QDRO, COBRA and Divorce

Every field has its own set of abbreviations and acronyms. People who work in the field are comfortable using these terms but, to people who do not work in the area on a daily basis, the terminology is foreign. In domestic relations law two of the most common acronyms are COBRA and QDRO. The purpose of this article is to explain these terms and discuss how they are related to a divorce. The Consolidated Omnibus Budget Reconciliation Act (“COBRA”) includes a provision governing employer provided health insurance. The purpose of the provision is to allow employees to remain insured under the company’s health insurance after they cease employment with the company. The employer is not required to pay for the coverage; the employee pays the full premium even if the employer previously paid some or all of the premium. This insurance coverage is known as COBRA insurance. COBRA coverage is an important consideration in divorce cases where the family has insurance through one spouse’s employment.

In addition to providing insurance for an employee who loses his or her job, COBRA coverage is available for the former spouse of an employee as soon as the parties are divorced. The employee spouse is required to notify his employer of the divorce at which time the former spouse is generally ineligible to participate in the group plan. However, the employer is required to notify the former spouse of the right to elect COBRA insurance under the plan. The non-employee spouse may not have insurance available through work and available individual policies may be too expensive or cover too few services to be practical. COBRA does not cost the employee anything. The non-employee former spouse pays the cost of the insurance while the coverage is in place. COBRA insurance is often expensive and it generally lasts for no more than eighteen months. However, the insurance is usually available without any health exams because the person is already covered under the plan. The coverage is designed to last until the person can obtain other, more affordable, insurance.

Because COBRA coverage is available to the non-employee spouse immediately after the divorce it prevents a lapse in insurance coverage. This is particularly important if the person has a pre-existing medical condition. Many insurance policies will not cover pre-existing conditions for the first several months of the policy. However, there is usually an exception if the person seeking insurance has been continuously covered under a prior insurance policy. COBRA insurance coverage allows a party to maintain continuous coverage until he or she is able to obtain new insurance. This protects the party from having the new insurance policy exclude a pre-existing condition.A Qualified Domestic Relations Order (“QDRO”) is used to divide retirement accounts between parties in a divorce case. Often in divorce cases the parties’ retirement plan or plans add up to one of the two largest marital assets (the marital residence is often the largest asset although, after taking the mortgage into consideration, the retirement account is often the greatest net asset). Because the retirement account is such a major asset in many cases it is often necessary to divide one or more such accounts. A QDRO is the tool used to divide the accounts between the parties. Most retirement accounts, including 401k plans and traditional individual retirement accounts, are tax-deferred investments. The investing party does not pay taxes on the money put into the plan (in the case of a traditional IRA the contribution is deducted from taxes, in the case of a 401k the contribution is made before taxes are calculated).

The investment is allowed to grow without paying any tax until the party withdraws the funds. Upon retirement the retiree pays taxes on the account proceeds as they are withdrawn from the account. This tax deferred status comes with a price, however. If the person withdraws the funds prior to retirement there is an additional ten percent tax which has to be paid (unless a special condition applies). In addition the money is taxed a regular income. When the parties are divorcing and dividing assets they usually do not want to pay the taxes on the retirement accounts. It is necessary, therefore, to find a way to take money out of the account and transfer it to the former spouse without incurring the taxes. The way this is done is through a QDRO. The tax code allows parties to transfer funds from a retirement account as part of a division of assets in a divorce case.

However, the code requires certain steps be followed in order to successfully transfer the funds without incurring tax liability. The term is derived from the fact it is used in domestic relations cases. The document is submitted to the court where it is approved by the judge and made an order of the court. Finally, a certified copy of the court’s order is submitted to the fund manager for approval. Once the fund manager approves the order it is “qualified”. The fund manager has a great deal of authority to approve or reject the proposed QDRO. Many larger employers will provide a sample QDRO form which, if followed, will be approved. However, there are a great number of employers, particularly smaller employers, who do not have a pre-approved form. As a result, the attorneys have to draft language, submit it to the manager for review, and modify the language as necessary.

The process can be long and drawn out if the fund manager requests multiple changes to the proposed document. I hope this article has explained the basics of COBRAs and QDROs. If you have more detailed questions consult a local domestic relations attorney.

Ken McRae is a Cordell & Cordell, P.C. attorney practicing exclusively in family law in the firm’s Overland Park, Kansas office.