What You Need to Know About “QDROs”

This is a guest post by Clark Williams of Heltzel Williams, P.C.  Clark is a QDRO attorney and also practices business law.  Clark can be reached at 503-585-4422.

So, you are about to be divorced or legally separated and one of the assets to be divided is a retirement plan sponsored by your employer or your spouse’s employer.  Your lawyer says that you need a “QDRO” (pronounced “qua’-dro”) to make the split, and that a specialist is required to draft it.

You ask your lawyer:  “What is a QDRO, and why can’t you do it?”  Those are good questions!  This article is intended to answer those and other basic questions about dividing retirement plans in divorce.

  1. Why can’t the retirement plan be divided or transferred just like a bank account or an investment portfolio?

Because retirement plans are uniquely protected assets under federal law.  Generally speaking, these plans are exempt from all legal process, period.  They are “bullet-proof.”  No creditors can reach them.  You can go thru bankruptcy, lose everything else you own including your house and car, but you won’t lose your retirement plan.  Congress has determined that it is more important for people to reach retirement age with their retirement benefits intact, to support them in retirement with more than just Social Security.

Before 1984, retirement plans were exempt from divorce, too.  But in 1984, Congress made a special exception, allowing retirement plans to be divided between spouses in the context of a divorce or legal separation, if ordered by the divorce court in a “qualified domestic relations order,” or QDRO.

  1. So, what is a QDRO?

A QDRO is a separate court order that is drafted specifically for the retirement plan to be divided.  The QDRO must be very complete about the how the retirement benefit is divided, and it must consistent with the terms of the retirement plan itself.

  1. Why must my lawyer hire a specialist to draft the QDRO?

Because it is very complicated.  Every retirement plan is different.  There are many different types of retirement plans – – profit sharing, 401(k), pension, defined benefit, employee stock ownership plans, deferred compensation and others.  Some plans make lump sum payments, others pay just a monthly payment in retirement years.  And, as stated, the QDRO must be drafted in a way that is consistent with the terms of that retirement plan.  The QDRO cannot require a retirement plan to pay the former spouse more than, or sooner than, or in a form other than, the plan would otherwise pay to the participant.  So drafting the QDRO takes someone who understands pension law, the type of plan being divided and the particular terms of the plan.  Most divorce lawyers don’t have that level of expertise.  Rather, to prepare a QDRO correctly and efficiently, it usually takes an expert who handles retirement plans and QDROs as a regular, every day part of his or her law practice.

  1. Might I need more than one QDRO?

Yes.  Generally, a separate QDRO is required for each retirement plan being divided.  So, for example, if you have a 401(k) plan and your spouse has a pension plan, and if the divorce calls for both retirement plans to be divided, then two separate QDROs will be required, one for each plan.

  1. So, what is the normal process for a QDRO?

First, when the divorce case is concluded, the judgment of dissolution will specify in general terms how the retirement plan is divided, e.g., “wife is entitled to 50% of husband’s 401(k) plan as of the date of the judgment. “  But this general language is not enough for the retirement plan to act on – – the plan needs a QDRO.  So shortly following the judgment, the QDRO lawyer will draft the QDRO specific for that plan and send it to the plan administrator for preapproval.  Most plans have a process for reviewing and approving QDROs in advance of being signed by the judge.  Again, every plan is different, so some plans will require changes that other plans won’t require.  Once pre-approved by the plan administrator, the QDRO lawyer will send a final copy of the QDRO to the divorce lawyer to be signed by the judge.  And once signed by the judge, a court-certified copy of the QDRO is sent back to the plan administrator for final approval and implementation. Then the plan administrator will start the process of segregating the portion of the retirement plan benefit that now belongs to the former spouse.

  1. So how long does this all take?

The usual QDRO process, from start to finish, is three to six months, and that assumes it goes smoothly and everyone cooperates.  The process involves a lot of people – – the two parties, their lawyers, the QDRO lawyer, the plan administrator, and the judge.  Everyone has to do their job timely.  If the process gets hung up anywhere along the way, which often happens, it can take even longer.  So you can’t be in a hurry for it.  If you are the former spouse and you are expecting money out of the QDRO (e.g., you are getting some of your spouse’s 401(k) plan), don’t spend the money before you receive it.

