Going through a divorce is difficult enough with all the decisions that need to be made about property division. Louisiana is a community property state, meaning that all assets that were accumulated during the marriage belong to the community and need to be allocated to each spouse in the Property Partition.
Most divorcing couples know that a retirement plan, like a 401(k), is a community asset. If the plan was established during the marriage and only funded by the deferral of community income or employee contributions during the marriage, the entire plan is a community asset. This is true even though the account is only in the employee spouse’s name. As all assets at the end of the marriage are assumed to be community, it is the responsibility of the spouse claiming that an asset is wholly or partially separate property to prove their claim.
Attorneys and clients need to know the following when dividing 401 (k) accounts:
- 401 (k)’s must be divided by a Qualified Domestic Relations Order (QDRO) A QDRO allows the tax-deferred or tax-free funds to be transferred to the non-employee spouse without tax and to avoid the ten percent early withdrawal penalty under Section 72 (t) of the Internal Revenue Code if withdrawals are needed before age 59 1/2. After the transfer, the non-employee spouse will have to pay regular income tax on any taxable withdrawal.
- If the 401(k) was established prior to the marriage the balance at the date of marriage is separate property. The capital growth of this property is not part of the community, but dividends and interest are part of the community. Identifying the separate or community property components of a 401 (k) can be data intensive and requires expert analysis to get it right.
- Transfers into 401 (k) accounts need to be documented so that the source of the funds is clearly identified. In a recent case we were able to identify over $500,000 of transfers coming from separate property sources and exclude them from the community.
- Withdrawals from 401 k accounts should be reviewed to see if they were made for the benefit of the community. This is particularly important if a withdrawal around the time of or after the termination of the community, but before the community was settled. If the withdrawal was not for the benefit of the community, the spouse who received the withdrawal may have to reimburse the other spouse.
- 401 (k) loans outstanding at the end of the community need to be properly accounted for so that the employee responsible for paying the loan receives credit.
- Some employers make annual contributions into a 401 (k) for periods of a spouse’s employment during the marriage after the termination of the community. In such cases a portion of this contribution may belong to the community.
- Louisiana courts value a 401 (k) at the date community property is settled. As some 401 (k)’s may not be able or willing to calculate gains and losses since the termination of the community, it is important to confirm whether a plan can perform this calculation to avoid a delay in completing the division of the 401 (k).
- Due to COVID-19 the performance of individual sectors of the economy have been very uneven and the gain or loss of investments in particular sectors or companies may be vastly different. When comparing and offsetting 401 (k) accounts (or other deferred contribution retirement plans), it is important to review all statements since the termination of the community and perform calculations based on current data.
- 401 (k) plans can include ROTH contributions. The contributions to these accounts are made with after tax money and under current tax law ROTH contributions and growth on ROTH contributions is not subject to Federal Income Tax. This makes a ROTH balance in a 401 (k) more valuable than a tax deferred balance. When analyzing 401 (k) accounts it is important to make sure that ROTH and after-tax balances are properly identified.
How We Can Help
At Hoffman Divorce Strategies, we work with family law attorneys to assist them and their clients in dividing 401(k)’s. We can help you ask for the right information by informal request or subpoena, analyze the activity in a 401 (k) to identify community and separate property, prepare defensible reports for negotiation or litigation, assist with language needed when drafting a Property partition to divide 401 k accounts and assist in the preparation or review of QDROs required under the Employee Retirement and Income Security Act . We work as part of a team in litigation, collaboration, or as a private financial mediator. Contact us for more information.