Retirement accounts, such as 401(k) savings plans, often need to be divided between divorcing parties. The division can be completed pursuant to a Qualified Domestic Relations Order, or “QDRO,” to avoid income tax and early withdrawal penalties. The QDRO is prepared by an attorney after the divorce and property division is final. The terms of the QDRO must match the terms of the Marital Dissolution Agreement (if the parties settled) or the Court’s final decree (if the parties went to trial). Missing terms in a Marital Dissolution Agreement and delays in implementing the QDRO after the divorce can sometimes turn out to be very costly.
For example, in Heisig (No. E2021-00925-COA-R3-CV), the parties were divorced in January 2018. According to the Marital Dissolution Agreement, Wife was awarded $130,000 from Husband’s 401(k). A draft QDRO was not submitted for court approval until January 2019, an entire year later. The trial court awarded Wife statutory post-judgment interest of $2,839.16. However, the value of the account had increased due to market forces over that one-year period. The gains on Wife’s share of the 401(k) exceeded an additional $55,000 by April 2021. The Court of Appeals refused to award Wife those gains.
The Court of Appeals found that because the Marital Dissolution Agreement did not explicitly assign gains (or losses) to Wife’s share of the account, she was not entitled to the extra $55,000. Rather, Wife had chosen the “comfort and security” of a defined figure from the 401(k). Her award would not be reduced by market losses that may have occurred, but by the same token she could not take advantage of market gains. If Wife had planned to take advantage of gains in the market from day the parties agreed her share would be $130,000, that needed to be explicitly stated in the Marital Dissolution Agreement.
Careful drafting of Marital Dissolution Agreements and timely completion of Qualified Domestic Relations Orders will keep you from being surprised by the final division of retirement assets in a divorce. In addition to addressing gains and losses, your Marital Dissolution Agreement should also cover who is responsible for legal fees for preparing the QDRO, the division of administrative costs, the valuation date, exclusion of loans, any survivor rights, and for pensions whether the award is a shared or separate interest.
The contents of this post do not constitute legal advice or suggest any outcome of your individual case. You should seek the advice of an attorney based on the facts and circumstances of your case before taking any action.
