Using A QDRO As A Settlement Tool

Many attorneys shy away from QDROs because of anticipated problems that they may incur in writing them and getting them approved by the plan. It is true that drafting QDROs has gotten harder as companies dumb-down the review process. It is much more common to have to rewrite them before final approval. In an attempt to save money on a process that is not a profit center for the company, many have hired lesser skilled employees or out-sourced the process to reviewers who work off of check lists or model orders. They often have little knowledge of actuarial calculations or what is permitted in the Retirement Equity Act of 1984. With most attorneys billing $200 per hour and up, it is difficult to get reimbursed for the time and research necessary to draft an acceptable order. Unless you are very familiar with domestic relations orders it is always more economical for you to out-source them to a service that guarantees acceptance at no extra charge and simply add on your cost of having the judge sign it, while you just file it and forward it to the plan. While you are still responsible for the order you have the expertise and third party malpractice insurance of the preparation service to better protect you. Also, cost is known beforehand and your client can be advised accordingly.

The reason I encourage the use of QDROs is not simply because we are in the business of drafting them but because in many cases they are the only source of cash necessary to settle the case. Most employees of larger companies and government agencies now have a 401(k), 457(b) or some other kind of retirement savings plan. Many of these accounts have very substantial balances (in the hundreds of thousands of dollars). These funds can only be accessed by the employee quitting his or her job and paying early-withdrawal tax penalties or by using a QDRO. These funds can be used to retire marital debt, equalize assets or to give the spouse with the lesser earning power, lump sum alimony. They can be used to pay off back child support and for various other settlement requirements. You can not order the plan to directly pay your fee but the available cash will be there if it is paid directly to the non-participant spouse.

If a portion of the account is paid to the alternate payee directly, there is no early-withdrawal penalty. The amount of the direct distribution is added to the income of, the usually lesser paid spouse, and taxes are owed on the distribution in the year of receipt. If the money is being used to pay off joint marital debt the taxes that must be paid by the non-participant spouse should be added to the distributed amount so both parties are paying their fair share.

QDRO distributions can be very flexible. The portion necessary to pay off marital debt can be paid directly to the non-participant spouse and another portion used to equalize marital assets can be paid with a trustee-to-trustee transfer with no taxes incurred by either party. The non-participant spouse simply has to set up an I.R.A. to receive the non-taxable portion. The plan must be advised accordingly. The specific instructions can be included in the QDRO to insure plan compliance. If there is also a defined benefit monthly pension, the distribution of that asset can often be incorporated in the same order at no additional cost, if prepared by a QDRO preparation service.

In summary, if your practice includes Family Law cases you owe it to yourself and your clients to become more familiar with the use of QDROs in settlements. More often than not you will find they make settlement of what would be a difficult case, much easier.