QDRO possiblity?

[Guest 401kadmin]

Does anyone know if a QDRO can be drafted for child support arrearages? I have only seen QDRO's drafted for splitting of assets.

[JanetM]

QDROs can be drafted to allocated funds to spouse, ex-spouse or child. See IRC 414p. Can be used for child support.

[QDROphile]

Different tax rules apply if the AP is not a spouse or former spouse. Beware of subtle withholding issues. The participant is the taxpayer and gets to make the withholding election. What would you do if you were the participant? What would your reaction be if you were the alternate payee and the participant elected 100% withholding? Do you want to be the plan administrator in the middle?

[Guest ERISA Litigator]

You have to consider state law as well. In some states back child support is considered a debt. The person's interest in the ERISA plan is, under state law, exempt from the judgment because it is a judgment on a debt, not a judgment for child support. Thus, even if the ERISA plan would accept the QDRO, you may not be able to get a court to award the retirement plan interest in order to satisfy the child support due.

In my opinion, it is a flaw in some of the states' statutes that govern the collection of child support.

On another point, if anyone can tell me how to log on as my old name, I would appreciate it. I had to register a new name.

[Kirk Maldonado]

ERISA Litigator:

I have always assumed that the test as to whether the amounts were paid for child support were determined under federal, not state law. Thus, if the QDRO was for past due child support payments, the QDRO would qualify, regardless of how the delinquent obligation would be classified under state law. However, I will freely confess that I've never researched that issue.

Moreover, I thought the plan administrator didn't have to look beyond the face of the QDRO to determine if it was qualified; that research into state law was unnecessary. But again, other than reading some summaries of some DOL rulings and court cases, I've never researched this issue.

[Guest mjb]

Under 42 USC 666(b) retirement benefits in pay status can be seized by state agencies for overdue child support payments. See 666(b)(8). Each state is required to adopt a plan to collect back child support from all sources. The procedures for collecting the back child support are similiar to procedures for QDROs except that the state agency is the authority for signing the order in place of a judge. Other State laws regarding collection of child support are superceded under 42 USC 666(b).

I dont understand your statement that back child support is not subject to collection under a QDRO because it is a judgement on a debt. State laws protecting retirement benefits from debts owed to creditors permit seizure of benefits assigned under QDROs. See NY CPLR 5205. Otherwise the employee could always avoid having to pay child support just by ignoring the original court order which would make collection an attempt to collect "debt".

Q I dont understand your concern for tax withholding. If the employee attempts to evade the order to pay CS he will be held in contempt by the state ct. Its not a PA problem since the state ct only has jurisdiction over the divorcing parties. The PA does not determine the amount of witholding but merely follows the particpant's instructions.

[QDROphile]

You are the plan administrator. The order says pay $5000 to the alternate payee. Is the amount net of withholding or subject to the amount that is elected by the participant to be withheld? My point is simlpy that the plan administrator does not want to be in the position to decide. The plan administrator should require the disposition of withholding to be expressly addressed in the order.

[Guest ERISA Litigator]

I'm only saying the the state court must first be able to enter the award before you can have any QDRO. I wasn't sure if the original queston was a question regarding ERISA or state law, so I thought I would address the state law issue. If, as you say, every state does permit an award of retirement benefits in satisfaction of child support due, then the answer is yes, you can get a QDRO for it (though you may have problems with some plans' timing of distributions).

I do know a lot of private child support collection agencies have substantial problems collecting back child support from retirement plans, particularly governmental plans. I once had such a client want me to write them a guide for collecting from every government plan in the country. Needless to say I told them they couldn't afford to have me do that for them; I would have been working the rest of my life. I'm still waiting for someone to publish a book on that. I would do it if I had the resources and time.

But ERISA does not fix their problems and would not even if the governmental plan was subject to ERISA - it is a matter of state law.

