Retroactive QDRO

[rblum50]

I have a 401(k) plan where the Plan Administrator got divorced and paid $50,000 to her spouse as part of a divorce settlement. There were all sorts of divorce documentation, but, no QDRO. I brought this up to the client who referred me to her attorney (a rather nasty individual). I mentioned that it was necessary to have a QDRO for the plan to avoid potential problems in the future. A tentative Retroactive QDRO has been sent to me for my review and I have the following comments:

1. The only verbiage in the document making it retroactive is:

"This Order is entered pursuant to the authority granted in the applicable domestic relations laws and the marital property laws of the State of Texas and IT IS ORDERED that this order is retroactive to December 28, 2009."

Question: I am not that familiar with these things and I am wondering if this simple reference is sufficient to make this attempt at a retroactive QDRO, in fact, a retroactive QDRO?

2. Remembering that this payment has already been made and rolled into an IRA, I question the following section:

"Commencement Date and Form of Benefit

Alternate Payee shall be paid Alternate Payee's benefits as soon as administratively feasible or, if the Alternate Payee so elects, at the earliest date permitted under the terms of the Plan."

Question: Given the fact that the Alternate Payee was already paid out and rolled the proceeds into an IRA, this section makes no sence. In fact, it appears to me, that this probably was a boilerplate section inserted into the document on the assumption that when this DRO is approved, a payment will be made subsequently. It just seems inconsistent with what has actually happened. Do you agree with my opinion on this or am I being too picky?

3. Finally, with regard to the tax treatment on this distribution, the document indicates that the "...Alternate Payee under the terms of this Order...will be required to pay the appropriate federal income taxes on this distribution." Again, it appears to me that this wording would be more appropriate if the distribution was to be made in the future and not already rolled into a tax sheltered environment.

Question: Again, am I being too picky with this wording?

Thanks for the help,

Rick

[mbozek]

I have a 401(k) plan where the Plan Administrator got divorced and paid $50,000 to her spouse as part of a divorce settlement. There were all sorts of divorce documentation, but, no QDRO. I brought this up to the client who referred me to her attorney (a rather nasty individual). I mentioned that it was necessary to have a QDRO for the plan to avoid potential problems in the future. A tentative Retroactive QDRO has been sent to me for my review and I have the following comments:

1. The only verbiage in the document making it retroactive is:

You need to provide the rest of your comments.

[QDROphile]

I don't think the problem is terms of the order and the terms of the order cannot fix the problem.

The problem is that the plan distributed funds (presumably to a nonparticipant and a nonbeneficiary) not in accordance with plan terms and not pursuant to a QDRO. The plan has an operational error. The plan needs to fix the error in accordance with EPCRS. Part of the fix will be getting a QDRO. As long as the terms of the QDRO describe the amount distributed and meet other qualification requirements, it will fit with the fix, but the fix will involve more than just qualifying the domestic relations order. Any provisions in the order relating to retroactivity can't save the plan from the premature distribution.

[mbozek]

I have a 401(k) plan where the Plan Administrator got divorced and paid $50,000 to her spouse as part of a divorce settlement. There were all sorts of divorce documentation, but, no QDRO. I brought this up to the client who referred me to her attorney (a rather nasty individual). I mentioned that it was necessary to have a QDRO for the plan to avoid potential problems in the future. A tentative Retroactive QDRO has been sent to me for my review and I have the following comments:

1. The only verbiage in the document making it retroactive is:

"This Order is entered pursuant to the authority granted in the applicable domestic relations laws and the marital property laws of the State of Texas and IT IS ORDERED that this order is retroactive to December 28, 2009."

Question: I am not that familiar with these things and I am wondering if this simple reference is sufficient to make this attempt at a retroactive QDRO, in fact, a retroactive QDRO?

2. Remembering that this payment has already been made and rolled into an IRA, I question the following section:

"Commencement Date and Form of Benefit

Alternate Payee shall be paid Alternate Payee's benefits as soon as administratively feasible or, if the Alternate Payee so elects, at the earliest date permitted under the terms of the Plan."

Question: Given the fact that the Alternate Payee was already paid out and rolled the proceeds into an IRA, this section makes no sence. In fact, it appears to me, that this probably was a boilerplate section inserted into the document on the assumption that when this DRO is approved, a payment will be made subsequently. It just seems inconsistent with what has actually happened. Do you agree with my opinion on this or am I being too picky?

