Modern Family Matters

What is a Qualified Domestic Relations Order, and Why Is It Important?

May 14, 2020 William Jones Season 1 Episode 1
Modern Family Matters
What is a Qualified Domestic Relations Order, and Why Is It Important?
Chapters
Modern Family Matters
What is a Qualified Domestic Relations Order, and Why Is It Important?
May 14, 2020 Season 1 Episode 1
William Jones

-Will Jones, Partner at Landerholm Family Law, explains the QDRO process and aspects to consider when dividing retirement accounts.

- Over 90 million workers in the United States are covered by over 800,000 employer- provided retirement plans, totaling billions of dollars. For many people, these retirement savings represent one of their most significant assets.

- When couples divorce with retirement accounts, these accounts need to be reviewed and a shared denominator needs to be determined so that both parties reach a fair agreement.

-QDROS cannot be handled by a state judge alone, and require federal intervention for approval. This multi-step process can take anywhere from 1-3 months.

-Due to the complexity of QDROs, and the risk of losing out on assets that you may have a legal right to, it’s advisable to discuss your situation with an attorney who can help explain your rights.

Show Notes Transcript

-Will Jones, Partner at Landerholm Family Law, explains the QDRO process and aspects to consider when dividing retirement accounts.

- Over 90 million workers in the United States are covered by over 800,000 employer- provided retirement plans, totaling billions of dollars. For many people, these retirement savings represent one of their most significant assets.

- When couples divorce with retirement accounts, these accounts need to be reviewed and a shared denominator needs to be determined so that both parties reach a fair agreement.

-QDROS cannot be handled by a state judge alone, and require federal intervention for approval. This multi-step process can take anywhere from 1-3 months.

-Due to the complexity of QDROs, and the risk of losing out on assets that you may have a legal right to, it’s advisable to discuss your situation with an attorney who can help explain your rights.

Steve Altishin: Our topic today is going to be about an important but not very well known, and even less well understood, issue that arises in more and more divorces around the country. We’re talking about Qualified Domestic Relation Orders, more commonly referred to as it’s four-wheeler sounding acronym: the QDRO. But before we start talking about the QDRO, let’s take a look at the landscape and discuss why the topic is so important.

Over 90 million workers in the United States are covered by over 800,000 employer provided retirement plans, totaling billions of dollars. For many people, these retirement savings represent one of their most significant assets. At the same time, the divorce rate in America is nearly 50% of the marriage rate, which means that huge amounts of retirement plans are being dealt with in divorce cases. While the division of marital property, along with custody visitation and support, is generally covered by state domestic relations laws, when it comes to splitting up a retirement interest, an entirely new set of federal laws come into play, and need to be strictly complied with.

That said, my guest today is Will Jones, a partner here at Landerholm Family Law and our resident QDRO guru. He’s here to help try to make this complex, difficult, but important topic a little better understood.

Will, let’s start today by talking a little bit about QDRO’s in general by using an assumption. Let’s assume that I’m a client and I’m coming in to see you. I have a spouse with maybe a pension, or a 401k, and you see that. So what would the first thing you say to me be when you see that my spouse has a pension?

Will Jones: I think the first thing we want to look at is whether it’s something that we’re going to divide, or are we going to try and offset it with something in another way? So, if you have a 401K that’s worth $100,000 but you have a house that’s, say, you have $200,000 in equity, the question becomes: do we really want to try and touch your retirement? Do we want to try and divide that? Or, is it divisible at all? Did you have that prior to the marriage and you maybe haven’t comingled it? So the first question is: is it divisible and is it wise to make that divisible?

So the first thing we want to do whenever we see either a pension, which you may have to value, or a 401K versus, say, a RothIRA, is we want to get a common denominator for the entirety of your property division. So a 401K is funded with pre-tax dollars. So we need to put in some tax rate (which we’re going to kind of make up and take a reasonable guess at), so we can basically compare post-tax dollars to post-tax dollars. 

Once we’ve looked at that, lets assume we need to divide that 401K, now we’re going to determine at what level we’re going to divide that, or what portion of that might be divisible. So what we’re going to look at in that situation is the martial coverture fraction. So we’re basically trying to pull out the parts of your retirement that are martial.

