WHAT IS THE DIFFERENCE BETWEEN A 401K, PENSION OR IRA?

WHAT IS THE DIFFERENCE BETWEEN A 401K, PENSION OR IRA?

There are differences?! Yes!
A: "401(k)" refers to the IRS Code section (in a section known as ERISA) about certain employer sponsored savings plans to be used for retirement only. Other similar plans include 401(a), 403(b) and 457(b). These are all "defined contribution" employer sponsored plans, where an employee contributes a certain percentage of their salary (with limits set by the IRS) to a retirement plan which has a specific balance. Sometimes, employees can take out monies, but only in very specific circumstances and ways - a "hardship withdrawal" for very limited reasons dictated by ERISA, or by loan, where the employee pays back the money into his/her own plan account with a set amount of interest. Often, the contributions are tax deferred until distribution. Upon termination or retirement, an employee can take a "lump sum distribution" and sometimes other pay-over-time options if at retirement. An IRA (Individual Retirement Account) is a plan where individuals can defer taxation until later distribution, with penalties if the monies are withdrawn prior to the retirement age set by ERISA. On the other hand, pension plans are "defined benefit plans" and usually do not allow lump sum distributions, or any distributions, until the earliest retirement age set by the plan. Even in a divorce, if the plan doesn't normally allow lump sum distributions, you can't get one from your spouse's plan. The plans follow the restrictions set forth in ERISA and even a State court cannot force a plan to go against its terms if they comply with ERISA.

What is "ERISA" anyway?

ERISA is the Employee Retirement Income Security Act of 1974, and is a section of the Internal Revenue Code. It was established because, previously, employers would at times offer pension and retirement plan benefits, then take them away. This resulted in people working for 20 - 30 years for a company only to have their retirement nest egg ripped away, leaving them destitute. ERISA now regulates employer actions and the terms of their plans, and also provides insurance in the event a company fails and terminates its retirement plan.

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DIVIDE MY 401K IN MY DIVORCE WITH A QDRO

DIVIDE MY 401K IN MY DIVORCE WITH A QDRO

How do I divide the 401k and pension benefits in my divorce?

You may think that all you need to have is your divorce decree in order to divide the retirement plans in your divorce. These benefits include Section 401a, 401k, 403b, 457b, private pension, union pension and annuity, Railroad Retirement - Tier II pension, military or government benefits. Each benefit or account is unique and each plan has separate provisions with IRS and/or ERISA oversight as to those provisions. In order to divide these plan benefits or accounts, the plans almost always require a separate order for division between parties in a divorce. Your attorney should be getting plan and account information about your plans and your spouse's plans during the divorce. Make sure your attorney also knows what language needs to be in your settlement agreement to get you all of the benefits to which you are entitled.



I can help you and your attorney during the divorce process to make sure you get a fair portion of the retirement plans - and that the proper orders are entered to accomplish that.



The language of the Marital Settlement Agreement is also vital, as you need to make sure you are awarded all portions of your spouse's benefit to which you are entitled. For example, if your are receiving a portion of your spouse's 401k account, make sure it says whether your portion is entitled to have earnings (gains and/or losses) added/subtracted to/from it from the date of the divorce until distribution to you. The order must also state whether any outstanding loans are to be included or excluded when calculating the amount of your award so it is important to know if there is a loan, whether it is part of the listed account balance and why the loan was taken. For pensions, you need to know whether your spouse is receiving pension benefits, how many years of service he/she has been in the plan, whether the plan allows for early retirement subsidies and survivor benefits. Illinois courts have determined that cost-of-living-adjustments ("COLA") are to be included in an Alternate Payee's award, so make sure your attorney knows these things before drafting and finalizing your settlement documents. I can help you and your attorney put the best language in your divorce paperwork!

NEGOTIATE A FAIR 401K AND PENSION DIVISION

NEGOTIATE A FAIR 401K AND PENSION DIVISION

Knowledge is the Key!

Your attorney may not be very familiar with the ins and outs of the government provisions - IRS, REA and ERISA, just to name a few - and may not draft and enter the order(s) necessary at the time of your divorce. You want the best division of these assets in your divorce, and you don't want this division to be set aside and forgotten. The best time to enter these orders is either at the court date to finalize your case, usually called a "prove up", or as soon thereafter as possible. The orders to divide employer or union sponsored plans are called Qualified Domestic Relations Orders ("QDROs), while Illinois government pension plan division orders are called Qualified Illinois Domestic Relations Orders ("QILDROs"). There are numerous other plans that can be divided as well. Railroad Retirement - Tier II pension benefits, military pension benefits and federal government pensions and accounts are just a few.


The best time to gather the information necessary for the proper and equitable drafting of these orders is during the discovery phase of your divorce. Make sure your attorney obtains the retirement plan information - statements, summary plan descriptions and service credit information about your plans and your spouse's plans. Your attorney should not negotiate the retirement plan division issues without this knowledge.

WHAT IS A QDRO AND WHY DO I NEED ONE?

WHAT IS A QDRO AND WHY DO I NEED ONE?

Your Divorce Decree is not enough - why?

A Qualified Domestic Relations Order ("QDRO") is a type of court order used to divide retirement plan benefits when people divorce. This is used for private employer sponsored plans. There are other orders as well - a Qualified Illinois Domestic Relations Order ("QILDRO") divides Illinois government workers' benefits (usually monthly benefits at retirement), including pensions for teachers, police, firefighters and even judges. The Illinois Pension Code governs the terms of each of those plan divisions and your attorney should become familiar with its provisions before negotiating or trying to "value" these benefits. There are also orders which divide Railroad Retirement Board pensions (Tier II), orders to divide federal pensions and defined contribution plans and orders that divide military pensions. The terms of all of the retirement plans are complex and expertise is needed to maneuver through the options to properly negotiate the division of any retirement plan.