  1. What are the tax aspects?

Like any distribution from a retirement plan, payments to a former spouse pursuant to a QDRO are taxable when received.  Any amount taken will be subject to automatic 20% federal tax withholding, to be credited against the former spouse’s final tax bill for that year.  Oregon law provides for 8% withholding, but that is waivable if the former spouse would rather pay the Oregon taxes with the tax return.  And there is one tax-break: the usual 10% tax penalty for early distributions (under age 59½) from a retirement plan does not apply to a distribution pursuant to a QDRO.  So if the former spouse is needing the money for other reasons (e.g., to pay debts or lawyer fees or to buy a new house), taking a lump sum distribution pursuant to a QDRO will avoid the 10% penalty, even if the distribution is still subject to income tax.   Or if the former spouse would rather defer all taxes, the former spouse can “rollover” any lump sum distribution tax free to an IRA where the funds can remain invested and continue to grow tax free until retirement.


Comparing Divorce vs. Legal Separation

People often ask what the difference is between legal separation and divorce.  Sometimes they will even ask, “Should I file for divorce or legal separation?”  This is clearly a very personal choice and not a decision someone else can make for you.  With that said, here is what you need to know:

If you are legally separated you are still married.

The main difference between divorce and legal separation is that you are still technically married if you are legally separated.  This means, amongst other things, that you cannot get married to someone else while you are legally separated.  Other than that, legal separation looks very similar to divorce.  In fact, you can make all of the same provisions in a legal separation that you can in a divorce.  For example, you can create a parenting plan, divide pensions, award the home to someone and establish spousal support.  Basically, anything you can do in a divorce you can do in a legal separation.

It is important to understand that the terms of your legal separation will continue to apply if you get divorced unless you both agree to change the terms.  In other words, it is very important that you are comfortable with the terms of the separation now because you probably will not be able to change them later on.

Why get legally separated?

Health Insurance.  The most common reason people get legally separated is because they want to proceed with divorce but they need to be able to maintain health insurance.  Important: Check with your company to make sure that you can cover a legally separated spouse under your health insurance.  Some companies do not allow you to you maintain health insurance for a legally separated spouse.  If you are considering legal separation for health insurance reasons, check with your company first to make sure you are able to maintain coverage.

Religious Reasons.  If you are legally separated you are still married.  Some people find legal separation preferable to divorce based on their faith.

Trial Separation.  Sometimes people will enter into a legal separation as a true trial separation, i.e., they want to see if the marriage can work but want to make sure there are agreements in place about the separation.  This is not a very cost effective way of trying out a separation.  If you really want to try to make your marriage work, you can save yourself a lot in legal fees by separating households and actually trying it out.  Further, the formality of a legal separation combined with working with divorce attorneys may actually make it more likely that your trial separation leads to divorce.

Liability.  In certain situations people are concerned about liability issues related to their spouse.  For example, they may be concerned that their spouse may injure someone in a car wreck and they themselves will be liable.  A legal separation may insulate you from spousal liability to some degree, but as long as you remain married you run the risk of being liable for damage or injury caused by your spouse.

Converting legal separation to divorce.

It is fairly simple and straightforward to convert a legal separation into a divorce.  If you have been separated for less than two years you can simply file a motion asking the court to convert the separation to a divorce.  If one person objects to converting it to a divorce, then a hearing will be set and the divorce will be granted.  If you have been separated for more than two years, it is still easy enough to convert a separation to a divorce but it does require some additional paperwork.  Mediation tends to be a very efficient way to convert a legal separation into a divorce.

