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401(k) Checklist 5 KEYS TO NEGOTIATE LIKE A PRO
U se this handy tool to maximize your client’s recovery the next time you negotiate the division of a 401(k). There are five variables you must address for every 401(k). Just walk through this checklist and consider the different options. Analyze how each variable creates a different result and you’ll be able to come up with a negotiating strategy. Type of Division Award the spouse a fixed dollar amount or a percentage of the account balance. But keep in mind that earnings, loans, the valuation date, and the possible plan administrator fee will significantly impact the award. The biggest problems arise when parties try to divide only the community property portion of a 401(k). Most plan administrators will not calculate the community property value for the parties. Instead, the parties must calculate it themselves by subtracting the value of the account on the date of marriage from the value of the account on the valuation date. If the records are not available or too difficult to obtain, many times the parties will simply negotiate the approximate value of the community property. Valuation Date Negotiating a valuation date can be deceptively simple. Under Texas law, for instance, the valuation date must be any date during the marriage. In most cases, it will be the date of divorce or mediation. Sometimes, it will be the date the parties separated. It can be deceptive because the valuation date strongly impacts the amount of earnings the spouse may receive. The more time that passes between the valuation date and the date that the funds are distributed to the spouse, the more impact the award or nonaward of earnings will have on the spouse. But, most of all, don’t leave money on the table because you overlooked a critical variable.
Earnings Earnings, gains, and losses can be applied to the spouse’s award from the valuation date until the award is segregated into a temporary account in the name of the spouse. The parties can also negotiate that no earnings, gains, or losses will be awarded to the spouse. This creates a significant problem if the spouse waits a long time after the divorce to submit the QDRO. The amount the spouse receives will be substantially less than if earnings, gains, and losses had been awarded.
If the QDRO is silent with respect to earnings, gains, and losses, the spouse’s award will not include them.
Loans Outstanding loans have the biggest impact on the spouse’s award of any variable.
The parties have two choices.
They can subtract the value of the outstanding loans before calculating the spouse’s award. This option maximizes the employee’s portion. The spouse’s portion of the 401(k) is reduced.
Or they can not subtract the value of the loan before calculating the spouse’s award. This option maximizes the spouse’s portion because it is not reduced by any portion of the loan.
Keep in mind that the spouse can never be ordered to pay a 401(k) loan. Only the employee can repay the loan. And the employee must repay the loan through payroll deduction.
PlanAdministrator Fee Plan administrators are allowed to charge a fee for processing a 401(k) QDRO. In most cases, the fee can be assessed equally between the parties or entirely against the employee or the spouse.
Fees range from $350 to as high as $1,500.
In our experience, attorneys rarely negotiate this expense.
–Judge Stephen Hernsberger
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