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Withholding on Distributions Pursuant to a QDRO


Guest SCUDDESLER

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Guest SCUDDESLER

My client sponsors a qualified retirement plan. The plan has received a draft QDRO requiring it to make payments pursuant to a child support order. The attorney who drafted the proposed QDRO claims that the distributions are subject to the 20% income tax withholding rules applicable to eligible rollover distributions. Is he correct? Thanks.

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Guest Grabitquick

If the named alternate payee is the spouse, the answer is "yes" since it's an eligible rollover distribution. If the named alternate payee is the child and not the spouse, then the distribution is taxable entirely to the participant and is not treated as an eligible rollover distribution to the participant. Thus, it is not subject to 20% mandatory withholding. Instead, it would be subject to the withholding rules for non-periodic distributions under IRC Sec. 3405(b).

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Guest pensionquestioner

Let me make sure I understand Grabitquick's answer.

Is Grabitquick saying that if the QDRO is for child support- then then the QDRO payor should withhold 10% from the QDRO distribution (unless, of course, the participant elects to not have the 10% withheld)??? Just wondering if I misunderstood??? Thanks

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Guest Grabitquick

Kirk--no, not if payments to the ex-spouse were spread out in excess of 10 years. I guess I assumed that the child support QDRO would call for a lump-sum (I think virtually all that I've seen do call for a lump-sum, and in fact are recovering arrearages), but perhaps something other than a lump-sum might be provided in the QDRO.

Pensionquestioner--if the named alternate payee is a child, then yes, it appears that the 10% automatic withholding rate under 3405(b) applies unless the participant elects out of it, assuming that it's a "nonperiodic" distribution such as a lump-sum. As Kirk alluded to, it might be a "periodic" distribution subject to 3405(a). Either way, payment to the child (even though taxable to the participant) appears to fall under these rules since it apparently could not be an eligible rollover distribution under Treas. Reg. Section 1.402©-2, Q & A 12(b). It does strike me as odd that, since the participant is on the hook for the taxes, a distribution to a child alternate payee could not treated as an eligible rollover distribution to the participant so that the participant (if he or she had the resources) could come up with the amount distributed and roll it over within 60 days, thus avoiding taxation. However, I'm not aware of any guidance that would allow this result.

I have seen a number of QDROs that purport to be solely for child support yet name the spouse or ex-spouse as the only alternate payee, in which case 20% mandatory federal withholding of course applies if the distribution(s) are eligible rollover distributions(s), regardless of the stated purpose of the QDRO, since IRC Sec. 402(e)(1) governs. This has come as a surprise to a couple of family law lawyers I've encountered.

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  • 5 years later...
Guest ggbrock

I know this is an old post, but I have a relevant question. If QDRO is for child support & AP is properly named as the child & QDRO assigns 100% of PPT's benefit to AP, can (or should) the Plan interpret the QDRO as 100% of PPT's benefit, after taking into account PPT's withholding obligation? (So the child would not in fact get 100% because a portion of that would be applied for withholding purposes). On the one hand, this seems like a reasonable interpretation to protect the Plan given that if the PPT does NOT elect out of witholding, I think the employer would probably be on the hook for that amount. However, it bothers me a bit that the court order assigns 100% of PPT's benefits but the Plan is essentially putting aside an amount wtihin that 100% to account for the PPT's tax obligations.

Any thoughts are much appreciated.

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... the Plan is essentially putting aside an amount wtihin that 100% to account for the PPT's tax obligations.

Is this different from tax withholding on any distribution from a qualified plan? From wages?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest ggbrock

That's what I'm trying to understand, if it should be different. The difference I am struggling with is the order (1) requires 100% of ppt's benefit to be paid to AP, and (2) requires PPT to pay taxes on this amount. It seems a tad inconsistent that PPT's tax witholding obligation could be fulfilled from that 100% award from the court. It sounds like you don't see this as an issue?

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... the order (1) requires 100% of ppt's benefit to be paid to AP, and (2) requires PPT to pay taxes on this amount.

Could this be viewed as the QDRO assigns the benefit to the AP, then the plan distributes it with whatever tax withholding applies?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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What you have is an interpretation problem. The plan does not know what it is to deliver to the alternate payee because of the odd twist that the participant can elect withholding. The solution is to require the order to speak to the withholding. If it does not, the order does not qualify because the plan cannot determine the amount payable to the alternate payee.

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Guest ggbrock

Thank you, David. I think that's the conceptual hook I was not seeing/getting comfortable with.

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That's what I'm trying to understand, if it should be different. The difference I am struggling with is the order (1) requires 100% of ppt's benefit to be paid to AP, and (2) requires PPT to pay taxes on this amount. It seems a tad inconsistent that PPT's tax witholding obligation could be fulfilled from that 100% award from the court. It sounds like you don't see this as an issue?

The taxation of QDROs used to be determined under IRS Notice 89-25 Q-3 which provided that the AP was taxed on QDRO payments received by him or her but that payments to a child were taxed to the participant who could elect out of voluntary withholding under IRC 3405. I think there is a new citation for this rule. It seems that the parties are trying to evade the tax withholding to the ex spouse by having the AP named as the child instead of having the participant elect out of withholding of payments to the child.

mjb

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