General vs. Detailed Parenting Plans

Parenting plans can be either very detailed or very general.  A detailed parenting plan is just want it sounds like – there will be a lot of detail about exact days, times of parenting exchanges, how summer vacation is scheduled, etc.  A general parenting plan, on the other hand, may just say that one parent will have two overnights per week based on his or her work schedule, and that both parents will work together to figure out holidays on an as-needed basis.  Different states have different requirements about the minimum amount of detail that must be included in a parenting plan.  In Oregon, ORS 107.102 provides that a parenting plan just needs to set out the minimum amount of parenting time that each parent will have.

Pros and cons of each approach.

There are pros and cons to both of these types of parenting plans.  The main “pro” of a general parenting plan is that it builds in a high degree of flexibility, which many parents prefer.  Another benefit is that you don’t have to worry about figuring out all of the different details of your parenting plan; by definition a general parenting plan does not address all of the various details that you would find in a specific plan.  The main “con” of a general parenting plan – and this is significant – is that if you cannot agree on something, what are you going to do?  For example, if your parenting plan says you will “work together” to determine holidays, what will you do if you can’t agree on Labor Day this year?

The main “pro” of a specific parenting plan is that all of the terms are spelled out so you know exactly what the parenting plan is at all times.  This (hopefully) serves to reduce disagreements regarding scheduling because everyone knows what the parenting plan is in every situation.  The main “con” is that a highly detailed approach may be too rigid for some people and actually lead to further disagreements.

Which one is right for you?

There are a few things to consider when deciding whether to use a general or detailed parenting plan.  The first question to answer is what kind of working relationship do you have with the other parent?  Be honest!  Do you work well together?  Do you disagree about whether the sun is shining or not?  If you work well together, a general parenting plan may work well for you.  If you disagree on everything, you probably need a more detailed parenting plan.  If you have a high conflict relationship, then you almost certainly need a detailed parenting plan.

Another thing to consider is how long you have been separated and how things have gone so far.  If you’ve been separated for six months and have established a routine, that should tell you a lot about what type of parenting plan you need.  If you’ve been able to “figure it out”, then a general plan may work well for you.  If you’ve been flexible with each other over time, you probably will continue to be flexible with each other.  If there is constant disagreement about days or times of exchanges, then a specific parenting plan probably makes more sense.

Another thing to consider is that even though co-parenting might be going well right now, it is at least possible that things might be difficult later on.  If that happens, it may be helpful to have a more detailed parenting plan.

You can always be flexible.

You can think of your parenting plan as a “baseline”, i.e., your parenting plan is what you will do unless you reach some different agreement.  Even with the most detailed parenting plan, you can still do something different if both of you agree.  Your parenting plan should address modifications to the parenting plan.  For example, your parenting plan might say that any permanent changes must be agreed to in writing, but one time changes can be agreed to verbally.  Of course, if you cannot agree, then the terms of the parenting plan will determine what is going to happen.

A hybrid approach.

If a general approach is appealing but you are concerned about running into disagreements later on, a hybrid approach may be worth considering.  In a hybrid approach, sometimes called a Plan A/Plan B” approach, you have a general “Plan A” and a more specific “Plan B”.  This approach can apply to your general schedule, your vacation schedule or your holiday schedule (e.g., it might just apply to your vacation schedule and the rest of your parenting plan is a set schedule).

Here is an example of how a hybrid approach might work for holidays:

  • Holidays.  The parents are awarded a “Plan A/Plan B” holiday schedule.
    • General Holiday Schedule. Both parents are desirous of a holiday schedule which provides maximum flexibility to both of them, so that each might have holiday parenting time with the children when they will be best able to take advantage of the time.  It is anticipated that the parents will be able to work together and work out a mutually advantageous schedule on an ad hoc basis.  However, if either party feels that this flexible, non-specific holiday schedule is not working effectively, he or she may unilaterally decide that the Alternate Holiday Schedule detailed below shall go into effect
    • Alternate Holiday Schedule. If the parties fail to reach agreement on a flexible, non-specific holiday plan, or if either party decides such agreement is not working effectively, this alternate general holiday schedule shall go into effect.  Under this alternate schedule the parties shall have holiday parenting time as follows:
      • The terms of this Alternate Holiday Schedule will need to be negotiated and will be inserted here.

