Dividing Retirement Benefits in Mediation Part One – Offsetting 401(k) Plans with Other Assets
- z85285
- May 28
- 5 min read
Hoffman & Van Clief LLP
QDROs | Valuations | Equity Compensation
Dividing Retirement Benefits in Mediation Part One – Offsetting 401(k) Plans with Other Assets
Dividing Retirement Benefits in Mediation Part One – Offsetting 401(k) Plans with Other Assets
by: Alex Hoffman and Elizabeth Van Clief
Our firm regularly works with mediators and attorneys to help address the division of retirement benefits in mediated divorces. A variety of issues specific to mediation settings can arise. This is the first of a five-part series that will discuss the top five most common issues when dividing retirement benefits in mediation as well as strategies for how to help the parties reach a fair resolution.
Offsetting 401(k) Retirement Plans with Other Assets
It is very common in mediation for the parties to horse trade and offset assets. When a 401(k) retirement plan (or other defined contribution plan) is involved, the parties should be aware that there are valuation considerations.
Taxes may apply. If the 401(k) plan is being offset with cash or after tax assets, the parties should be aware that the 401(k) plan is subject to ordinary income taxes (federal and Colorado) when the assets are withdrawn which may mean the 401(k) plan assets are less valuable than cash. If a withdrawal is going to be made directly from the 401(k) plan to obtain cash, the discount rate would be the marginal tax bracket and an early withdrawal penalty if the participant is under the age of 59½.
Stock market investments are volatile. In addition, the parties should be aware that 401(k) plan assets are volatile because they are typically invested in the stock market whereas other assets in divorce are typically less volatile. The party retaining the 401(k) plan may experience significant market gain or market loss in the months after the divorce, and both parties should be aware that this could occur so that they feel comfortable with the offset and potential outcomes.
The valuation date matters. In terms of market valuation, it is best practice to review the most recent 401(k) plan statement when determining the value and to value the 401(k) plan on the same or similar day that other assets are valued. For example, it is generally discouraged to use the home value as of one month and compare it to the 401(k) value that was several months earlier.
Quarterly statements are informative. Ensure that both parties are aware of any disclosures of recent transactions in the 401(k) such as withdrawals, loans, or contributions. The industry standard method of review is to review the quarterly statements. ERISA requires 401(k) plan statements to be issued “no less frequently than quarterly.” Quarterly statements have minimum content requirements that other statements such as screenshots of the account or “transaction reports” do not, and therefore account screenshots and transaction reports are normally thought to be inferior in quality and reliability to quarterly statements. On the statements look for withdrawals, 401(k) plan loans, contributions, unvested benefits, or significant changes in investment strategy.
Partial offsets can still include earnings and losses. Finally, when partially offsetting 401(k) plans (meaning that part of the 401(k) will still be divided and part will remain with the participant and offset other assets), mediators and attorneys should consider using a valuation as of a specific date which fluctuates with the market. This strategy can be very useful so that both parties are not upset during the QDRO process when they either experience market loss and the other party does not, or when they do not experience the market gain and the other party does! For example, if Wife owns a 401(k) plan worth $100,000 valued as of 12/31/2024 and the parties own a car worth $50,000 valued as of 12/31/2024, and the parties have decided that Wife will keep the car in exchange for Husband receiving $25,000 less in 401(k) assets, the parties might look to the mediator and attorneys for how to write this agreement. One way to write this agreement so that both parties share proportionately in the market fluctuation is as follows:
“Husband will receive $75,000 from the 401(k) plan as of 12/31/2024 which shall be further adjusted for investment earnings or losses from 12/31/2024 through the final date of distribution. Wife shall retain the remaining balance in the 401(k) plan.”
This language not only allows for both parties to receive their share of market gain on the split after the offset on 12/31/2024, but it also excludes any post-Judgment contributions that Wife may have made to the 401(k) as her separate property during the QDRO process. If the agreement was simply written that “Husband would receive $75,000 from the 401(k),” Husband might be disappointed to find out that he receives no earnings on his assets for the time that it takes the retirement plan to accomplish the transfer (which can vary depending on the administrator).
Partial offsets with flat dollars should be clearly stated. Note that a flat assignment can be used when partially offsetting a 401(k) (as in the $75,000 in the above example), as long as both parties are aware that the party receiving the assets will not receive the gains, and the party retaining the assets could incur losses, meaning they have essentially “overpaid.” If the parties want to use a flat dollar assignment, it is recommended that additional language is added which states: “Both parties agree this assignment from the 401(k) is a flat dollar amount that shall not fluctuate with earnings or losses from the date of this Agreement to the date of transfer.” Adding a timeframe for the QDRO process can also cut down on any frustration over the parties not sharing in earnings and losses if a flat dollar amount is used, therefore, language such as this can help: “Both parties shall cooperate with the QDRO process and retain a QDRO attorney within 30 days of signing this Agreement.”
Takeaway Tips for Attorneys and Mediators
Offsetting 401(k) plan assets in mediated divorces can be helpful to allow the parties to reach a fair settlement. Here are the takeaway tips for dealing with 401(k) assets:
· Advise the parties of the valuation considerations.
· Offset 401(k) assets with other assets using the same valuation date.
· Review the quarterly 401(k) statements for loans, withdrawals, unvested benefits, or a significant change in investment type.
· Offer that the 401(k) plan can be divided by QDRO if either party is uncomfortable with using the valuation in an offset.
· Write the Separation Agreement to clearly state whether there will be earnings and losses.
· Include a timeline for the QDRO in the Separation Agreement.
If you have any questions about the course, please feel free to call our office at
720-800-8418 or e-mail alex@hvclaw.com and we will be happy to assist!