72(t) and QDRO

[Guest KHayes]

Plan Sponsor is a husband-wife corporation. In 2001, husband went on disability; wife closed all offices but kept the corporation alive to receive residual income and cover expenses. Both spouses began receiving SEPPs under 72(t).

In 2004, husband is 60; wife is 54. Divorce was finalized in 2003; QDRO effective 1/1/04, equalizing account balances in the plan. Wife now wants to increase her SEPP from 12,000/month to 17,000/month to handle increased monthly expenses for house payments, higher tax rates, etc.

The QDRO amount transferred was approx $600,000. If I apply the new calculation rules to the QDRO ONLY, I get an income stream of around $3500/month, which isn't quite enough, but might hit close enough to the mark for her to hold on until she's 59 1/2 (Nov. 2005).

My questions are:

1) Is it possible to simply transfer the income stream the husband was receiving from that portion of the QDRO to her so that I can use the higher amount calculated in 2001? (e.g., If he received $20000/month pre-QDRO and $5,000/month was attributable to her QDRO amount, could that $5,000 simply continue to her?)

2) If I can't do number 1, is it okay to calculate the payments on the QDRO without touching the payments she's currently receiving from her other balance? I really don't want to touch the way the other balance is calculated at all -- it works for her and would decrease under the new rules.

3) At what point can she stop worrying about this and just take whatever income she wants from the plan?

If it matters, NRD in the plan (a profit sharing plan) is age 55.

Thanks so much for any thoughts!

[david rigby]

Probably not significant to your inquiry, but if wife is 54 in 2004, how will she be 59-1/2 in November 2005?

I don't really know what is going on here, but it sounds as if someone is asking to violate the terms of the plan and/or the QDRO. Maybe it's just me.

[Guest KHayes]

LOL....I think I typo'd!

Age 55 in 2001

Age 58 in April, 2004

Age 59 1/2 in Nov, 2005

[Guest KHayes]

Oh...no one is trying to violate anything. It's truly a need thing (I know, I know...how can someone NEED 17,000/month?). The home she's in is being sold and in our area it isn't especially easy to buy a house, especially at this age. So the goal is to get her monthly income at a level where she can buy a home and still live on the budgeted income. It's actually pretty representative of what we hope retirement plans will do for folks when they start taking benefits. It just happens that these folks hit that point earlier than most and then had a divorce, to boot.

[jevd]

I think your question is best answered with a private letter ruling. There have been some in the past prior to REV RUL 2002-62 which allowed for the prorated 72(t) distribution to take place as long as the recceiving spouse took the distribution. I would agree that you probably shouldn't add the funds to the existing plan as that would violate 2002-62 rules on additions etc. Best bet is to get PLR.

[Mary Kay Foss]

I'm not sure that I understand the question either, but since there is no 10% penalty on distributions pursuant to a QDRO why are you using the SEPP route?

Normally you can't do SEPP from a Qualified Plan unless there's a separation from service. If they're both separated from service, who is the employer?

Maybe I shouldn't have looked at this on a Sunday!

[Guest KHayes]

I know it's confusing...I'll try and unconfuse it.

Both spouses have their funds in the same Profit Sharing Trust. There was a QDRO -- on paper. Wife had begun distributions from HER account balances in 2001 under 72(t). Because of the divorce she needs more monthly income and wants to increase her payment to $17,000, using the QDRO money to bump payments up $5,000. My question is whether she must do it as a 72(t) distribution (e.g. with the required interest rates, etc) or could simply annuitize it.

Neither spouse's money is going to leave the trust in a lump sum. They want to receive a monthly income just as they have in the past.

[Mary Kay Foss]

The QDRO -- on paper still makes this confusing.

If there is a real QDRO issued by a court, etc -- the whole deal; it can specify a $ amount of benefit that the wife is to receive. She could then receive that amount each month in addition to the SEPP to get her to her desired target.

I don't like the idea of the owner-employees taking SEPPs from a qualified plan as being separated from service -- but that's not your question.

The final answer is, with a valid QDRO there is no 10% penalty and payments can be structured as the alternate payee and the plan adminstrator agree.