 This approach can provide the best of both worlds for co-parents.  It provides a high degree of flexibility but it also takes into account situations where you cannot reach an agreement.  Sometimes people don’t want to take the time to develop a specific Plan B.  However, a specific Plan B is necessary for this type of parenting plan.

So what type of parenting plan should you choose?

The most important thing is to focus on what is best for your children.  A parenting plan that minimizes conflict between co-parents will be better for your kids then one that could contribute to conflict.  With that in mind, if one parent prefers a specific plan and the other prefers a general plan, it probably makes sense to either have a specific or a hybrid type of parenting plan.  If both parents feel like a general parenting plan will work, then it’s probably a safe bet that it will.

Regardless of the parenting plan you choose, be aware that parenting plans are always subject to modification.  If you don’t get it quite right the first time, you can always modify the parenting plan in the future.

Dividing Personal Property During Your Divorce

A year from now the way you divided personal property in your divorce probably won’t matter to you.   However, that isn’t much comfort right now when you need to separate households and furnish a new residence.  Here are a few of the most common questions about dividing personal property:

How do we value personal property?

For the most part people do not assign values to personal property in the divorce.  To the extent you are going to value personal property, the standard approach is to look at what the same thing would sell for on Craigslist.  That usually doesn’t seem fair to one or both people, but that is the usual approach.  Of course, the two of you can agree to whatever valuation you want to.

What about more valuable items, collections, etc.?

If you have a more valuable item, such as original artwork, antique china, a coin collection, etc., it may make sense to have it appraised by someone specializing in that particular category.  You can usually find someone who can do this for a reasonable flat fee.

What do we do about the cars?

There are two different approaches people usually taken when dealing with vehicles.  One approach is to just say “let’s each keep our own”.  If your vehicles are similar in value (similar is subjective, of course), then this approach is probably the easiest thing to do.  On the other hand, if there is a significant difference in value, then you may want to account for the difference in value.  The standard approach to valuing vehicles is to go to Kelly Blue Book and get a valuation based on “private party, good” value.  For example, if one person’s car is worth $5,000 and the other person’s car is worth $25,000, then under this approach the person with the more valuable car might owe the other person $10,000 so that they both end up with $15,000 in value.

How do we handle jewelry?

Generally speaking, jewelry is considered to be the separate property of the person who it was given to.  One exception to this is if there was an agreement (that you can prove) that the jewelry would be returned to the person who gave it in the event of divorce.  A different approach that people will sometimes take is to sell jewelry and apply it to a joint debt.  For the most part jewelry isn’t worth nearly what someone paid for it.

So…how do we actually divide the property between us?

For the most part people are able to simply agree on the division of most of the household items between them.  If someone brought something into the marriage they will typically keep those items.  If personal property was inherited from someone’s family, they will usually keep that as well.  They will usually keep their own clothes and personal effects.  If there are “sets” of furniture, one person will usually keep one set and someone will keep a different set.  For example, one person might keep the dining set and one person might keep the bedroom set.  If certain items remain in dispute, then they can be sold and divided, or perhaps a trade can be agreed upon (e.g., you keep the Vitamix and the other person keeps the Kitchenaid).  If disagreements still remain, those disagreements can be addressed in mediation.

The other person received way more value in terms of the personal property and it doesn’t seem fair to me.  What now?

Sometimes when one person is keeping most of the personal property (usually the person staying in the home), people will agree that the divorce is a family issue and therefore family resources will be used to help furnish a new residence.  A different approach is to agree that the person not receiving the personal property will receive some “offset” somewhere else.  For example, if someone is taking most of the personal property, maybe they take slightly more debt.

What do we do about family photos, the kids’ paintings, etc.?

Sentimental family items are usually evenly divided between you.  Often what people will do with photos is to have each person take half of the original photos and then make a copy of the photos for the other person.  Now that most photos are digital this is less of an issue.