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Guest umr

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Upon payment (lump sum) of NQDC to an executive, a calculated portion goes to x-wife of the executive. Is there any way where x-wife's portion can be paid directly to her and taxable to her? Currently it is anticipated that the entire payment comes to the executive. Thank you.

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Also read the thread below (which I would hope you did) on divorce since that thread talks about whether and how you can force a NQDC plan to pay someone other than the participant (DRO v QDRO discussion). No one one on the board can give you a definitive answer to your question other than to say maybe it can be paid to her or maybe it can't. We can only point out the issues.

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As long as the spouse provides the necessary tax ID information, I dont see why the employer would object to dividing up a lump sum between the employee and the ex w/out the need for a DRO.

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As long as the spouse provides the necessary tax ID information, I dont see why the employer would object to dividing up a lump sum between the employee and the ex w/out the need for a DRO.

Because it would normally be against the terms of a plan and not permissible under a rabbi trust to pay to other than P, unless the plan provides for a payment to a spouse (it which case I think payment could only be made on account of a DRO). If there is rabbi trust, there must be a spendthrift provision that obligates the trust to pay only to the P and to not allow P to assign his benefit to anyone else. If there is no rabbi trust, the employer should only pay P pursuant to the terms of the plan and it would not be advisable to pay directly to wife without a court order. Would you advise an employer to pay an amount from a company plan to someone other than the employee without a DRO or other legal document that mandates attachment of the benefits or payments?

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Why do you keep asuming that payment for NQ plans are made under Rabbi trust? Most NQ plans pay benefits based upon a plan document w/out a rabbi trust. In any event the plan could pay the spouse pursuant to an assignment of interest agreed to by the employee which eliminates the need for a DRO. Since the ee is the only person adversely affected by paying the spouse a portion of the NQ benefits an assignment by the employee of some benefit woiuld allow the plan to pay the benefits to the spouse.

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Why do you keep asuming that payment for NQ plans are made under Rabbi trust? Most NQ plans pay benefits based upon a plan document w/out a rabbi trust. In any event the plan could pay the spouse pursuant to an assignment of interest agreed to by the employee which eliminates the need for a DRO. Since the ee is the only person adversely affected by paying the spouse a portion of the NQ benefits an assignment by the employee of some benefit woiuld allow the plan to pay the benefits to the spouse.

Agreed to by the employee and who (the ex)? The employer will not generally agree to pay someone else unless forced to. You're ignoring the er/ee relationship and the contract. Payments or benefits (without a RT) are still generally non assignable and payable under the terms of a plan to the participant. I can't imagine counsel advising an employer to pay an ex spouse (or any other creditor) without a court order or some writ attaching the payment.

Also, the employee won't be the only person affected if the employee later claims the employer wrongly paid the ex spouse. A smart employer would require a release, but a smarter employer would pay the participant and let the spouse go get her cut from the participant.

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Why would the employer resist paying the ex if the employee agrees to assigning the the payment since it wont cost the employer any more money and will keep the exec happy? I have drafted amendments to NQ plans to allow distributions to an ex spouse under Rev rul. 2002-22. What is the legal impediment which prevents the payment to an ex- spouse under a NQ plan when the benefit is paid to the employee and will result in taxation of the spouse on the benefits as allowed by the IRS?

Separately, why cant a rabbi rust be amended to allow payment under RR 2002-22?

Having the spouse collect from the employee is not good advice because the employee would have to pay taxes on the distribution which can be avoided by having the plan pay the spouse under RR 2002-22 which will not cost the employer any more than the payments promised to the employee.

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I understand the tax implications, which is the only real reason why an employer would do it. And I am not saying there is necessarily a legal impediment (unless the plan or trust has an anti assigment clause, which most do). Certainly it could be done as you say and any plan or trust could provide for an exception.

I am just not in favor of doing this just to please an executive to reduce his taxable income, which has become the basis for doing so many things that are not best practice or just plain not advisable (sometimes even illegal). I am not slamming you for doing this, I just am not in favor of it. We are in the business of employee benefits not spousal benefits.

My major concern tho is if it later turns out the spouse wasn't entitled to the benefit. I can't see exposing the ER to this risk.

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Also, in RR 2002-22, the IRS ruled that an amount paid to the ex pursuant to a QDRO would be taxable to the ex spouse. Under your facts, you are using a contract of assigment. When you deviate from the facts of a ruling you create the risk that the IRS will rule against you. If the employer accepts a DRO, it at least has proof that the ex is entitled to payment and the taxation of the x spouse is appropriate. But if you allow the plan to pay a non participant based on a lesser legal document, such as a contract, you open up the transaction to (1) attack by the IRS that the money is taxable to the executive anyway pursuant to the assigment of income doctrine and (2) a potential for abuse by the executive, who obviously wants to lower his taxable income.

How can the employer verify that the assigment is valid and that the exec isn't doing it to avoid taxation, e.g. claiming that there is a separation agreement, when there is none? In addition it's not like getting a DRO is difficult, and only a judge can enforce a division of marital property. If the parties agree, a judge will sign the order blindfolded. So why would an employer not want to require a DRO, it couldn't possibly be in the best interest of the company to pay an ex spouse w/o a DRO.

Using a DRO eliminates the risk that the executive should have been taxed on the full distribution (the risk is that the executive would owe back taxes and ER will be liable for failure to withhold just because it was "easier" to use an assigment contract and it made the executive happy).

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SF:I thought that under IRC 1041 any transfer of property between spouses incident to divorce is not subject to taxation.

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SF:I thought that under IRC 1041 any transfer of property between spouses incident to divorce is not subject to taxation.

Exactly-- 2002-22 limits its application to transfers upon divorce, which are typically incident to a court order decreeing the divorce and either an order dividing the marital property or an agreement b/w the parties signed by a judge. I think it would be dangerous to rely on that RR for the proposition that a plan can pay the ex spouse directly pursuant to something other than a DRO. How far a practitioner wants to take the facts is up to them, but my prerequisites for having the plan pay an ex-spouse directly would be the following: Consistent with the terms of the plan (and any applicable law) and pursuant to a DRO.

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In order for a transfer of NQDC benefits to be considered a transfer of property under IRC 1041 RR 2002-22 only requires that the property settlement dividing the NQ benefits be incorporated in the divorce decree. RR 2002-22 does not require that a non taxable transfer under IRC 1041 be made under a DRO (and could not be required by the IRS since a DRO/QDRO under 414(p) does not apply to NQ DC plans). I dont see how the IRS can require that the transfer be made pursuant to a DRO in order for it to be non taxable under IRC 1041.

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