NQDC Plans and Divorce

[Guest halka]

Is there any CLEAR authority on this ??? NQDC Participant (significant balance in rabbi trust) is getting divorced? Part wishes to divide NQDC benefits w/ spouse in same fashion as qualified plan benefits under QDRO. Appears to be some dissension as to whether QDRO applies to NQDC and, more importantly, whether the division of the NQDC can effectively transfer the income tax liability on NQDC distribution to the soon-to-be ex-spouse (e.g. LTR 9340032). Any help greatly apprectiated. THANKS

[mbozek]

Need to answer two basic questions:

Is NQDC plan subject to ERISA--

Do parties reside in Community Property state?

Under the assignment of income doctrine ( Duran V. CIR, 1941) the person who earns retirement income in a common law state will be taxed on the income which is assigned to another person. Benefits accrued under a qualified plan subject to ERISA can be transferred to the spouse under a QDRO without the employee being taxed. In a cp state each spouse owns 50% of the nq benefits if the nq plan is not subject to ERISA (e.g., excess benefits plan). If the nq plan is subject to ERISA then state cp laws are preempted under ERISA 514(a) and the Boggs case, even though nq benefits are not subject to the rules for QDROs. Transfer of 50% of benefits to spouse would be an assignment of income to employee. Note: a transfer of property (employer stock, annuity contract) in a common law state between spouses is exempt from taxation under IRC 1041 regardless of whether the plan is subject to ERISA.