So if you’ve been contributing to a 401K regularly for 20 years but you’ve only been married for 10, well you’ve got 10 years of that 20-year period that maybe we don’t divide. So we need to get that out of there. And we do that with a martial coverture fraction, where we look at the total time that you’ve been adding to that pension or 401K, then we look at the time that you’ve added to it while you’ve been in the marriage, then we take roughly half of that (we may offset with some other property or something like that). But the first issue is: let’s look at common post-tax dollars, and then let’s look at what portion is divisible through the martial coverture fraction.

Steve: So, let’s say then that you decide that there is an amount of the 401K or pension plan that should be split. Because this is a QDRO, what’s the difference between just putting that in an order and having the judge split it, or does it have to be split in a different way than, say, a house?

Will: So, you end up in what’s called a “physical division” of the dollars. You end up in kind of a different land. When you look at something like a 401K, the term 401K comes directly from the tax code. So the IRS’s tax code is controlling that. We’re in state court on the dissolution side of things. So just because you have a dissolution judgement in the state court, you’re asking the state court and the dissolution judge to divide something that is controlled federally. So we need a separate order that complies with federal law in order to divide that through the planned administrator. So the way we do that is we enter a dissolution judgement that says ‘hey, we’re going to split this 401K 50/50’. Now it’s clear between the parties what’s going to happen, but now we have to clarify that for the planned administrator, for whoever holds the plan.

Steve: So the planned administrator actually gets to make the decision as well?

Will: Not necessarily the decision. It’s really the court that makes the decision and the paperwork that goes to the planned administrator. But the planned administrator has to approve of how it’s divided. So the planned administrator will have to follow, say, 50/50 division, but you also have to comply with things like ERISA (Employee Retirement Income Security Act), tax implications, and the logistics of how it actually happens. So your QDRO is what lays all of that out and makes all of the federal issues overall and the actual division happen.

Steve: So it sounds like it’s really more of an administrative decision on the end of the administrator. It has to follow their particular rules of how it’s done, but the actual decision of getting it done or being done is still with the judge.

Will: Yes, that’s 100% true.

Steve: So then, let’s say we’re going to do a QDRO. Do I have to go out and get some information from you? What do you tell me to do? Do you get the information? What the heck do we need to get to make this happen?

Will: So a lot of the information is going to come from the dissolution case itself, because things like account statements, who holds the plan, who are the people listed on the plan, all of that information should have come about through Discovery in a dissolution case. So a lot of times we already have the information we already need if we handled your dissolution case. If not, we’ll need your most recent account statements, account holders, alternative beneficiaries, social security number, information like that, depending on how we’re going to divide that. Sometimes we may just want to pull all of the cash out of those accounts, subject to taxes and penalties. Other times we actually want to divide it and create a separate account, or roll over into some other qualifying plan so that we can avoid tax consequences. But generally we need account statements and information for the parties.

Steve: so let’s say we’ve got that now, we have all of the information, and we’re ready to do it. What’s the timing of this thing?

Will: So you have a general judgement of dissolution. Let’s assume that got signed and says we’re going to split this in half. Then we’re going to start drafting a QDRO which actually makes the physical division of this account. So that gets drafted and sent back and forth between counsel or parties for approval. Once everybody has approved that, then that draft order goes over to the planned administrator for pre-approval, just like you would do with a home mortgage. It’s saying: ‘take a look at this and tell us if this looks okay- if it’s okay or if it needs changes let us know’. Then it comes back to the attorneys or the parties and if it’s approved then it gets sent to the court. The court looks at it, makes sure it’s all in order and the judge signs it, then it comes back to the attorneys or the parties. Everything’s executed. Then it goes out to the plan itself, and the administrator can make a full division of that account.

Steve: Sounds again like this is similar to a closing. If we were going to sell the house, judge orders it, but there still is a procedure that actually finalizes it, kind of like a closing of the house sale.

