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Child Support QDRO


Guest jac

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Who is the proper alternate payee for a child support QDRO--the child? The non-participant parent? Is it best to structure the QDRO so that the child is the alternate payee and the non-participant parent (or guardian) is the legal representative who will receive notices re the QDRO as well as payment for the benefit of the child? A non-participant parent could be an alternate payee in his or her own right as a former spouse, for example, but does that still make them the correct alternate payee for child support? And what if there is an arrearage? Thanks.

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The child would be the alternate payee but the payments would be paid to the custodial spouse as the guardian because a child under 18 is incompetent to provide for their own welfare. Some courts designate the payments to the custodial parent for the benefit of the child. I dont understand how there could be an arreage since the plan would be required to make the payments directly to the custodial parent from the participant's account/benefits. The participant does not have the right to stop payment.

mjb

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Note the different tax treatment accorded to an alternate payee who is the spouse or former spouse and an alternate payee who is the child or dependent. The spouse/former spouse alternate payee is treated as the distributee, i.e. is taxed on the assignment. Also, payment to a spouse/former spouse alternate payee is subject to the rollover rules. Payment to the child or dependent would be taxable to the participant and would not be an eligible rollover distribution. I would assume that child support would be taxed to the participant even if the QDRO requires payment to the spouse/former spouse. An arrearage (that presumably arose before the QDRO) can be paid in a QDRO if ordered by a domestic relations order.

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An additional note to RTK's point. Be careful about withtholding. The 20% rule does not apply. Under regular withholding rules the "taxpayer" may be able to make elections. The plan does not want to be caught in a dispute over withholding. For example, what if the participant elected 100% withholding? The alternate payee would get nothing and the participant would get a nice credit against income taxes on "real" income. I insist that the order itself somehow resolve withtholding so the plan merely executes according to the order. If the order does not specify about withholding, I think it can be disqualified because it is not certain about what should be paid to the alternate payee.

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Q :participant who elects 100% withholding on child support payment would be held in contempt of court. Also under Child support enforcement act, 42 USC 666(B), state agency which provides welfare payments to custodial parent because of failure of employee to pay child support can enforce mandatory withholding of child support from employees wages by serving an order on the employer. The employer is not liable to the employee for following the order. The order can also be enforced against retirement benefits in payout. I dont think PA has authority to question withholding elected by the participant.

mjb

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mbosek: I am unconvinced, although I don't exactly see the point you are making. I agree that the plan adminstrator has no authority over the participant's tax elections. That is why I want to see something in the order. The order can simply say that the participant may make withholding elections. As for contempt of court and other ancillary remedies, the plan administrator has no concern for what happens in state court, or aspects of the order that do not relate to qualification. The plan administrator wants to avoid the issues and I think the qualification process provides the tool for that.

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maybe we come from different worlds but I have never had a problem arise over the issue of withholding. IRC 414(p)(2)(B) states that a QDRO must provide the amount of funds to be paid to an alternate payee. If the order states the amount that is to be paid then that amount is what the PA pays out to comply with the order, not that amount reduced for withholding. Withholding is the ee's problem not the AP's problem. The ee can always increase the amount of withholding from wages to make up for income tax withholding if the AP is a dependent child. A pa who refuses to honor a DRO until it includes statement on withholding is looking for trouble.

mjb

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Perhaps my point was lost because I presented the extreme example. Let's try a more realistic one. The order says to pay $1000 to the alternate payee. Let us assume that the federal income tax withholding rate is 10 percent, but the taxpayer can waive that amount. For the moment, we won't even contemplate the possibility that the participant could elect greater withholding. Assume that the participant does not waive.

What does the plan pay to the alternate payee and what does the plan charge to the participant's account? The trust (not the employer) is obligated to withhold according to the rules.

Does the plan pay the alternate payee $1000 or $900? If the plan pays the alternate payee $1000, does it "withhold" $111 and charge the participant's account for an aggregate of $1111? Does the participant complain? There is a good chance that the participant is a deadbeat dad and not cooperative, and maybe not even very nice. Maybe he is a Montana Freeman. But I digress.

If the plan pays the alternate payee $900, does the distribution violate section 401(a)(13) because it it does not follow the terms of the order and is therefore not "pursuant to a qualified domestic relations order"? Does the alternate payee have a claim for $1000 rather than $900? Does the state court try to hold the plan in contempt (maybe only in the sovereign nation of California, where ERISA does not pre-empt and the state courts have authority to determine qualification)?

