While a divorce is generally very taxing emotionally, it also has very serious financial ramifications. One concern you may have already is how your 401(k) Retirement Plan will be treated in a divorce. Similar to your home, it can be an essential asset of the community estate with significant value. You will need to propose how to handle the nonparticipant spouse’s interest when negotiating how to split your community property.
Are Retirement Benefits Really Community Property?
Retirement benefits such as your 401(k) are a form of employment compensation, like your earnings from income. Thus, regardless of when these benefits are vested or matured, the benefits are characterized as community property, to the extent earned during marriage, up to the date of separation, which is how the length of marriage is measured in California.
There are two main options for dividing a retirement plan during a divorce. The future ex-spouses may agree (or a court may order) that the nonparticipant spouse will receive his or her pay-out when the participant spouse does, upon retirement. Alternately, the spouses may agree (or a court may order) to assign the entire value of the retirement plan to one spouse and grant other community property to the nonparticipant spouse.
What Is a Qualified Domestic Relations Order?
In order to divide a 401(k), you need a special order from the Court called a Qualified Domestic Relations Order, or “QDRO.” A QDRO is a legal tool derived from the Employment Retirement Income Security Act of 1974 (ERISA). It allows a state court to split any qualifying benefit plan or pension plan between spouses.
In order for a QDRO to go into effect as a result of a divorce, it must contain general identity information about you and your future ex-spouse. This often includes your dates of birth, social security numbers, and addresses. The QDRO also requires information from the plan provider in question. This is especially important because the QDRO cannot go into effect without a specific outline in the plan’s guidelines.
To determine what is the best option for dividing a retirement plan as the participant or nonparticipant spouse, we recommend consulting with your attorney and usually a financial advisor as well. Each individual situation requires an analysis of its specific facts and circumstances. [Disclaimer]
Our family law team at Naimish & Lewis can advise you on this and other dissolution and divorce related matters involving division of property. To schedule an initial consultation with an attorney at our firm, please contact us.