Employee retirement plans like 401(k) plans are usually not co-owned with a spouse. However, couples in California who are planning to get a divorce should understand how a 401(k) can be treated when a marriage ends.
Under certain conditions, the retirement account can be split between the two divorcing parties, even if the 401(k) was opened before the marriage began. The Internal Revenue Code and the Employee Retirement Income Security Act of 1974 dictate which requirements will have to be met.
While federal law does not allow for an individual’s 401(k) to be assigned to another person, there is an exception that allows for an alternate payee. The correct procedures must be adhered to in order to be in compliance. When this is done, a family court judge can require that a spouse receive a distribution from the fund.
The qualified domestic relations order is a special document that has to be created and approved by the divorce court when it decides a 401(k) will be allocated between the divorcing parties. The order is the only method in which a former spouse can avoid being taxed on the funds from the other’s 401(k) plan. To prevent a taxable distribution from occurring, funds will be transferred into the recipient’s individual retirement account. This prevents both parties from being assessed taxes on the distribution.
The division of marital property can often be a contentious issue. In many cases, an attorney can assist a divorcing client in negotiating an overall settlement agreement that covers this and other applicable matters.