IRAs & OTHER COMMON FEATURES OF RETIREMENT PLAN DIVISION
(The following applies primarily to defined contribution plans, not pensions)
IRAs
The method of dividing IRAs has to be determined on a plan by plan basis, by checking with the particular plan. There are several common methods the IRA plan may require: A court order called a domestic relations order or DRO (similar to, but not a QDRO); Letters of Instruction & Acceptance; a certified copy of the divorce judgment; plan internal forms completed; or a combination of these documents.
Unlike plans accepting QDROs, some IRA plans will not accept direction to compute and include market gains and losses on the share divided or assigned to the other party, and will only accept a set dollar amount, as opposed to percentage or fraction division. This should be verified with the particular plan as well.
Loans
Outstanding loan balances from defined contribution plans (e.g., 401k) should be specifically addressed in the divorce judgment or settlement agreement. The plan will not divide, or assign part of the loan obligation to the non-employee. Only the employee can be responsible to pay the loan per plan terms. (The divorce judgment of course can obligate the non-employee to contribute towards the loan payments, as with any other loan).
Stating a plan division is “inclusive of loan”, or a similar provision in the divorce judgment means, that not only is the current plan owner solely responsible to repay the loan on that party’s retirement plan, but the loan balance is added back to the total account balance and then divided. As such, the separated accounts are “equalized” with the loan balance included in the employee’s separate balance only.
Or, it may be stated in the divorce judgment - Party A shall be responsible for the retirement loan. That could be interpreted as meaning, Party A is not only responsible for repayment, but also that the loan balance is to be included in the balance divided.
Be certain that is the intent, as the employee repays the loan to him/herself (their plan account), not a third party. Thus, they may be willing to repay the loan, but would have a very different outlook on the loan amount being included in the plan balance being divided, since it only benefits the other party.
For example, if the plan has an original balance of $50,000, and a $10,000 loan is taken. “Including” the loan in the plan division means, $50,000 is divided, and with a 50/50 split, the non-employee gets $25,000, the employee gets $15,000, as understandably, the plan will only divide “net” or non-loan assets in the plan.
Dividing several plans with one order
It is not uncommon to divide several retirement savings plans through one DRO addressing one plan, with the amount of division adjusted for the other plans. If doing so, it must be understood only the plan being divided by the DRO will reflect market gains/losses from the division date. Therefore, it is important to file the DRO as soon as possible after the division date, as the other accounts will also change in value.
We reserve the option of charging an additional fee for evaluating and documenting the division of several plans through one order dividing one plan. While the concept of using one order may appear simple, it often does not materialize that way. Our normal flat fee is per order needed, and does not include this additional task (and responsibility) at no additional charge, intended to minimize the number of Orders and thus our fees. We hope the irony of that is not missed.