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What Happens to Retirement Funds and 401(k) Plans in a Divorce?

Where Strategy Meets Skill

Retirement and 401K (or for that matter any form of pension/savings benefit program intended for retirement), are considered, by Florida Law, to be potential marital assets. This means they are subject to the presumed 50/50 division afforded by Florida Statutes to the extent that the asset accrued between the date of marriage until the date the dissolution petition is filed (note: any monies accrued either before the marriage or after the date of filing are considered “non-marital” and therefore are not subject to distribution).

This presumption is, of course, the default division applied if you bring your case to court. A lot of people resist the idea of dividing up their pension in such a manner, and often will attempt to negotiate around the 50/50 divide by coming up with an alternative settlement, either in advance of filing, or pursuant to a successful mediation. The Court will not impose the 50/50 divide standard if the parties agree to some other means to share property.

Bear in mind, however, that merely getting the retirement in “your” column is not likely to be agreed to by your spouse in situations where there are no other assets to negotiate away. For example, let us say your entire nest egg of $200,000 was all martial and is the ONLY thing you have of any value. Chances are high your spouse is not going to agree to let you keep it for yourself, nor will the Court expect them to. You need to, in other words, give due regard to fairness in your expectations.

The value of retirements and distribution thereof can be a very sensitive and emotional topic (particularly for professions where personal risk is involved, such as police, fire, and first responding professions), and many people simply do not understand or what to accept the public policy behind the default setting of the law. BE CAREFUL. Many a case is subjected to wasteful litigation because an obstinate plan participant refused to accept the black letter position of the law.

Put at its most simplistic, the idea behind WHY such plans are divisible is as follows. While you, as an employee, were busy working and using part of your paycheck to make retirement nest egg, you were doing so either 1) with the assistance of your spouse picking up the slack elsewhere, either financially, or in the homestead by action (i.e. you didn’t have to hire a nanny or day care because they stayed home, thereby allowing you to afford to save, or because you saved they used their own income/paycheck to meet marital expenses); or 2) that asset was accrued with the intent of it to benefit the joint venture of the marriage and would have done so but for the incident of the divorce. That other person subsequently made no retirement planning of their own or fell short of their goals, having expected joint benefit.

The next issue often questioned is how plans are divided, and that will often depend upon the Plan Administrators. Some benefits can be transferred in lump sum, so that once the martial portion of the asset is identified one-half of that can be immediately transferred upon entry of the final judgment. The other more common method with pensions is that the asset will not “pay out” until the retiree is entitled to take the benefit. For example, a military retirement will not vest until separation from the service, at which point the entitled ex-spouse will get a stipend check each month just as the retiree does.

Either method requires the additional step of a Qualified Domestic Relations Order (QDRO). The Final Judgment, alone, is not sufficient to self-execute this, and in many cases QDROs must be approved by the Plan Administrator before a payment will be processed. Some older cases are running into the issue of QDRO orders that were rendered years ago not being now found sufficient – mainly due to math formulas not being specified or other technical issues. The fix is, in most cases, as simple as amending the Final Judgment or QDRO to attend to the relevant information, since the intent of the judgment is clear, its merely the means of division that requires clarification.

If you are an entitled spouse or beneficiary spouse as a result of a divorce who is seeking lump sum payout, bear in mind that unless the QDRO transfers funds from plan to plan directly there will be tax penalties and fees associated with the transaction. Similarly, if the agreement is that in lieu of QDRO the “owner” spouse of the plan takes a withdrawal and pays directly, then the parties must consider in so doing who would be responsible for the payment of penalties, and who will be considered responsible for the taxation associated with the transaction.

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