Maximize Your Benefits: QDRO Planning for the Gilsanz Murray Steficek Llp Engineers and Architects 401(k) Plan in Divorce

In 401(k) plans like this one, both employee deferrals and employer matching or profit-sharing contributions may be part of the account. The QDRO must clearly state whether the alternate payee (typically the former spouse) is receiving a share of:

• Just the employee’s contributions
• Both employee and employer contributions
• Any gains or losses on those contributions

This is a major point of negotiation during divorce, especially since employer contributions may be subject to vesting schedules.

The Gilsanz Murray Steficek Llp Engineers and Architects 401(k) Plan may include contributions that aren’t fully vested at the time of separation. These contribution types can revert, or “forfeit,” back to the plan if the employee leaves the company before fully vesting. A properly worded QDRO accounts for these forfeitures and avoids disputes regarding unvested balances. If your spouse isn’t 100% vested in employer contributions, their share may end up being less than what’s listed on paper.

One often-overlooked issue in QDRO drafting relates to outstanding loan balances. If the plan participant took out a 401(k) loan, that reduces the plan account’s payable balance. The QDRO should clarify whether the alternate payee’s share is calculated before or after the loan balance is deducted. For example:

• If there’s a $100,000 account but a $20,000 loan outstanding, is the alternate payee receiving 50% of $100,000, or 50% of $80,000?

This distinction can have serious financial consequences. Loan terms and repayment obligations also stay with the plan participant, not the alternate payee, so that needs to be clearly stated.

Many modern 401(k) plans, including potentially the Gilsanz Murray Steficek Llp Engineers and Architects 401(k) Plan, offer both traditional pre-tax and Roth after-tax accounts. When the QDRO is silent on the type of account being divided, problems can arise. A good QDRO will specify whether the division includes:

• Only traditional contributions
• Only Roth contributions
• Both types, and in what proportions

This matters significantly come tax time. Roth distributions are generally tax-free, while pre-tax funds come with tax deferral until withdrawn and are taxable at that time by the recipient. Mislabeling these in a QDRO causes confusion and delays during implementation.

Although the sponsor is listed as “Unknown sponsor,” identifying the actual plan administrator is essential for drafting and serving the QDRO. Our team helps track down this information as part of our full-service approach.

The QDRO should define the date on which the division is based. This might be:

• The date of divorce
• The date of separation
• Another specifically agreed-upon date

The valuation date determines the account balance that will be divided and ensures an accurate allocation.

There are two common approaches:

• Percentage method—e.g., 50% of the account as of the valuation date
• Fixed dollar amount—e.g., $120,000

The percentage method automatically adjusts with market fluctuations, while the dollar method locks in the amount. Both have pros and cons depending on market conditions.

Once the QDRO is drafted, it must be signed by the court and then submitted to the plan administrator for final approval and implementation. Some plans offer pre-approval processes, which we coordinate to help avoid unnecessary delays or rejections.