Employers often offer 401k plan options. Under some plans, employers will match any money you put into the plan up to a certain amount, commonly between 2 and 6 percent. A major benefit of these plans is that you put money in tax-free and allow it to grow over time.
These 401k retirement plans are highly regulated under the Employee Retirement Income Security Act (ERISA). Like a parent setting guidelines for the safety of a child, the ERISA sets strict requirements and limitations for the participants lawmakers enacted it to protect. You might own the account, but you are not allowed to withdraw or transfer funds early without incurring penalties.
So how do you handle the division of retirement accounts in a divorce?
When you file for divorce in New York, the funds you and your spouse contributed to a retirement plan during the marriage are considered part of the marital estate and subject to division under state law. Lawmakers were well-aware of this possibility when they drafted ERISA and included guidelines for qualified domestic relation orders (QDRO).
A QDRO is a judgment, decree or order that allows you to roll over all or a portion of the benefits to a spouse during a divorce without incurring early withdrawal penalties. As is with many financial issues, executing a QDRO properly is easier said than done.
When you draft a QDRO, you must include certain information, like the dollar amount and number of payments, in the document. ERISA also prohibits you from setting certain terms such as requiring a plan to provide for increased benefits.
You can include the document as part of your property settlement or a court can issue a separate order, but the terms must be clear and you must execute it properly. Any mistake can affect your retirement benefits and be costly to fix.