Divorce and the College Entrance Examination Board Tax-deferred Annuity Plan: Understanding Your QDRO Options

In the College Entrance Examination Board Tax-deferred Annuity Plan, both employees and the employer may make contributions. When dividing the account, it’s important to differentiate between:

• Employee deferrals: These are always considered 100% vested and are generally easy to divide.
• Employer contributions: These may be subject to a vesting schedule. QDROs must account for vested vs. unvested amounts.

Most QDROs divide the vested portion of the account as of a certain date—usually the date of divorce or another agreed-upon date like the date of separation.

Because this is a 401(k) plan, it likely includes a vesting schedule for employer contributions. That means not all employer-funded amounts may be available for division unless fully vested. The QDRO should properly clarify whether it divides only the vested portion or includes future vesting, which could lead to administrative issues. To avoid disputes, request a vesting report from the plan administrator when preparing your QDRO.

One common oversight in divorce settlements is how 401(k) plan loans are handled. For the College Entrance Examination Board Tax-deferred Annuity Plan, if the participant has a loan from their retirement account, there are two ways it can impact the QDRO:

• If the loan balance is significant, it can reduce the divisible balance available for the alternate payee.
• If the divorce agreement does not account for the loan, the order may unintentionally shift the loan burden onto the alternate payee or distort the intended percentage division.

Ideally, the QDRO will specify whether the loan balance is to be considered part of or excluded from the divisible balance. This choice affects equity, particularly when dividing percentages.

Many plans now include both traditional (pre-tax) and Roth (after-tax) sub-accounts within the same 401(k) structure. The College Entrance Examination Board Tax-deferred Annuity Plan may support both. Each type has different tax consequences for distributions:

• Traditional 401(k): Distributions are taxable at ordinary income rates.
• Roth 401(k): Qualified distributions are tax-free.

Your QDRO must specify whether the awarded amounts come from traditional, Roth, or pro rata from each. Omitting this language can result in unintended tax consequences later. We often advise clients to split the source pro rata unless the parties agree otherwise.

Before drafting the QDRO, you should request the SPD (Summary Plan Description), account statements, and any QDRO procedures directly from the Unknown sponsor. This helps clarify critical issues like vesting, loan treatment, available account types, and whether the plan allows for lump-sum or installment transfers.

Ambiguous language is one of the top reasons QDROs are rejected or misapplied. That’s why we recommend avoiding generic phrases like “50% of the account” and instead use specific language, such as:

• “50% of the participant’s vested account balance under the College Entrance Examination Board Tax-deferred Annuity Plan as of June 15, 2024, adjusted for gains and losses through the date of distribution.”

This clarifies timing and ensures the alternate payee receives their fair share along with standard investment fluctuations.

401(k) plan QDROs typically take several months to process from drafting to final implementation. At PeacockQDROs, we always explain that several factors affect this timeline. You can read more in our article:5 Factors That Determine How Long It Takes to Get a QDRO Done.