"Lot’s of times agreements we get are drafted and signed by a judge, and they call for something that can’t be done. It is legally impossible.” - Michael O’Connell, QDRO Solutions
"People will contact us and say 'Well, I’m supposed to get part of my husbands 401k but I don’t know what the name of it is.’ That is very important, to get that form filled out, make sure they know the name of the plan that’s going to get divided, and the company, and the plan administrator, and if they don’t know at all at least give us as much information as they can so that we can research the rest...They send a package to us and we charge a flat fee. “ - Donna Dodds, QDRO Solutions
A retirement plan is often one of the largest assets that you may have during divorce. Unfortunately, also one of the most complicated assets to split. As today’s interview guests said, “Every plan is different, every plan administrator is different.”
What is a QDRO? It stands for Qualified Domestic Relations Order, and it’s one of the most important terms in divorce you’ve probably never heard of. We have some of the foremost QDRO experts in the United States with us on the show. We interview Michael O’Connell and Donna Dodds of QDRO Solutions. They will tell you important information about QDROs, and why you MUST get one if you have a 401K, Pension Plan or other retirement assets in divorce.
For anyone with a retirement plan, this episode is required listening.
To learn more about QDRO Solutions: http://www.qdrosolutions.net/
This transcript has been edited for clarity.
Shawn: Today on the show with me I have Michael O’Connell, a lawyer and owner of QDRO Solutions, as well as his associate Donna Dodds. Welcome to the show.
Michael O’Connell: Thank you Shawn.
Donna Dodds: Thank you.
Shawn: Why don’t you tell us a little bit about your firms, your respective backgrounds, and what QDRO Solutions does?
Michael O’Connell: I’m a lawyer in Charleston, South Carolina. I’ve been practicing continuously in South Carolina since 1975. I’ve a had very good career, including 15 years in State and Public Defenders offices. In 1996 I left the Federal Public Defenders Office to practice with Ann Sterling, who is retired and one of the, if not the premier family court lawyers in South Carolina. She’s also my wife. When I did that, I knew what was going to happen, which was a large percentage of my clientele was going to become family law cases. So it evolved very quickly, at least fifty percent and often times my cases were domestic cases, family law cases, divorce, custody, division of marital property, which is what we’re here to talk about today, as far as pensions are concerned. Anne retired in 2015, and I’ll say transferred the business to me, it was a pretty good price. I’ve been owning and operating it ever since. Donna?
Donna Dodds: Well, I am a legal assistant and I have been a legal assistant for probably 35 years. I came to work for Anne Sterling, January of 1995. I’ve been with Sterling and O’Conner Law Firm since. When Anne decided to purchase QDRO Solutions from David Carrad who is what we call the guru of QDRO’s, Mr. Carrad came and personally trained us on how to do QDRO’s of every kind. That’s what we’ve been doing ever since.
Shawn: That’s great. I actually have read David Carrad’s book and it is extraordinarily detailed on QDRO’s. I’m glad you’ve worked in the field for such a long time because it’s a pretty extraordinarily complicated area of the law and of divorce.
Donna Dodds: I do call David’s book my bible.
Michael O’Connell: It is the bible for us because it is quite complex. I took income tax in law school and it’s perhaps like reading the IRS code. It is the only source of the information we need. It’s the only one out there. David unfortunately passed away in April , but until he passed away – which I believe was quite sudden – he was a consultant for the last 8 years. Ever since Ann acquired QDRO from him, he signed on as consultant. He was invaluable to have and taught us a lot over the years.
Shawn: That’s great. So for most of the people listening, they don’t know necessarily what a QDRO is and what we’re about to get into. Why don’t you tell us – I think you mentioned pension plans briefly, but you have certain types of assets –when might you need this QDRO? And also give us just a quick definition of what QDRO even means because we’re going to be using the term quite a bit.
Michael O’Connell: A QDRO is a Qualified Domestic Relations Order. I’m going to go through a brief history of why they exist. Prior to 1974 there was no protection for pensions for the employee. You could go to work for somebody and they’d promise you a pension after you stay there for 30 years, and they could fire you at 29 years 364 days and you had no protection, no pension, it was gone.
In 1974 the congress enacted the ERISA act which is Employment Retirement Income Security Act, which protects the employees pension, and it has tax advantages for both the employer and the employee. The employer can –to the extent they pay into a pension system –deduct that as a business expense. As we all know you make contributions to your pension plans or your 401k for the employee. They’re not taxable until you take them out at retirement, when presumably we’ll all have lower tax rates. When people divorce, those pensions are marital property to the extent the marital portion i.e. the portion that existed or gained value during the course of the marriage, and they’re divided by courts. About 95% of family law cases, the divorces settle by agreement after negotiation or mediation. Those negotiations in part, divide the pensions, 401k’s, and pension plans. The goal is, the reason that there is protection, for the husband and wife, when the pension is divided between them it’s a non taxable event. Ordinarily, if you take money out of your pension or 401k before age 59 ½ , you get taxed on it.
In 1975, in order to solve that particular problem, what is called the Retirement Equity Act, or the REA, was enacted, and amended ERISA and the Internal Revenue Service Code to provide that upon divorce, the division of pensions would not be taxable provided that there was a qualified domestic relations order. That’s pursuant to federal law, not state law. The feds have specific requirements that are necessary to be at those orders in order to qualify and to make the transfer from the participant, let’s say the participant is the husband. The husband has a pension with his employer, and it’s going to be divided, and say the wife get’s 50% of that by negotiation, or by court order if they have a trial. That state court order is drafted and signed by a judge, and then they come to us and ask us to draft a QDRO, which qualified domestic relations order, which ultimately is submitted to the planned administrator. Most companies outsource their pension plans to planned administrators. The planned administrator tells us whether they’ll accept it or not. Once it’s accepted we send it back to the lawyers to get signed by a judge. Then the qualified domestic relations order once it’s signed by a judge –this is all after it’s been approved by the planned administrator –sent back to the planned administrator in the division of the pension plan is completed by the planned administrator. That may be more than what you asked.
Shawn: No, that’s actually a great answer because it gives a lot of follow up areas that I want to dig into a little bit more with you. So if I’m listening right now, it sounds like if I have a pension plan or 401k plan and it’s going to be divided in divorce, those are the times that I will likely need, or will need a QDRO.
Michael O’Connell: The person who suffers if the plan is divided without a QDRO, is the person who owns the plan, who owns the pension. The other ones are going to have to pay the taxes on it. There’s no need for them to do that with a QDRO, so it’s essential. Nobody wants to pay taxes period, but nobody wants to pay taxes until they have to. The theory behind pensions and at least part of the theory is that you’ll get them at retirement age when your taxable income bracket is lower than it was during your working career. So it’s essential, there’s not really any question about it.
Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for 1-on-1 coaching and a full transcript of this episode. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.