I wanted to develop a site and a process that would help people, many of whom did not even have lawyers in their divorce, who still want to make sure they have properly divided their retirement accounts. In fact, our service may be absolutely best for people who didn’t have lawyers during their divorce but need one to help them draft the retirement division orders. I tell potential litigation clients that, if they only have finite resources (which is true of virtually everyone), they should spend their money on a lawyer to draft QDROs in their favor rather than on the actual litigation, since in so many jurisdictions, the only option with a valuable asset like a retirement plan is to “divide it by the time rule” (more on the “time rule” and other methods of division in the FAQ) because neither party has any resource they can use to buy out the other party’s share of the retirement asset.
Take my drywall subcontractor client with the $800,000 union pension and the $600,000 worth of other assets. The total value of the estate was $1.4 million, meaning each should get $700,000. But there is no really good way to achieve that. Add in the fact that he was the license holder so his wife could not take the business in the divorce, meaning it was going to need to be awarded to him at value, and we had a real problem. The only real option is to divide the retirement plan/pension/401(k) by “time rule” and then divide the rest of the assets separately. That is exactly what we had to do, with the wife taking half the pension, the husband taking the business and the wife taking the house and the majority of the other assets. That was the only way to get to a reasonably fair division of assets.
With that in mind, if the family has a pension/defined benefit plan/deferred compensation plan/401(k) or other ERISA-backed or federal government-backed retirement plan, most likely you are going to need some sort of Domestic Relations Order (let’s call them “DROs” here as opposed to “qualified” Domestic Relations Order “Quadros,” which are really a sub-species of DROs).
The DRO is basically a simple document in concept. It tells the plan administrator how to divide the plan assets between spouses. This is not really rocket science – it’s normally done by “time rule.” This is why we can draft one for you for $500. The problem is not the QDRO itself; the issue is what goes in it – this is an advocacy document that gets treated like a “neutral document.”
I’ve mentioned the “time rule” a few times, which, in short, says that the community property share of the asset is based on the following fraction:
number of months of marriage while contributing to the plan
number of total months contributing to the plan
This is the “time rule” for determining the community property share of the pension. It basically says, in English, that everything you contribute to the pension during the marriage belongs to the community and everything you contribute to the pension before marriage or after separation (or the final divorce decree in the case of federal plans) is separate property. So, in a 10-year (120-month) marriage where the spouse has worked for the same company for 20 years (240 months), the community has a 120/240 interest in the pension or 50%, the other 50% being separate property. That means the non-employee spouse has a 25% interest in the plan and the employee spouse has a 75% interest in the plan. If the employee spouse continues to contribute to the pension, the number of months in the bottom will grow. After an additional 120 months, the fraction will be 120/360 or 33% to the community and 67% to the employee. The percentage interest decreases, but the total amount of money/benefit/deferred compensation increases. That is why, when you draft a DRO, you have to be careful not to include a dollar amount, since the amounts will likely increase over time.
This may not seem fair exactly, and it’s not necessarily fair, but it’s a rough approximation – the percentage ownership goes down over time, but the total amount goes up. It’s having a smaller percentage of a larger number. It actually works just fine for defined benefit plans and plans where there are “credits” for time of service rather than dollar contributions to the plan.
A good divorce lawyer should be thinking about the retirement assets during the divorce, and particularly at trial and/or in the drafting of the final decree. The language of the decree itself can drastically favor or disfavor you depending on how it is written. Too few attorneys actually know this, and even fewer judges ever think about it, which means, with a very flippant turn of phrase (written or oral), the entire dynamic of the divorce decree can change regarding your most valuable asset.
Having counsel who really understands the importance of the language in a DRO is extremely important to your future financial well-being.
DROs are orders given by the Court impacting the dissolution of a domestic relationship. “Qualified” DROs are orders for plans that are “qualified” under ERISA, which governs the majority of state and local pensions, union pensions, 401(k) plans, usually not IRAs (but not 100% out of the question), and deferred compensation plans. ERISA, however, does not govern FERS or military retirement pay and, as a result, the DRO needed to divide FERS or military retirement pay is different than the one we use to divide so-called “qualified plans.”
