Rules of Processing a Solo 401k Divorce QDRO

When splitting solo 401k retirement assets in divorce,  it is very important that the division of these assets be handled carefully and correctly. For purposes of this blog post, a couple of definitions are necessary if you are not familiar with division of solo 401k retirement plans in divorce.  The solo 401k participant is the spouse who has worked for the self-employed company that sponsors the solo 401k plan and accumulated the benefit.  The alternate payee is the spouse who has a right to some or all of  the solo 401k assets due to divorce.

A qualified domestic relations (QDRO) is a judgment, decree, or order that creates or recognizes the existence of an alternate payee’s right to receive all or a portion of a solo 401k plan participant’s benefits payable under an ERISA-qualified employee benefit plan. QDROs have been in existence since 1984. QDROs are common in divorce settlements.  They are also utilized in obtaining child support (including arrearages) and/or alimony.

A QRDO is not an official document until the solo 401k plan administrator approves it and the document is signed by the family law judge. The divorce attorney’s job is not complete until the QDRO is in place.  There have been times when attorneys have not followed through with the plan administrator to be sure that the QDRO has been officially approved.  Remember, unless the solo 401k plan administrator approves it, it doesn’t count as qualified – whether the judge has signed the document or not!

A solo 401k plan is a defined contribution plan. In a defined contribution plan, each solo 401k participant has an account balance. Other examples of defined contribution plans are  profit sharing plans and money purchase plans, among others.

The QDRO for a defined contribution plan such as a solo 401k should define the alternate payee’s share of the benefit in terms of an account balance using either a percentage or specific dollar amount.  Moreover, there are several other confusing issues that must be addressed, such as outstanding solo 401k participant loan balances, employer contributions and pre-tax vs. post tax dollars.

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