As with any property in the marriage, the first order of business is to determine whether the property is marital or non-marital. If the property is marital the property will be subject to division in the divorce. If the property is non-marital, the party who has the property in their name or possession shall keep that non-marital property in whole after the divorce.
401k and other retirement funds are treated very differently from other funds, marital or non-marital, in an Illinois divorce.
750 ILCS 503(a)(6) even outlines this specific exception in defining marital property as:“property acquired before the marriage, except as it relates to retirement plans that may have both marital and non-marital characteristics”
The reason for this special exception is that 401ks, pensions and retirement funds are often a mix of marital and non-marital property. For example, you may have put in $ 10,000 into your retirement account before marriage but put $ 90,000 into your retirement account after the marriage. But that doesn’t necessarily mean that 10% of your retirement account is non-marital.
Retirement accounts are full of stocks and other assets that can behave strangely. The initial non-marital contribution could have been invested in Google or some other asset that became extremely valuable while the marital contribution could have been invested in real estate stocks before 2008. You can see how a scenario like this would create a split between non-marital and marital portions of the retirement fund that are not equal to the contributions (in the above case 10% vs 90%).
How do we figure out what the non-marital vs. marital contribution split is, then?
The good news is we don’t have to. The retirement fund does it for us. In the Judgment of Dissolution of marriage or the Marital Settlement Agreement (a document that accompanies the Judgment of Dissolution) we include the following language:
“Upon entry of Judgment for Dissolution of Marriage the parties agree that the marital portion of each of the above retirement accounts shall be divided equally (50/50) between the parties by Qualified Domestic Relations Order (QDRO). The amount awarded to each by said QDRO shall be offset by any loans taken against the retirement accounts and any money withdrawn from said accounts during the marriage.”
The marital portion is then determined by the retirement fund through a form they issue called a QDRO, or Qualified Domestic Relations Order. Every fund has a sample QDRO that they distribute to divorce attorneys that lets them determine the marital portion. Typically, all they need is the date of the marriage and the date of the divorce. This chunk of time will be considered the marital portion. The fund will then use actuarial software to determine exactly what was contributed when and what that property is worth today.
Keep in mind that the marital portion is considered, by default, all assets deposited into the fund during the marriage. This includes after the separation and during the pendency of the divorce. Perhaps it would be wise to limit your contributions during this time. Of course, this can be negotiated away, you can ask for a legal separation or the parties can ask the judge to consider post separation assets non-marital.
You must also consider that there are many retirement funds that are not-divisible. For example, railroad employees have a special federal pension wherein their spouse also has a pension which is included in the retirement package. Because of this consideration to the spouse federal law makes it illegal to divide up the actual railroad employee’s personal pension.
Some lawyers prepare their own QDROs. Other lawyers send them to QDRO specialists to prepare. I myself, prepare about 80% of the QDROs and refer out the particularly byzantine QDROs to a specialist who has experience with that particular fund.