Does Your 401k Plan Have A Non Marital Portion That Will Not Be Divided In A Divorce?
I was recently retained to review a Qualified Domestic Relations Order that was dividing our clients 401k balance during a divorce. What I found was a financial discrepancy that could have cost our client between $12,000 and $23,000!
In this particular case, our client (Husband) had a 401k worth about $175,000. At the time the parties were married, our client had an account balance of $28,000. The Qualified Domestic Relations Order drafted by Wife’s lawyer simply subtracted the $28,000 from the $175,000 and divided equally the remaining portion, correct? NO!
The South Carolina Code of Laws defines non marital property as “(5) any increase in value in nonmarital property, except to the extent that the increase resulted directly or indirectly from efforts of the other spouse during marriage”. S.C. Code Ann. § 20-3-630
During the course of the marriage, only Husband contributed to his 401k. As such, all of the passive increase in his 401(k) was non marital property in accord with the SC Code.
Husband and Wife were married 10 years. I used my HP 12c financial calculator determine the rate of growth of $28,000 for 10 years at a 6%, 8% and 10% compounded annually. During the 10 year term, the $28,000 had grown to between $51,175 and $74,118! All of this passive gain would have been lost to Husband had he simply gone along with the QDRO drafted by Wife’s attorney.
It took me about an hour to run the financial calculations and re-write the QDRO to apportion to Wife the correct sum of money. Our client paid me $350.00 for this service, and in return we saved him tens of thousands of dollars!
The moral of this story is that the division of a retirement account is tricky. Care in drafting with an eye on the law can have huge financial repercussions for the parties.