Texas Family Code, section 9.102, are strictly followed.
In this case, they were not.
The Results
The trial court held that the QDROs were void for failure to comply with Texas Family Code §9.102. Judge Hernsberger sent the order to vacate the QDROs to the plan administrator, and the excess funds were never distributed to Doris.
Gary called his divorce lawyer, who referred him to Judge Hernsberger.
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How Does the 80/20 Rule Apply to QDROs?
SUDOKU
Did you know that 80% of the results you achieve come from only 20% of your efforts? Stated another way, you’re spinning your wheels 80% of the time.
The 80/20 rule is an economic phenomenon that has been observed and documented throughout the world and throughout the ages. For example, in health care, 20% of patients use 80% of health care resources. In Italy in the 1700s, 20% of the population owned 80% of the wealth. In occupational health and safety, 20% of hazards cause 80% of the injuries. The 80/20 principle provides an excellent prescription for where to focus your efforts in negotiating the division of retirement. Find the 20% of activities that are going to make the biggest difference. Focus all of your resources on those activities. Allocate very few resources to the 80% of activities that will only generate 20% of the results. In this issue’s cover article, we describe the five keys to negotiating the division of a 401(k) retirement plan. The lawyer who uses all five keys to negotiate will have accomplished 80% of what has to be done to successfully divide and document the 401(k). On the other hand, the lawyer who omits one or more of the five keys, such as neglecting to negotiate how outstanding loans will be handled, is doomed to spin their wheels and devote additional resources to accomplish the same result.
Be Inspired
Search for the vital few activities that make a difference.
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INSIDE This Issue
Your 401(k) Negotiation Checklist PAGE 1
Is Going Green Good Business? A Look at a Case: When a QDRO Is a Void Judgment PAGE 2 Applying the 80/20 Rule to QDROs PAGE 3 Not Your Ordinary Turkey Shoot PAGE 4
Not Your Ordinary Turkey Shoot THE CRAZY CASE OF JACOBS V. KENT
It began like any other hunting excursion. Neil Jacobs was walking softly through the bushes, looking for a spot to hunker down and watch for a flock of turkeys. The only problem was that someone beat him to that neck of the woods. James Kent had established a
When their case came before the Supreme Court of the 4th District of New York, the courts denied both the motion and the cross-motion. They agreed that Jacobs had assumed the inherent risks of hunting — just not the risks it would be unreasonable to assume, like getting shot by another hunter who thought you were a turkey. Beyond that, the courts did not pronounce judgment because they did not have enough verifiable facts. Jacobs asserted that turkey hunters should not shoot unless they can see the turkey and verify its gender. The court could not determine whether Kent had failed to follow this rule when he shot Jacobs. They also could not determine whether the doctrine of primary assumption of risk, which Kent pointed to in his defense, was even applicable. The court also called into question whether Jacobs had also been negligent. Ultimately, the case didn’t move forward.
hunting spot for himself, and, when he heard rustling and gobbling in some nearby bushes and saw a flash of red, he took aim and fired. Unfortunately, the movement in the bushes was not a turkey. Kent was horrified to find that he had
shot Jacobs. Jacobs promptly moved for a partial summary judgment against Kent on the basis that he had failed to determine that Jacobs was not a turkey but, in fact, a human being. Kent cross-moved for summary judgment, saying Jacobs should have expected risks when he stepped into a popular hunting environment.
Maybe next time, they should just try getting a turkey from the supermarket.
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