Remember the 401(k) in Your Divorce
Retirement plans like 401(k)s are plans companies offer to their employees. This means that a 401(k) is not an asset you and your spouse jointly own — it is instead a benefit offered to one person by his or her employer.
A common question in divorce cases is whether you can split the payouts of a retirement account if you do not work for the same employer as your spouse. The answer is yes, but only if you meet the requirements of the federal laws pertaining 401(k)s, known as ERISA (the Employee Retirement Income Security Act of 1974) and the Internal Revenue Code.
Federal law does not allow an employee’s 401(k) to be assigned to another person, even a spouse. This law ensures the benefits will go to the employee upon his or her retirement.
There is, however, an exception for an “alternate payee.” If the proper procedures are followed in compliance with ERISA, the local divorce court may order distributions to the spouse.
How this process works
After the divorce court determines the 401(k) will be split, the court must approve a special order, called a Qualified Domestic Relations Order (QDRO). This is the tool used to transfer assets from the person who owns the 401(k) to his or her former spouse. This is the only means by which an individual can receive nontaxable payouts through his or her former partner’s 401(k).
In most cases, the portion of that 401(k) that goes to the spouse will be transferred to the spouse’s own individual retirement account (IRA) to avoid taxation. A QDRO may also be used to assign part of a 401(k) to a child or a dependent to satisfy child support obligations.
For more information about dealing with a 401(k) when dissolving your marriage, work with an experienced Long Island divorce lawyer at Bryan L. Salamone & Associates.