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NUA for QDRO Spouse - Husband still employed


Guest feiertag

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Guest feiertag

My 56 year old client has some highly appreciated stock from her 56 year old ex-husbands qualified plan, divided via a QDRO. He is still employed by the company. We were told by their benefit distribution expert that since the ex-husband is still employed by the company, the wife cannot utilize favorable NUA treatment on the highly appreciated company stock. The company is forcing her to rollover or withdraw all assets in her portion of the plan within 60 days. Since we live in a "Hurricane Wilma" zone, any taxable distributions the wife receives in 2006 is exempt from the 10% premature withdrawal penalty, but we need to know if NUA rules apply to her. Please advise. Thank you.

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Would you care to challenge being forced out of the plan now? Section 402(e) certainly suggests that an alternate payee's treatment is based on the participant's status, but I have not looked for any other authority that might support a different interpretation. If you really, really want to get capital gains treatment, then you will need to stay in the plan until the particpant would be eligibile. I don't think a plan can force out altnernate payees, but I know a lot of them try (and get away with it).

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AP consent is not required for cashout of a QDRO payment under reg. 1.411(a)-11©(6) if consent is not required in the QDRO. Plan could provide that distributions to AP under QDRO are mandatory after approval by Plan admin. the same as payment to a spouse after the death of the employee under-11©(5) does not require spousal consent.

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To clarify, if the terms of the QDRO do not cover timing of distribution, such as a provision that says that the alternate payee may elect when a distribution is made, the plan or QDRO procedures can provide that the alternate payee's benefit will start distribution whether or not the alternate payee wants to start. An alternate payee could be stuck with an incompetently drafted QDRO and forced out. A well drafted QDRO would protect the alternate payee, but aggressive plans don't pay attention.

Also, if a distribution would be made to, or in respect of, the participant under plan terms, then the plan or QDRO procedures can require the alterante payee to start and provisions in the order are not proper if they try to trump.

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Plan admin can reject DRO which provides for deferral of receipt of distribution if plan requires immediate distribution to AP.

I dont understand your last paragraph.

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Guest feiertag
Plan admin can reject DRO which provides for deferral of receipt of distribution if plan requires immediate distribution to AP.

I dont understand your last paragraph.

Feiertag - What I'm trying to ask, can my client use the NUA rules on stock distributed to her if her ex-husband is still working for the company? Both are under age 59-1/2.

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Under IRC 402(e)(4)(D)(vii) NUA is available to AP who receives the balance to the credit of her account under a QDRO only if a lump sum distribution from the plan is distributed to the employee in the same yr.

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Guest feiertag
Under IRC 402(e)(4)(D)(vii) NUA is available to AP who receives the balance to the credit of her account under a QDRO only if a lump sum distribution from the plan is distributed to the employee in the same yr.

Feiertag - I looked at the above code section, and while I am just a lay-person, it does not seem to me that it says NUA is only available to the AP if the employee takes a distribution the same year. Please advise. Thank you.

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mjb:

My last paragraph says that plan can require the AP to take a distribution no later than when the participant receives a distribution.

You believe that the plan can require the AP to take a distribution immediately and that a domestic relations order that requires consent may be rejected if the plan has such a requirement. I think that intepretation of the regulation is aggressive, but I have no other authority to offer on the subject. Because I do not subscribe to your interpretation, my last paragraph notes the exception to my interpreation -- a domestic relations order cannot require to the plan to postpone the AP's distribution to a date later than when the participant starts.

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IRC 414(p)(3)(A) provides that a DRO will be qualified as a QDRO only if such order does not require a plan to provide an option not otherwise provided under the plan. If the plan provides for immediate distribution to the AP w/out consent as the only distribution option under the plan (which is permitted under Reg 1.411(a)-11©(6)) a DRO which requires spousal consent would be rejected as inconsistent with the terms of the plan.

fertig- your client needs to consult a tax advisor to determine if the AP can take NUA as I cannot provide tax advice.

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I still think your interpretation of the regulation is aggressive and I don't see what spousal consent has to do with anything. I don't think you can get to 414(p)(3)(A) by a special provision that cuts back only on alternate payees. You have to have other authority. For example, if the plan allows in-kind distributions to participants, I don't think you can have a special rule in the plan for cash only distributions for APs. If the plan does not allow in-kind distributions, a domestic relations order would not qualify because of 414(p)(3)(A)if it specified an in-kind distribution.

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Guest Harry O

An alternate payee can obtain the benefit of NUA if the employee-spouse is otherwise eligible for NUA. In your case, the employee-spouse is age 56 and still employed. He is therefore not currently eligible to claim NUA treatment if he took a distribution. However, once he terminates or reaches age 59.5 (even if still employed) the alternate payee can take a total distribution and claim the NUA exclusion.

Note that your alternate payee can claim NUA treatment for the portion of any distributed stock attributable to any after-tax contributions made by the employee-spouse (if any). This can be done even though the employee-spouse is still working or hasn't reached age 59.5.

Also, the alternate payee's right to elect NUA does not depend on whether the employee-spouse takes a distribution at the same time and elects NUA. Once the employee-spouse terminates or reaches age 59.5, the alternate payee can take a total distribution and claim NUA even if the employee-spouse takes nothing out of the plan for years . . .

Good luck.

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