401Ks and Divorce – Part 1
Retirement assets (along with a home) are often the largest assets couples have to divide when divorcing. It’s important for a client considering divorce to have at least a basic understanding of those assets and the legal rights both spouses have to those retirement assets. In Part 1 (of 2) of this series, we review the basics of 401Ks as they relate to marriage and divorce.
Unless you earned all of your 401K prior to the day you married, your 401K is community property – meaning that it doesn’t matter in whose name the account is. Under Texas law, both spouses have equal ownership in any asset acquired during the marriage (except by gift or inheritance). So if you worked the entire marriage and your spouse was a stay-at-home parent – or your spouse worked part time or didn’t have a 401K benefit at work – your 401K still also belongs to your spouse.
It is not uncommon for a spouse to have a 401K that he or she has built up before marrying, and then continue to build that same 401K account during the marriage. In that instance, part of the 401K account is separate property and part is community property. Determining the value of the separate versus the community portions is not as simple as you might think. Legally, you can’t just pull a statement from the day before you married to see how much was in the account. A legal determination requires a process called tracing where a financial expert must review all of the trades in the account since the date of marriage in addition to the income received in the account since then as well as any withdrawals from the account. In other words, the financial expert must “follow the money” by effectively tracing where each separate property dollar goes during the life of the 401K following the date of marriage. Depending on the length of the marriage and the amount in a 401K, a couple may opt for a simpler solution to avoid the cost of the financial tracing expert.
Dividing the 401K at Divorce
401Ks are subject to federal regulation by way of ERISA – the Employee Retirement Income Security Act. If a 401K is to be divided upon divorce, ERISA requires the plan administrator to have a Qualified Domestic Relations Order signed by the divorce court. This order is commonly referred to as a QDRO (pronounced “quadrow”). Because this is a specialized area of the law potentially involving tax ramifications, death benefits, and other intricacies of different 401K plans, most divorce attorneys in Texas will retain an attorney who specializes in retirement benefits work to draft your QDRO once a divorce settlement is reached. It is an important document that should not be taken lightly.
In Part 2, we’ll review some options for how the 401K can be divided – or not – in a divorce settlement.
Rhonda Cleaves is a divorce attorney in Plano, Texas, who has been Credentialed as a Collaborative Divorce Attorney. She represents clients in the DFW metroplex, including clients in Collin, Dallas, Denton, and Tarrant counties. To schedule a consultation, you can reach Cleaves Family Law at (972) 403-0333.