Kelly Byrnes & Danker, PLLC

Dividing a 401(k) after divorce requires care

In many divorces, one or both parties will have a 401(k) retirement account through an employer. As with other assets, the 401(k) is usually considered a part of the marital estate and is subject to division in Virginia. But when dividing these retirement accounts, special care must be taken to ensure the division does not become a taxable event.

A 401(k) account can be divided 50/50 or some other percentage. Another option is for a firm dollar amount to be set aside for the non-participant. The amount set aside may be kept with the plan sponsor or transferred to an IRA. If certain requirements are met, the transfer will be considered a tax free transaction by the IRS.

Though the division of the account is ordered through the divorce decree or property settlement agreement, a separate court order is needed to facilitate the transfer. This document is referred to as a Qualified Domestic Relations Order (QDRO). The QDRO will identify the plan name and sponsor, the account number, the participant and non-participant, the cash value as of a certain date and other information.

The order will direct the plan administrator to transfer a certain dollar amount or percentage of the present value to the non-participant or to an account created by the non-participant. Normally, every 401(k) plan has particular language that must be present in the QDRO before it will be approved. When approved by the plan administrator, the court ordered sum will be transferred.

If a 401(k) account or ERISA pension is likely to be divided in a divorce proceeding, an experienced family law attorney could be particularly helpful. The attorney will normally contact the plan administrator before the divorce is final and obtain specific instructions for preparing the QDRO and dividing the account. Ensuring that the QDRO is prepared correctly will prevent post-divorce delays and mistakes.

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Kelly Byrnes & Danker, PLLC

Kelly Byrnes & Danker, PLLC

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