When Do 401(k) Proceeds Get Distributed Following the Dissolution of a Marriage?
401(k) plans are tax-deferred retirement savings programs that require a contribution on the part of the plan participant. Like pensions, annuities and other retirement assets, a 401(k) can constitute marital property in a divorce case, thereby subjecting it to division by the court. Just because a party to a divorce case has a 401(k), however, does not mean the plan will be divided. Whether this happens depends upon several factors.
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Equitable Distribution and Community Property in General
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States divide marital property and debt under the laws of either equitable distribution (ED) or community property (CP). CP states divide the marital estate equally, whereas ED states must divide the estate equitably, or fairly. While an ED court will apply a presumption that an equal division is fair, the law provides for an unequal distribution in the presence of certain statutory factors. In an ED state, the presence of these factors can affect the division of the estate and therefore the necessity of dividing a 401(k). If the court orders an unequal division, the plan participant might keep the account undivided.
Definition of Marital Property In General
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Both ED and CP states apply similar definitions of marital property. In general, the marital estate begins on the date of marriage and ends, depending upon the state, on either the date of separation, date of filing of a divorce decree, date of entry of a legal separation decree or on the actual date of divorce. Everything earned by either party between those two dates is presumed marital. Everything acquired by inheritance or gift or acquired outside of those dates is presumed to be separate. Because of this, a 401(k) might be a party's separate property and escape division by the court. The plan will only constitute marital property to the extent the money contributed to it was earned during marriage.
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Makeup of the Marital Estate
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Courts prefer to make an in-kind distribution of the marital estate, meaning they prefer to achieve whatever division they're pursuing by distributing assets and debts intact. If they can reach that division without cutting up retirement plans, they will usually do it. Because of this, a 401(k) plan may escape division if the makeup of the marital estate is such that the desired division can be achieved without dividing the plan. This may occur because the plan participant is assuming a great deal of debt, or it may be because sufficient assets exist to compensate the other party for his share of the plan.
Type of Resolution
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A party must generally file an ED or CP claim before entry of a divorce decree or the claim is lost; as such, if the parties divided their estate by oral agreement prior to divorce and the 401(k) in question wasn't divided beforehand, the plan participant might refuse to divide it and the nonparticipant will be out of luck. If the parties enter into a separation agreement prior to divorce, retirement assets are typically divided within a few months of the agreement's execution. If the marital estate has to be divided through court, though, division may not occur for years.
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References
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