Divorce and the 401(k) Plan

Divorce, Financial Difficulties, and Your 401(k)

With couples getting divorced during this recession, we are seeing more and more people tapping into their 401(k) plans to pay mortgages and prevent foreclosures, as well as to pay credit card debt through the use of QDROs (a Qualified Domestic Relations Order filed during a divorce which pays the nonemployee spouse his/her community share of the 401(k)). Before or even during the divorce though, one of the parties may have already tapped into his or her 401(k) assets through the use of a loan or a hardship withdrawal. When evaluating the worth of the 401(k), make sure you know the current value and whether any withdrawals were taken after separation.

Although taking a loan or a hardship withdrawal is a viable option when attempting to avoid foreclosure or other hardship circumstances, borrowing or withdrawing from the 401(k) plan can lead to problems for the nonemployee spouse. Although some plans require spousal consent to take a withdrawal or a loan from a 401(k), most do not. It depends on the employer and the plan document governing the 401(k). As soon as the divorce is pending, the participant’s spouse’s attorney should send a notice of adverse interest to the 401(k) plan to put a flag on the account so that the employee spouse cannot take any withdrawals or loans during the pendency of the divorce, since typically the amount accumulated in the 401(k) during the marriage is community property subject to division.