Divorce settlements would generally include your 401(k) plan because it is considered a joint asset like a home or other possessions. The management or dividing of a 401(k) account from divorce proceedings is done through a qualified domestic relations order, known as a QDRO.
The division is authorized through your attorney usually with a court judge approving the order. The 401(k) plan administrator must also approve the QDRO after determining it is in compliance with the federal government requirements.
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The spouse becomes an "alternate payee" of the 401(k) under conditions of the settlement. A QDRO is a domestic relations order that applies to other matters in the settlement as well, such as child support, alimony payments or property rights issues, according to the Department of Labor.
A state court, state agency or other authority can issue the order under state laws regarding property law.
Each 401(k) plan contains different provisions and rules. Some plans allow distributions at the time of the divorce settlement and approved QDRO, but other plans may stipulate distributions can only be made at the time of retirement.
The distribution of the 401(k) assets depends on the details of the QDRO in the divorce settlement and how assets are distributed to the spouse from the plan administrator, according to Legal Zoom.
The agreed upon proceeds might be rolled over into the spouse's retirement plan. The money might remain in the plan, so the spouse can take a portion upon retirement.
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Distributions can also be made as a cash payment according to the settlement and under the approval of the plan administrator. Cash payments must abide by IRS regulations, which state the agreement has to be a one-time deal when the plan administrator approves it.
Any further disbursements would subject the spouse to a 10 percent penalty for early withdrawal, unless the spouse is 59 and a half years of age, the age when federal rules allow distributions for retirement to begin without penalty.
It is recommended that spouses file for the QDRO as soon as possible during divorce proceedings. Death or retirement before the plan administrator approves the QDRO could mean the spouse loses the right to the 401(k) plan benefits.
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