There are really three basic issues that can be present in any divorce case: child custody, parenting time and child support, division of property/debt, and alimony known formally in Michigan as spousal support. The question of what happens to a 401(k) falls into the area of property division.
How Does a Court Divide Property and Debt in Michigan
Typically family law attorneys will handle the property division by first trying to determine whether the property is marital or separate. Marital property is basically anything earned or accumulated by the efforts of either party regardless of how that asset might be titled or held. Separate property usually falls into one of the following categories; property that one party owned before the marriage and maintained it's nature as separate property or was not otherwise "commingled" with marital funds or property, gifts to one party specifically and inheritances that are kept separate and not commingled. The separate property is typically awarded to the party to whom it belongs and is not considered when dividing the property between the parties. Then the divorce attorneys will most likely divide the property into different groups: real estate, cash, stock or other non-retirement type accounts, retirement accounts and personal property. So as to compare apples to apples, the real estate equity will be divided equally or if not, then when equalizing out the cash or stock accounts the party that receives less equity value should be awarded more of these accounts to compensate or the other party will have to refinance some of the real estate to "cash out" the other party's equity.
Dividing the 401(k)
Typically most 401(k) accounts are contributed to during the marriage and in many cases the entire account was accumulated during the marriage. In these cases the 401(k) will be divided in an equal 50% manner to each party. The non-participant (the spouse that is not the "owner" of the 401(k)) will have to open up his or her own 401(k) and for most 401(k) plans the participant will use a form provided by the 401(k) plan to instruct the 401(k) plan administrator to transfer one-half of the marital portion to the non-participant's 401(k). There will be no tax consequences or penalties for either party based upon this distribution, however, if either spouse does "cash in" their own 401(k) accounts, then that party will pay any taxes and/or penalties associated with the withdraw and the other party will not.
If there is a premarital balance to the 401(k), funds that were accumulated in the account up to the date of the marriage, that amount will typically be awarded as separate property to the plan participant. So for instance, if the participant had $100,000 in the 401(k) on the date they got married and $500,000 on the date of the divorce, the participant will often be awarded the first $100,000 and the remaining $400,000 will be equally divided (the participant will receive $300,000 and the non-participant $200,000). The participant will not be awarded any interest that accumulated over the term of the marriage that may be attributable to the premarital balance or as the Michigan courts have stated, they will not trace the accumulated funds back to the date of the marriage to determine the interest earned on that pre-marital balance.
If you or your spouse are considering divorce, you should seek consultation with a family law attorney to get an understanding of how the case will effect you, your children, your income and your assets. Please do not hesitate to contact us to schedule a consultation.