[Guest mjb]

Q:Taxes are not a problem since the PA will withhold in accordance with IRS rules. If the AP is the spouse then taxes will be withheld form the amounts taxed to the spouse. If a child is the AP the the payments will be taxed to the employee under the assignment of interest rule. The only queston is whether the withholding will be paid from the payments to the AP or will be taxed to the employee for 1099 purposes and subject to voluntary 10% withholding. In either case the AP will approve the QDRO subject to applicable withholding laws. I have never seen court order the PA to violate federal tax withholding laws.

EL: the rules are different for collecting child support from Govt plans which are not subject to QDRO procedures and cannot be forced to pay benefits under a QDRO. Under some state retirement plans, no amounts can be paid from the plan until the employee retires. The same rule would apply to an ERISA plan if no payment could be made until the ee terminates employment or reaches retirement age.

[QDROphile]

If the alternate payee is not the spouse or former spouse the participant will be able to elect the amount of withholding. If the QDRO says to pay the alternate payee the alternate payee $5000, the plan administrator will start from the proposition that the plan will distribute $5000. But then the plan administrator will solicit withholding instructions from the participant. If the participant waives withholding, the alternate payee will get $5000. If the particpant elects standard withholding of 10%, the alternate payee will get $4500. I believe (but am not sure) the participant can be allowed to elect withholding that is more than the standard 10%. If so, if the participant elects 20%, the alternate payee gets $4000. What amount is the alternate payee supposed to get? Will a dispute arise when the alternate payee gets $4500 and observes that the QDRO says to pay the altnernate payee $5000? Should the plan administrator have interpreted the QDRO to require a distribution large enough to yield a payment to the alternate payee of $5000? I suspect that an amount specified for child support is intended to deliver the specified amount, not some lesser amount.

Where is the withholding going to come from if not the distribution? Even if the participant is employed by the plan sponsor, I am not sure you can cross over to take withholding from regular pay without emplyee consent.

So I renew my suggestion that the plan administrator does not want to be in the position of interpreting the order with respect to the application of withholding. The order should specify what the altenate payee should get after taking withholding into account.

[Guest mjb]

The Plan Admin. applies withholding on the distributions to either the AP or the participant as required under the IRS rules. The PA has no discretion on how much is to be withheld. A participant who opts out of voluntary withholding will be required to pay additional tax when the return is filed as well as penalites for underwitholding of estimated tax. Since the PA is not a party to the divorce the ct cannot order the PA to pay amounts in violation of the IRS rules. The instructions for the QDRO should inform the parties that any amounts paid will be subject to applicable tax withholding.

[QDROphile]

mjb:

Enough persiflage, how about a pertinent response? The order says pay the nonspouse alternate payee $5000. What should the plan administrator do? Be specific, no "in accordance with IRS rules."

[Guest mjb]

Pay $5000 subject to voluntary 10% withholding as required by IRC 3405(b)(1).

[QDROphile]

Then what do you say to the District Attorney/alternate payee who says the order requires payment TO THE ALTERNATE PAYEE of $5000 and the plan paid only $4500?

[WDIK]

persiflage

This is a great word. Thanks for improving my vocabulary.

[Guest mjb]

The same thing that the PA tells every other recipient who receives a 402f notice- distributions are subject to applicable fed withholding taxes. Why are you ignoring the obvious- every judge knows that distributions from retirement plans are subject to fed income tax and plans are required to withhold taxes.

[QDROphile]

With that comment, you have shown the you are not taking this seriously, so I won't be concerned with the less than thoughtful earlier posts or any further comments from you on the subject. You know better, which is why I always try to explore any apparent difference of opinion with you.

To reiterate my point, the plan administrator must recognize that the tax rules are different when the alternate paye is not a spouse or former spouse, and not may people are aware of that. Consequently, either (1) the plan's written QDRO procedures need to deal with the situation, such as providing for a default interpretation (e.g. the amount will be distributed net of withholding elected by the particpant, whatever that may be), or (2) the administrator should not qualify the order unless the order speaks to the issue of withholding. Otherwise, the administrator will risk a dispute over the meaning of the order after the administrator has determined the amount to deliver to the altnernate payee. A dispute does not mean potential liability for the plan or the administrator, but it is generally a good idea to avoid disputes. Having good provisions in the QDRO procedures provides protection, but probably does not do much to avoid such disputes because no one reads QDRO procedures before preparing orders. I think is is best to require that the order speak to the question of withholding.

