Over 46 million Americans currently have some type of retirement plan through work. These plans are governed by the rules of your particular employer, but also by federal laws. And rightfully so, as saving for retirement is a very important thing to do (especially considering the current state of social security). In general, Federal law protects your 401(k) against judgments from creditors, even if you declare bankruptcy. Individual Retirement Accounts (IRAs) are not given the same protections. However, under the 2005 law, the Bankruptcy Abuse Prevention and Consumer Protection Act, up to $1 million in IRA assets are protected in the event of bankruptcy.
There are great protections in place for two types of retirement plans. But what happens to your 401k during separation and divorce proceedings? Can your spouse get your 401k in a divorce?
Exception for Family Support and Division of Property at Divorce
Division of marital property is generally governed by state domestic relations law. However, division of retirement assets must also comply with Federal law. Specifically, it must comply with the Employee Retirement Income Security Act of 1974 (ERISA) as well as the Internal Revenue Code of 1986.
Under both of these sources of Federal law, assignments of retirement benefits can only occur if the “judgment, decree, or order creating or reorganizing a spouse’s, former spouse’s, child’s, or other dependent’s interest in an individual’s retirement benefits constitutes a “qualified domestic relations order” (QDRO).” The order must relate to child support, alimony, or marital property rights.
Can a Spouse Get Your 401k in Divorce?
Yes, a state court may order part or all benefits to be paid to either the spouse, former spouse, child, or other dependent through a state court judgment, decree or order, or court approval of a property settlement agreement.
When part or all of the benefits are awarded, the person is named “alternate payee”. The order must be drafted into a QDRO, and then must be qualified by the plan administrator.
Qualified Domestic Relations Order (QDRO)
What is a QDRO? What qualifies as a QDRO?
A QDRO is a domestic relations order that qualifies an alternate payee to receive all or part of another person’s retirement plan. A qualified QDRO must contain the participant’s name and last known mailing address, name and last known mailing addressing of each alternate payee, name of the plan, amount/percentage/or method of determining the amount/percentage of the benefit to be paid to the alternate payee, and the number of payments or time period to which the order applies.
Here are other tidbits of information for you regarding QDROs:
- Method of Determining Who Gets What Amount: The amount awarded to the alternate payee will vary depending on which state is involved in issuing the state court judgment, decree or order, or court approval of a property settlement agreement. Factors in consideration are generally whether or not the funds were accumulated entirely during the marriage, or if funds were accumulated prior to the marriage.
- What Happens in the Event of Plan Changes/Mergers/Etc.?: The alternate payee rights under a QDRO will be protected in the event of plan changes (which can include amendments, mergers, change of plan sponsor, etc.) to the same extent that participants’ rights and beneficiaries are protected. Alternate payees should be treated the same.
- QDRO as a Divorce Decree or Standalone: A QDRO can either be part of a divorce decree, or can be a separate document.
- Types of Plans Covered: QDROs only apply to employee benefits/pension plans subject to ERISA. There are comparable types of orders available to divide military retirement pay, Individual Retirement Accounts, and other Federal civil service retirement plans.
- Drafting the QDRO: It is recommended that you obtain the services of a lawyer or QDRO drafter to draft your QDRO. You can generally obtain the retirement plan’s QDRO Approval Guidelines and Procedures, and sometimes even a template. Once drafted, the document must be filed with a court, certified, and executed by the court. Then it must be given to the plan administrator, who will then make the determination as to whether it is qualified or not.
What Happens to Your Plan after the QDRO is received by the Plan Administrator?
Typically, once your Plan Administrator receives a QDRO and before they qualify it, they will put a freeze on your account. The primary plan participant will still be able to make contributions to the account during this time. However, during the restriction period, the participant generally will be unable to collect benefits, take out a loan, or make a withdrawal. The freeze is lifted once the QDRO is qualified.
For more information, check out the Department of Labor’s publication: The Division of Retirement Benefits through Qualified Domestic Relation Orders.