In divorces, 401K plans are treated as marital property to be split between spouses. The amount that each person receives depends on the couple’s agreement and state and federal laws. The terms of 401K division should be recorded in Qualified Domestic Relations Orders, given to divorcing spouses by plan administrators. These forms need to be filled out a certain way and signed by judges and plan administrators to be valid. Attorneys on both sides should have these documents when exes plans to negotiate on 401K terms.
Couples have different options for dividing up 401K benefits. The spouse with the 401K benefits could choose to make a one-time cash payment to satisfy the amount owed. Both parties could reach a negotiation where one side keeps another asset, such as a property, instead of half of a 401K. Another option would be to add half of the 401K amount to the other spouse’s retirement assets. Individuals receiving half of their spouse’s retirement benefits have to pay a penalty of 10 percent to the Internal Revenue Service if they choose to withdrawal the amount before the age of 59.
It is important for couples to read the directions of a QDRO and fill it out accordingly to ensure that it is valid. Not finalizing the details of this plan can mean that divorced spouses fail to receive benefits if their exes retire or die before the agreements are signed and filed. Couples with questions on options offered by their QDRO should talk with their plan administrators early in the process.
In a high-net divorce, a 401K can become a major source of contention. Couples need to make sure to fill out all pertinent forms, including the QDRO, correctly to ensure that 401K benefits are split up according to agreements or judges’ orders. A family law attorney with experience in divorce law may be able to help spouses through the negotiation process for 401K plans and other disputed assets.