Understanding Retirement Savings Plans
Defined Contribution Plans are employer-sponsored retirement accounts. While they vary by industry and employer, they are commonly referred to by the following names:
- Corporate/Private: 401(k), 401(a), Profit Sharing, Money Purchase, or Employee Savings Plans.
- Non-Profit/Government: 403(b), 457 Plan, or Thrift Savings Plan (TSP).
- Other: Union annuity plans, deferred compensation plans.
Key Considerations for Defined Contribution Plans
1. Vesting
While employee contributions are always yours, employer contributions may require a specific number of years of service to “vest.” If a participant terminates employment before they are fully vested, the unvested portion is typically forfeited and cannot be paid out.
2. Loans
Many plans allow participants to take loans against their balance.
Your separation agreement must explicitly state whether these loans should be added back to the total value or netted out before calculating the assigned benefit.
3. Distribution Restrictions
Most employers allow an immediate lump-sum distribution to a former spouse. However, some plans, such as multi-employer unions, may restrict distributions until the participant reaches retirement age or has a break in service.
4. Taxation & Rollovers
- Direct Distribution: If a former spouse takes a cash payout, the employer must withhold 20% for Federal taxes and 6.99% for Connecticut taxes. The final tax liability depends on the recipient’s total income bracket.
- IRA Rollovers: Taxes can be deferred by rolling the assigned benefit into an IRA.
- Exception: Rollovers are not permitted if the QDRO payee is a child or other dependent of the plan participant; in those cases, the participant is taxed.
- The “QDRO Advantage”: Under IRS Topic 558, the 10% early distribution penalty does not apply to distributions made to a spouse/former spouse via a QDRO. This makes 401(k) assets a strategic tool for paying off marital debt.
Options for Defining the Assigned Benefit
To ensure a QDRO is successful, you must be specific in how the benefit is calculated:
| Approach | Requirements |
| Dollar Amount | Assign a specific flat fee (e.g., $25,000) with or without investment gains/ losses. |
| Percentage | Assign a percentage (e.g., 50%). You must specify if this applies to the total or only the vested portion and whether investment gains/ losses apply. |
| Marital Portion | Typically is: (Value at Divorce) – (Value at Marriage). Crucial: You must provide the pre-marital value. If unknown, the parties must agree on a figure. |
The “Investment Gains” Rule
Per Kremenitzer v. Kremenitzer 81 Conn. App. 135 (2004), unless the judgment specifies otherwise, there is no adjustment for investment gains or losses. The agreement must explicitly state if you want the assigned benefit to fluctuate with the market.
Sample Agreement Wording
Disclaimer: These are common templates. It is your responsibility to ensure the final language fits your specific circumstances and client needs.
Option A: Dollar Award
“Party A (Former Spouse) is assigned, by QDRO, $xx from Party B’s (Plan Participant) 401(k) savings plan, valued as of the date of divorce, along with a proportionate share of investment gains and losses through the date of transfer.”
Option B: Percentage Award
“Party A (Former Spouse) is assigned, by QDRO, 50% of the vested value of Party B’s (Plan Participant) 401(k) savings plan as of the date of divorce, along with a proportionate share of investment gains and losses through the date of transfer. choose one: [For purposes of determining the account value, the account balance will be net of loans outstanding.] or [The value of any loans outstanding will be added back prior to calculating the assigned benefit.]”
Option C: Percentage of Marital Portion
“Party A (Former Spouse) is assigned, by QDRO, 50% of the marital portion of Party B’s (Plan Participant) 401(k) savings plan, valued as of the date of divorce, along with a proportionate share of investment gains and losses through the date of transfer. The marital portion will be the vested account valued as of the date of divorce less $xxxx, which represents the pre-marital value. choose one: [For purposes of determining the date of divorce account value, the account balance will be net of loans outstanding.] or [The value of any loans outstanding will be added back prior to determining the date of divorce account value.]”