Pennsylvania residents who are considering getting a divorce should know what could happen to their 401(k). Although the retirement plan is offered to employees and is not considered a joint asset, it can be divided between employees and their spouses, even if the plan predates the marriage. However, this is only possible if certain criteria related to the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 are met.
Federal law typically does not allow 401(k)s to be assigned to someone other than the intended recipient, but it does allow an alternate payee. The processes to do this have to be in compliance with ERISA, and then distributions to a spouse can be ordered by a family court.
A qualified domestic relations order is drafted once it has been determined that a 401(k) can be allocated between spouses. A properly written and approved QDRO is used to reassign assets from the retirement plan of the owner to the former spouse. The QDRO is the only mechanism with which a former spouse is able to avoid being assessed taxes on any funds received from a spouse’s 401(k) plan. Assets of a 401(k) may also be transferred to a child or any other dependents by using a QDRO, for support purposes although QDROs used for children are a rarity. For minor children, the QDRO can stipulate that the funds be directed to the child’s guardian or trustee.
A family law attorney may work with clients during a divorce to ensure that they receive favorable terms regarding the division of property. As this is often a fairly contentious stage of the process, the negotiations might be lengthy.