Divorce can be a complicated and messy affair, even in cases where the couple is determined to make a clean break of the matter. Since there are a host of variables to consider – child custody, home ownership, splitting bank accounts, to name just a few – things rarely go according to plan.
Often couples will neglect hiring seasoned divorce attorneys because they envisage a scenario where their lives are split evenly down the middle, thinking that it’s simply a matter of adding everything up and dividing by two. But this attitude can lead to a rude awakening once either party is forced to deal with the legal realities.
One area of divorce law that can blindside couples is the division of retirement funds, also known as Qualitative Domestic Relations Order (QDRO). It is also an area that receives little attention, despite the enormous complexity involved. To successfully split retirement funds, a lawyer must have an advanced understanding of the terminology and law that governs the QDRO.
Emily McBurney specializes in QDRO law and is a partner at the Atlanta based law firm Kegel McBurney LLC, and according to her, it is crucial for a couple to fully appreciate the difficulty and importance of successfully splitting retirement funds. Ms. Burney took the time to answer a few questions for us on the subject.
What is a Qualitative Domestic Relations Order?
When someone is in a retirement plan, like a 401k or pension program, there’s a whole bunch of federal laws collectively called ERISA, and those laws basically define all of the rules for what an employer can or can’t do with retirement money. A big rule is that they cannot give that money to anyone other than the employee. There are all sorts of laws attached to prevent someone [else] from getting that money. But early on, the courts realized that this is a problem, because when couples get divorced a lot of times retirement [money] is their biggest or only asset.
This is because a lot of times in a traditional family there’s a man who has worked for 30 years, saving away money each month for retirement, and now it’s all they’ve got. And when they decide to get divorced, there is suddenly all of this law that can create real inequities in the divorce.
In the early ’80s, Congress amended the law that allowed for the employer to pay out to a non-employee in very specific circumstances, such as domestic relation situations – a spouse, former spouse, child, or other dependent of the worker. The law sets up all of these specific conditions that can be followed. So the QDRO is really a creation of that section of the law that allows for someone else to be paid retirement money, so long as they meet these specific conditions.
How does QDRO affect same-sex couples?
Same-sex couples are not yet eligible. I think there are some retirement plans that recognize them and treat the couples the same as a married couple. There are a lot of unanswered questions as to whether the IRS will recognize it as a legitimate transfer. Under the current law, it has to be a legal spouse. It’s still an open question in states in which same-sex couples can get legally married. But under the federal tax code you still can’t.
What makes dividing retirement assets so different from dividing regular assets?
What makes this somewhat unusual is that while the law that governs retirement plans is federal law and tax law, the rules about how it’s divided in a divorce are entirely state laws. So each state has different laws about division of property and equitable division.
How important is an attorney in splitting retirement funds?
Super important! Here’s the conflict in my life. I get several calls a week from people who say, “We got divorced and I need to get this QDRO done, and we’re paying all this money for the divorce already, so why can’t I just get some guy for $200 online?” But just like anything in life, you can be pennywise. It doesn’t mean you’re going to do it right. It’s an area where it can look really simple, and I get endless calls from people who say they’re just dividing it in half. And sometimes it’s the people who insist the most that it’s going to be straightforward that run into complications.
Can you give some examples of the complications that might arise?
Here’s a favorite example. I dealt with a case where a couple got divorced and there were a lot of different kinds of retirement money. It was clear nobody understood the different kinds of money, and the rules aren’t evident if you don’t know what you’re doing. The wife was supposed to get 50% of the 401k and her lawyer drafted the QDRO, and it looked like it would be easy – she’d fill out the QDRO so it was clear she gets half and it will be no problem. So for instance, if there was $500k in the 401k, she thought she’d be getting $250k. But the lawyer wrote in “50% of the marital portion.” It seems like a meaningless phrase but it made all of the difference. Then she got a check for $80k dollars. She went ballistic and thought the husband did something wrong.
It turns out that every word in a QDRO means something and in this case, “marital portion” means [the] portion accumulated during the marriage. They had a short marriage but a long courtship and most accumulation was before that. So when calculating her sum, they went back to a date [only] a couple years beforehand, when they got married. And something like this is a big problem. It requires litigation to fix. It wasn’t that she got screwed; it was because she did the wrong thing.
What other consequences might arise from doing a QDRO improperly?
In a best case scenario, everyone understands the problem right away and can start to work to fix it. The big gut-clincher is that most of the time nobody knows a mistake has been made. A lot of the mistakes that get made are made with [matters like] surviving spouse benefits. You forget about it and someone dies or retires and gets the wrong amount and too much or too little and it’s 20 years later and too late. So one of the reasons it’s important to have a lawyer is you might be making a terrible mistake and not know it until it’s too late to fix. Even in situations where people are saying “We’re just doing 50/50,” they have to understand that the devil is in the details.
Another example is where you say whether a loan is supposed to be included or excluded. Everybody makes this mistake. A magnanimous husband might say that he doesn’t want his wife to bear the brunt of a loan, so he says the loan is “excluded,” but if you are the wife you want the loan included. It’s counter-intuitive, and I don’t want to get into the tiny details that makes that so, but it’s just so filled with pitfalls that you have to have an expert working on it.
Considering how important retirement funds are to a divorce, why don’t you think QDRO gets more attention?
There are a bunch of reasons. The top one is that you’d be surprised how few people understand anything about their own retirement benefits. I have dealt with super-high-level executives with multiple business degrees and they have no idea of the different forms of retirement benefits and they lump it together, but really they have all different plans, restrictions, and criteria. So there’s just some kind of general ignorance, and a complete resistance to understanding it. It makes everybody’s eyes glaze over and all you have to do is say “retirement plan” and their brain shuts down. It sounds really boring. But in the real world where it’s played out, it can make the difference between a retiree living in comfort or eating cat food for the rest of their days.