Will: Yes, very similar. The larger hurdle that we’re trying to overcome here with a QDRO, from a functional level, is you have a judge who is presiding over a dissolution case, where you have, say, a husband and wife. So clearly the judge can direct what’s going to happen between husband and wife, but now we’re directing a third person, third entity, that’s not part of the case. That’s why the supplemental order that deals with federal law becomes important, because whoever holds the 401K funds they weren’t there- they’re not part of the dissolution case- so we’re directing them outside and after the dissolution is done, to do something supplemental. But yes, it does closely resemble the closing of a house where you may have pre-approval firm mortgage but that’s not final approval, you have preliminary statements, but they’re not final. Nothing is final until you get to closing and that’s when the QDRO actually hits the planned administrator for final division. 

Steve: Got it, and how long does that normally take? Or is there not a normal in that question?

Will: Unfortunately, the process is kind of riddled with delays. We do our best to minimize them, but when you send a QDRO out for planned approval, how long does it take for the planned administrator take to get that back to you, right? Let’s say it gets approved and goes to court- how long does it take a judge to sign in? Then it comes back to us and you send it to the planned administrator- how long does it take them to make the actual division? So a lot of that is outside of our control. We minimize that as much as we can. When we get one back, we review it and bam it’s off to the next phase, but because you’re involving so many parties and that document is moving so many different places, it can take some time. A month and a half wouldn’t be uncommon, three months wouldn’t be uncommon. So somewhere in there is usually safe.

Steve: And that’s following the divorce decree?

Will: Yeah

Steve: And I take that by doing that, that protects, let’s say, my half of it? Because what happens if my spouse quits- gets fired- somehow does something to mess up his or her portion of that 401K or pension plan. Does that affect me?

Will: It could. So you have all kinds of different plans. So you have a 401K which is a cash value account. It’s just a retirement account, it’s subject to gains and losses. But when you look at a 401K statement subject to taxes and penalties, that’s what it’s worth-it’s a dollar figure and that’s what it is. When you start talking about a pension, which pays monthly payments after someone qualifies for retirement, that’s a whole different animal and beast. Sofi you take something simple (which isn’t really simple, but the numbers are simple), like a military pension, military pension doesn’t vest until 20 years of active duty. So if someone retires or gets discharged from the military at year 19, it never vested- there is nothing there to be had, no payments will be made, because it never came into being. So if you have a military spouse who’s at year 19, you use a COAP (Court Order Acceptable for Processing) instead of a QDRO, but you divide it at year 19- say wife got half of that and husband got half of that, and then he retires the next day, it’s a worthless asset entirely. It never vested so everybody has risk in there. But when you’re talking about a 401k, it’s a cash value account, it exists right now, it’s already vested. 

Steve: let’s say it’s a pension account that pays until the employee dies, and the employee retires, moving along, three years later the employee dies. Does your half of the pension stop at that point?

Will: Not generally, but it really depends a lot on the plan. A lot of plans will basically split the account and create a new pension account. So, husband has a pension, wife doesn’t, and they divide it, they may just go ahead and create wife’s own pension account with generally the same terms as the husbands. So if husband can retire at age 65, well now wife can as well under her portion of that plan. There are some other plans that do it kind of the opposite way. They say ‘okay, we’re going to create an account for wife, but all of our timed deadlines are going to be computed on husband’s service, husband’s retirement age, husband’s ability to retire, which makes some sense for them, because say you have a wife who is 15 years older and you divide that account, well now the pension has to pay her because she’s already 65 when the husband is 50. So you can see where you have kind of two different systems in how that might work.

Steve: it sounds like this is a valuation game as well as just a follow-the-I’s-and-e’s-and-dots game because you’re required to not only try to put a value on that pension plan, but you also have a risk value on that pension plan, and you have other assets. I imagine that you’re putting all of those together in terms of finally talking to the client about if they should take half of the pension plan, or is there other property that you should take, maybe a little less value of, but with less risk.

Will: Very true. So when you’re looking at all of these things, and kind of where we started this whole thing, we need a common denominator. What is this actually worth in relation to something else? So a dollar in your checking account is worth far different than a dollar in a 401K. So to get those to the same number, if we were going to take money out of a 401K, we’ve got a 10% early withdrawal penalty and then taxes on whatever tax rate you’re in- let’s say 25%, which is probably a little low, but that gets us there. So really your dollar in your 401K returned to cash is worth, what, $0.65, something like that? So now we’re looking at a common denominator.