3. Finally, with regard to the tax treatment on this distribution, the document indicates that the "...Alternate Payee under the terms of this Order...will be required to pay the appropriate federal income taxes on this distribution." Again, it appears to me that this wording would be more appropriate if the distribution was to be made in the future and not already rolled into a tax sheltered environment.

Question: Again, am I being too picky with this wording?

Thanks for the help,

Rick

Where did the 50k payment come from? The plan or out of the employees pocket?

Was the 50k payment ordered to be made from the plan because it was deemed to be the spouse's interest in the plan or was it part of an overall property settlement of the comunity estate of the couple?

In order for the transfer of retirement funds to be taxed to the alternatate payee there must be a valid QDRO. See IRS notice 89-25 Q3 (only payments made under a valid QDRO will be taxed to the alternate payee).

In Randolph Simpson TC memo 2003-294, a payment of $18k by the employee to the ex which was part of an ESOP distribution paid to the employee that was used to satisfy a divorce judgment was subject to the 10% penalty under IRC 72(t) because the payment to the ex spouse did not qualify as a payment under a QDRO. Under the divorce decree the 18k was specifically intended to be a division of the community estate, not an assignment of the employee's interest in the ESOP which would be taxed to the spouse under a QDRO.

[rblum50]

The $50,000 distribution came from the plan and was deemed to be part of the marital settlement. It was ordered in the original divorce papers which referenced a QDRO. The problem is that the QDRO wasn't actually done. The attorney for the payor (as a said a nasty "b") has now drafted what she considers a "retroactive QDRO" for review. It appears that she just simply added a sentence indicating that the order will be "retroactive" and used boilerplate language for the remainder of the order. That is why,when reviewing her work, it appears as though the monies "will" be paid out subject to this QDRO rather than responding the the fact that the monies have already being paid out and rolled into an IRA by the alternate payee. Before I critique her work as a non-lawyer, I just wanted to assure myself that the points I am making can be considered as valid.

In you opinion, what are the tax consequences of the rolled money? If this retroactive QDRO is approved, are there still adverse tax consequences on this rollover?

Thanks for the help

[Laura Harrington]

The $50,000 distribution came from the plan and was deemed to be part of the marital settlement. It was ordered in the original divorce papers which referenced a QDRO. The problem is that the QDRO wasn't actually done. The attorney for the payor (as a said a nasty "b") has now drafted what she considers a "retroactive QDRO" for review. It appears that she just simply added a sentence indicating that the order will be "retroactive" and used boilerplate language for the remainder of the order. That is why,when reviewing her work, it appears as though the monies "will" be paid out subject to this QDRO rather than responding the the fact that the monies have already being paid out and rolled into an IRA by the alternate payee. Before I critique her work as a non-lawyer, I just wanted to assure myself that the points I am making can be considered as valid.

In you opinion, what are the tax consequences of the rolled money? If this retroactive QDRO is approved, are there still adverse tax consequences on this rollover?

Thanks for the help

When did the distribution of the $50,000 occur? Was it in 2010?

[mbozek]

The $50,000 distribution came from the plan and was deemed to be part of the marital settlement. It was ordered in the original divorce papers which referenced a QDRO. The problem is that the QDRO wasn't actually done. The attorney for the payor (as a said a nasty "b") has now drafted what she considers a "retroactive QDRO" for review. It appears that she just simply added a sentence indicating that the order will be "retroactive" and used boilerplate language for the remainder of the order. That is why,when reviewing her work, it appears as though the monies "will" be paid out subject to this QDRO rather than responding the the fact that the monies have already being paid out and rolled into an IRA by the alternate payee. Before I critique her work as a non-lawyer, I just wanted to assure myself that the points I am making can be considered as valid.

In you opinion, what are the tax consequences of the rolled money? If this retroactive QDRO is approved, are there still adverse tax consequences on this rollover?

Thanks for the help

If you are stating that the 50k payment to the ex spouse from the plan was specifically required under the divorce decree then it would be taxable to the ex as a distribution event if a valid QDRO was in effect. In every situation I have reviewed the QDRO was approved before the payment was made to the ex because holding up payment is the only leverage the plan has to to make sure that the parties submit a DRO that meets the requirements of 414p. Retroactive QDROs are usually issued to change the provisions of a valid QDRO that was previously approved by the plan. I dont know whether a payment would be taxable to the ex if it is made before the plan approved a QDRO even if the QDRO is retroactively approved.

One way this could work is if the divorce decree contained all of the necessary elements for a QDRO under 414p. There are court case which have upheld the terms of divorce decree as a QDRO although a formal QDRO document was never approved by the plan administrator.

You need to discuss this issue with counsel.