Qualified plans such as a solo 401k are split according to Qualified Domestic Relations Orders (QDROs). The QDRO must be signed by the court and approved by the company plan administrator. It requires part or all of the plan benefits to be paid to an alternate payee who is usually the former spouse, but can also be children, according to the divorce settlement. When the QDRO is drafted correctly, it makes sure that the former spouse has rights to an agreed-on portion of the retirement plan. If it is not done correctly, a former spouse may wind up with nothing, or, in some cases, everything, as you will see in some of the court cases referenced below.
The QDRO applies not only to qualified retirement accounts like solo 401(k) plans, but also to defined benefit plans. A defined-benefit plan presents more planning challenges. A solo 401(k) plan has an account balance that can be divided, but a defined-benefit plan provides a future benefit that must be calculated.
The QDRO cannot force a retirement plan to make a distribution that it would not normally allow. The former spouse may not be able to access benefits in the plan until the plan participant is eligible to receive those benefits. That should be taken into consideration in negotiating the divorce settlement.
For solo 401k plans, if the funds are not paid according to the divorce documents or QDRO and the account owner distributes retirement funds to the former spouse, then the account owner pays the income tax (and 10% penalty, if applicable). Any solo 401k funds that are given to the former spouse will be tax-free to the former spouse and the funds can no longer be transferred to the former spouse’s IRA, ending the tax deferral.
Divorce Cases – Death after Divorce Court Rulings
- Who Gets the Survivor Benefits, Spouse 1 or Spouse 2? First Wife Gets the Retirement Account
Lera Braehler v. Ford Motor Co. UAW Retirement Plan (2007, WD Ky) 2007 WL 1805045
- Opposite Result
Second Wife Gets the Retirement Money Over the Children of the First Wife – ERISA Trumps a QDRO for Children
Hamilton, David v. Washington State Plumbing and Pipefitting Industry Pension Plan (2006, CA9) 433 F.3d 1091, 2006 WL 44305, cert den. (2006, S.Ct.) No. 05- 1535 November 27, 2006
ERISA Trumps Prenuptial Agreement
- Court Case – October 24, 2006
Greenebaum Doll & McDonald PLLC v. Sandler
No. CIV.A. 3:05CV-754-H. , 2006 WL 3071253, 39 EBC
Court: United States District Court , W.D. Kentucky. , Date: 10/24/2006
Classic Divorce Cases
- Incorrect Transfer of IRA Funds in a Divorce Triggers Tax
Stephen R. Jones v. Commissioner; T.C. Memo. 2000- 219; No. 13203-99 Date: Jul. 20, 2000
- Voluntary Payment of Divorce Obligations from an IRA Triggers Tax
Edward A. Bougas III v. Commissioner; T.C. Memo. 2003-194; No. 13256-01 Date: Jul. 2, 2003