May 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 2

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following is a continuation of the materials presented in the March 2015 Tax Trends column.

III. Defined Contribution (DC) Plans

1. A DC plan–such as a 401(k) plan – provides for separate account for each participant.
   1. E.g.–W’s account balance under the XYZ 401(k) plan was $50,000 on December 31, 2014.
   2. Other types of DC plans include pro t-sharing plans, money purchase pension plans, and 403(b) annuities.
2. Division of DC plan accounts is also accomplished either by the o set method or by deferred division using a QDRO/EDRO.
3. Offset method – Valuation
   1. The present value of the DC plan interest is generally considered its account balance as of the valuation date. See above for an example.
   2. As with the present value of pensions under DB plans, it is typically appropriate to tax affect the value of the account balance.
   3. It is important to specify a valuation date, generally close to when other assets will be divided.
   4. If there is a plan loan, the account is (1) valued net of the loan and (2) responsibility to repay the loan is assigned to the participant.
      Example:
      • The total pre-tax value of W’s 401(k) account is $50,000 – $40,000 of plan investments and (2) a $10,000 loan she drew from the plan.
      • Equal division under the offset method:
        (Table shown in PDF)
4. Deferred division method – QDROs/EDROs
   …
   

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)