[Kirk Maldonado]

I agree with QDROphile. My goal is to try to keep my clients from getting embroiled in ugly situations that the one that this tax withholding issue could easily degenerate into. Why would anybody want to be exposed to the headaches and costs (including legal fees) of getting into the middle of such a dispute?

[Guest mjb]

What we have here is a failure to communicate. My response to Q's question of how much to pay a nonspouse AP was to apply IRS Notice 89-25, Q-3- "Distributions to a nonspouse AP are not includible in the AP's gross income but are included in income of plan participant. Consequently amounts shall be withheld from the distribution as if the plan participant were the payee, unless the plan participant elects not to have the withholding rules apply." My response said to pay $5000 subject to 10% voluntary withholding. Nothing more, nothing less. I never agreed that only $4500 could be paid because the participant could be ordered by the court to elect out of withholding so that the full $5000 would be distributed. In other words it is up to the court to decide whether the distribution will be reduced for withholding, not the Plan Admin. If the plan receives the order to pay $5000 and the employee does not opt out of withholding the Plan Admin cannot be faulted for complying with the tax law. Please explain what costs will be incurred by the Plan Admin who is not a party to the action?

[RTK]

my $.02

My experience with child support orders is that the agencies/court want the amount specified in the order. Using the $5,000 example, their perspective is that the participant owes $5,000, and they want a check for $5,000 - and not $4,500. My experience also is that the agencies/courts are not familiar with the tax laws.

To short cut all of the issues that could arise if the participant does not waive withholding (or refuses to make an election), I ask that order specify that the $5,000 is net of withholding. And then to comply with the tax withholding requirements, I send a W-4P to the participant with a cover letter explaining the amounts that will be distributed from the account with and without a waiver of withholding. To do otherwise likely would result in a question from my client as to why I did not anticipate and address the issue.

[Guest ERISA Litigator]

A QDRO is first and foremost a DRO. If a state court can't award it, you will not get a DRO. If you can't get a DRO, you will never, ever, ever get a QDRO.

It doesn't matter what the plan says, what ERISA says, or what any other federal statute says unless that federal statute specifically preempts state law and says the state court judge can or must award it.

Since I know of no federal statute like that - ERISA sure doesn't do it and 42 USC 666(b) applies to state agencys - the first question to ask when you ask whether a "QDRO can be drafted for child support arrearages" is whether state law permits it. If state law don't permit it, you won't get it.

Some have said every state law permits it, but I'm not sure of that because I don't know the law in all 50 states.

[Guest mjb]

EL- I dont understand what you are saying. All state courts can award child support to the custodial parent to provide for the welfare of the child under a divorce decree. Child support is not usually paid under a QDRO but is paid from the wages/investment income of the noncustodial parent. If the employee does not pay the child support required under the ct order, then 42 USC 466(a) mandates that the states impliment a plan for withholding of income provided under 666(b)(8) to collect the back child support which could include withholding from pension benefits in payout. There is no need to obtain a ct order or a QDRO to collect the unpaid child support from a pension. Unlike a QDRO 666(b)(8) does not apply unless the retirement benefits are in payout.

[RTK]

EL- I dont understand what you are saying. All state courts can award child support to the custodial parent to provide for the welfare of the child under a divorce decree. Child support is not usually paid under a QDRO but is paid from the wages/investment income of the noncustodial parent. If the employee does not pay the child support required under the ct order, then 42 USC 466(a) mandates that the states impliment a plan for withholding of income provided under 666(b)(8) to collect the back child support which could include withholding from pension benefits in payout. There is no need to obtain a ct order or a QDRO to collect the unpaid child support from a pension. Unlike a QDRO 666(b)(8) does not apply unless the retirement benefits are in payout.