I don't really think that plan disqualification is a risk, but I think it is fair for the plan administrator to require that these questions be adequately addressed in the order so a dispute does not arise after everyone learns about the exact results -- after disbursement to the alternate payee.

In response to your first statement, I live in a a storybook world where everything is defined by words and the words are taken literally. Most of the the stories do not happen outside of the book. The real world is a messy and unpredictable place and approximate solutions can work out just fine.

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To use your example, the PA will pay to the alternate payee the amount specificed in the DRO, i.e., $1000. If the assignment of interest rule requires that the payment be taxed to the participant rather than the recipient, then the participant will get the notice of withholding and upon the advice of counsel will determine whether any withholding should be applied since withholding from periodic payments is entirely voluntary. If the amount received by the alternate payee is less than the DRO requires because of withholding then the participant will be subject to action by the court that issued the dro or the agency that administers the child support enforcement act will have the underpayment withheld from the participants's wages or pension payments. The PA avoids being held in violation of the ct order because it is only performing a ministerial act required under the tax law to notify the participant of the withholding requirement and is assigning the amount of the payment required under the DRO to the AP as required under IRC 414(p)(2)(B).

mjb

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You describe a plausible outcome, but you get the same outcome with less trouble if the plan administrator says that the order is not qualified, which would be even easier if someone had the intelligence to submit a draft order first. Then the drafter would go back and resolve the withholding issue by rewriting the order to say "distribute an amount in respect of the alternate payee to provide payment to the alternate payee of $1000, net of applicable withholding." No contempt of court. No agency going after supplemental wage garnishment to make up for shortfall because of withholding. No getting dragged into the mess to argue about the plan administrtor perfoming only ministerial functions. The plan administrator should excercise control over the part of the process that the plan administrator is responsible for, namely whether or not the order is qualified. Section 414(p) gives the plan administrator the power to solve the problem where the problem lies -- bad drafting of a domestic relations order based on ignorance of the odd rules that apply when you have an alternate payee that is a spouse or former spouse.

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The PA has no responsibility to determine what is the correct amount of withholding for a QDRO under IRC 414(p)--Having the PA get involved in whether the support order is before or after withholding is an unncesssry burden which is the responsibility of the participant-- If you want to do this extra work for the participant go ahead.

mjb

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I don't understand. The trust has to withhold according to the rules. The plan administrator is not trying to determine whether anyone intended the amount to the alternate payee to be before or after withholding. The plan administrator is trying to resolve a latent ambiguity about how much to pay the alternate payee when that amount cannot be determined without taking into account the effect of the withholding rules. That is the plan administrator's job. If the plan administrator has to require that everyone else do their jobs better rather than accept a defective order that could easily lead to more trouble, I am happy to advise the plan administrator how to do it. That happens with QDROs all the time, just different issues and circumstances. In this case, all the plan administrator has to do is refuse to qualify and explain the the order fails to specify what to pay the alternate payee because it fails to specify how withholding will be handled, and the handling of witholding directly affects the amount that will be delivered to the alternate payee.

I don't belive in disqualifying domestic relations orders unless they have a defect that can't be fixed by reasonable interpretation of the order by the plan administrator (plus appropriate disclosure and opportunity to object, but that is another matter). Sometimes this even means that the plan administrtor will interpret "green" to be "yellow." But I think the withholding issue has enough variability and risk that the best course is to disqualify when everything is not nailed down. We seem to assess the same situation differently.

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Interesting issue. Somehow I have been lucky and avoided this. (I remember now, any child support orders have been going to someone else, but unfortunately, that someone else will not be there soon).

In my ideal world (where life is easy and pleasant), I would like the child support QDRO to specify that the assignment is net (or not net) of withholding, if for no other reason than to keep the mess from ending up on my desk if the particpant elected any withholding.

In the spouse/former spouse qdro world, I have recommended no qualification for orders that could not be readily interpreted (not only as a matter of qualification, but also to avoid battles at a future payment time). I am going to give some real thought to whether I am going to extend this to the child support world re withholding. My preliminary thinking is that I likely will for draft orders, but perhaps clarify executed orders by disclosure of the withholding election. In any case, thanks for the discussion on the issue.

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