Recommended Posts

I generally don't deal with 403(b) plans, but I'm trying to help a friend (the ex-husband in the case below).

A professor participates in the university's 403(b) plan. She is divorced and a QDRO awards her ex-husband 40% of the marital portion of the 403(b) benefit, which winds up being about $72,000. The ex-husband needs the funds, so, even if it's rolled over into his IRA, he will immediately have the funds distributed from his IRA. The participant has offered to pay him by check, but will charge him for doing so.

1) Can the participant charge for paying by check?

2) If the ex-husband is 56, will he need to have a) 20% withheld for federal b) applicable state withholding withheld, and c) the 10% penalty? Will this be true if he rolls it over and has it immediately distributed?

Thanks for any responses!

Share this post


Link to post
Share on other sites

The statements about paying by check make no sense. Are you suggesting a payment of the amount outside of the plan from the participant's personal funds?

The early distribution "penalty" tax does not apply to distributions to alternate payees under a QDRO.

  • Like 1

Share this post


Link to post
Share on other sites

Right. If the participant pays the AP "by check", is that intended to replace the QDRO? If so, the parties need to get the QDRO changed first.

  • Like 1

Share this post


Link to post
Share on other sites

The statements about paying by check make no sense. Are you suggesting a payment of the amount outside of the plan from the participant's personal funds?

The early distribution "penalty" tax does not apply to distributions to alternate payees under a QDRO.

But if the alternate payee rolls the funds to an IRA and then takes a distribution, the 10% penalty tax does apply.

Share this post


Link to post
Share on other sites

agree that the participant should NOT write a personal check because the QDRO directing the plan to pay his percentage is still in effect. She could end up owing that amount again from her retirement plan. Not a smart move.

Honestly she should have agreed to pay him that amount out of other assets prior to the QDRO. Now she has the expense of getting it changed or allowing the distribution out of her retirement funds and putting her cash in non-retirement vehicles (or upping her current deferrals as much as she can over time)

Share this post


Link to post
Share on other sites

Of course she can charge him for paying by check, in the sense she can offer him a smaller amount by check outside of the 403(b) in exchange for him agreeing to have the court void the QDRO. This may be the best alternative for both parties. The check she writes him would be considered part of the property settlement (and thus not taxable to him), so he could end up with as much money after taxes even if the check is less. Meanwhile, by writing a check, she increases the amount she will ultimately get from the 403(b) by more than the amount of the check (because he will no longer get anything from the 403(b)), without it being treated as a contribution to the 403(b) subject to the usual maximum limits.

Yes, they should have thought of all this before entering into the QDRO. But if both parties are willing to amend the QDRO, better late than never (unless the costs associated with amending the QDRO are so high as to make the whole thing uneconomic).

  • Like 2

Share this post


Link to post
Share on other sites

Also note, a payment under the terms of a QDRO from the plan to the alternate payee will be taxable to the alternate payee. But if there is no QDRO, and a participant payment occurs which is signed over to the alternate payee, well then the participant gets taxed on the payout, not the alternate payee.

  • Like 1

Share this post


Link to post
Share on other sites

Carol, is there a guideline you use for cash payouts?  We have not gone through a QDRO and I have a 403(b).  Other party is under 40.  Thank you!

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now