But when you start talking with clients and you start dealing with what’s going on, now we add in layers of complexity. Let’s say I have somebody who comes in and they have a $1 million dollar house, and they only owe $150,000 on it. They have a wife who maybe makes $50,000 a year. Well, she can probably refinance that $150,000. She’s going to have to offset a whole lot of equity- about $850,000, which we may do with retirement that husband may want to keep, but wife may never be able to buy another $1 million house again. And she may say, you know, ‘I want the kids to stay here, this is very important to me’. Well now she’s bought, by offsetting retirement, a $1 million house by letting husband keep more retirement, and she only had to pay, out of pocket, $150,0000. So you get into very complex moving division depending on what people want to do. Does wife want retirement, or does she want a house that she can suddenly afford that she was never able to get before?

Same thing happens with your retirement accounts. You have a Roth IRA that’s post-tax dollars, so it’s worth about what you see, and you have a regular IRA that’s pre-tax dollars (401K is pre-tax), then you end up doing this pension plan (and valuing of pensions is a field in and of itself). So if you have a pension that pays out $1,000/month, say, when someone turns 65- what’s that $1,000/month equal to once it’s all paid out? So how long is this person going to live? What are cost of living adjustments? What’s going to happen with the tax code? 

So if you have $1,000 a month and that guy lives to 79, well that’s 12 months times 14 years. Whatever that comes out to- $160,000 something? Well that’s the true value, overall. And there’s obviously a lot more math that goes into that, but you’re taking some risk there, because what if he dies before he even gets it? What if he dies at 70? So all of those things are moving and that’s where you have to get to a common denominator to start making some decisions.

Steve: it sounds to me like anyone who is in the process or considering a divorce, any couple or any of the parties, if there is a pension, retirement account, 401K or any sort of retirement account, it really is sort of impossible for them to try to do that in a divorce themselves, because that particular QDRO requires a level of skill that most people don’t have.

Will: Yes. QDRO and federal tax law in general is complex. The scary situation that I see is when I have people come in to see me for consultations, or who did a divorce on their own, and they say ‘yeah my husband had some retirement, but it’s his. It has his name on it and I can’t touch, he earned it.’ Well that’s not true, right? It was earned during the marriage. But now you have a property division, which is what we’re talking about here, that is finalized. And that is presumptively non-modifiable in Oregon, but they never talked to anybody. They didn’t know that that was happening, they didn’t know that that could happen. Anything from ‘well we didn’t know’ to ‘woah, we drastically screwed this up’- that happens. So it’s important to at least talk to somebody to at least know what you’re getting into.

Steve: And it seems like it’s becoming more and more so because the sheer numbers of people who have some sort of retirement account is dramatically higher than it was, say, 15 years ago.

Will: Yeah. And you have all kinds of other concerns. You have a wage-earning spouse and non-wage-earning spouse. Well, one person is going to max out social security while the other one may not. So you end up in this: ‘what are we doing to do in retirement’ situation. Of course there’s provisions where one spouse can get a payment equal to one half of the wage-earning spouses social security, but you have to look really closely as you do all this stuff. You know, what are we looking at monthly budget? How are we going to maximize property division to make sure that works out? Now we look at retirement a little bit, well, say my client has half the social security of what the other party has. So maybe I want more retirement, or maybe I want to offset some cash value item we have now for more retirement because I know my client isn’t going to be able to make it on $1,200/month in social security, so we need to actually maximize more retirement. TONS of decisions to be made and they all bounce off one another.

Steve: Well thank you, this has been really informative. I’m just going to stop with one last question, and I think you’ve sort of said it today, but what would your one piece of advice be to a person who is contemplating a divorce and either of the parties have a retirement account?

Will: You just have to talk to somebody.

Steve: That makes sense. Thank you Will. This was really informative and really difficult stuff, and clearly this requires an attorney who knows what the heck they’re doing.