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401(k) & QDRO


Guest rozie3130

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Guest rozie3130

My boyfriend is currently going through a divorce. His ex has made it clear that she will want half of his 401K. Since we live in PA she will get what's fair and only 1/2 (if she gets that) of what was accrued through the marriage. It is HIS 401K, she did not contribute anything and opted to not have one even though she was a RN making great money during their marriage. What we want to know is, if his plan through his employer states that in the event of a divorce settlement, what she is awarded is to be moved and cannot be touched until he withdrawals - do the courts have to abide by that plan? Is that what is put into the QDRO or can she fight and say she wants a lump sum of cash?

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1. If she is awarded an amount and it is set aside for her, why do you care when it is paid?

2. A plan can provide that an alternate payee (the former spouse) cannot be paid her share until the participant is paid. An exception applies to most 401(k) plans -- the alternate payee must be eligible for payment when the participant attains age 50 even if the participant is still working or has not chosen to be paid.

3. The terms of the order can be more restrictive about payment than the plan would be.

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Guest rozie3130

She is money hungry and just wants cash. He thinks his plan states what you said in #2; she cant be paid until he is but he wants to know if she can pitch a fit to just get the cash or do they go by what his plan has set. Which has more weight? Her demands or his 401K plan? If she is made to roll it over into her own account and she decides to withdraw, he doesn't care. She'll get hit with taxes and fees at that point.

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One of the requirements for a domestic relations order (DRO) to be Qualified (QDRO) is that the Order does not require the Plan to provide any type or form of benefit, or any option, not otherwise provided under the Plan. The Plan rules.

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1. See (1) above from QDROphile.

2. Read it again.

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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Most 401k plans provide/require that assets transferred to the ex spouse must be placed in a separate account under the spouse's control. All divorce decrees I have hever seen provide for the spouse's assets to be segregted from the participant's share in a 401k plan since the spouse has the right to designate the benficiary of her own benefits and select investment options.

It is up to the plan as to whether the spouse's benefits can be paid before the benefits are available to be distributed to the participant. Most plans allow distributions to ex-spouses after the QDRO is approved because they do not want to deal with ex spouses as beneficaries under the plan.

In any event I dont know why you should be concerned if the ex spouse can withdraw her share of the particpant's funds after the divorce since they are her funds.

mjb

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mbozek:

Switching to a side track, if an alternate payee designates a beneficiary and then dies, is the distribution still covered by section 402(e)? It seems unfair to the participant to have the tax consequences change, but the language does not fit so well any more.

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mbozek:

Switching to a side track, if an alternate payee designates a beneficiary and then dies, is the distribution still covered by section 402(e)? It seems unfair to the participant to have the tax consequences change, but the language does not fit so well any more.

If the AP is designated as the beneficiary of the 401k account for amounts transferred under the QDRO, then the funds are the property of the spouse same as any other plan beneficiary and will be inherited by the spouse's beneficaries who will be taxed under the rules for distributions including rollovers to an IRA. See reg. 1.401(a)-13(g)(4)(iii)(B) QDRO cannot provide a greater right to designate a beneficiary for the AP's benefit than the participant's right. So if the participant can designate a beneficiary for his/her plan benefit, then AP as beneficiary will have the same right to designate a contingent beneficiary for the amount of the AP's account balance under the plan.

mjb

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Sorry, I do not see a response about taxation of a distribution to a beneficiary of an alternate payee unless you are saying the general rule applies that a beneficiary is treated as the taxpayer with respect to a benefit of the person who designated the beneficiary. Perhaps the question should have started a new thread.

Under a QDRO, an alternate payee gets an interest under the plan. Think defined contribution plan to make things simple. IRC section 402(e) says that when the interest is distributed, if the alternate payee is a spouse or former spouse of the participant, the alternate payee is treated as the taxpayer and the rates and rules for qualified plans apply (e.g. 20% withholding if distribution is not directly rolled over).

The corollary is that if the alternate payee is not the spouse or former spouse of the participant (e.g. a child of the participant), the participant is treated as the taxpayer (recipient of the income for income tax purposes) and the regular witholding rules apply (not 20%).

If the alternate payee is the spouse or former spouse of the participant, and then designates a beneficiary for the alternate payee's interest (as allowed by the plan) and dies, the distribution to the beneficiary is not a distribution to a spouse or former spouse of the participant. Does 402(e) say that the participant includes the income? Seems to be nonsense, but that is what 402(e) seems to say, on its face. Does some other rule apply?

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While I see your point, the general rule of 402 is that the "distributee" is taxed, the only exception being the take-out rule for APs who are not spouses or former spouses. Therefore, one could argue that since the AP's beneficiary is not an AP the special take-out rule doesn't apply and the general rule applies. If that argument doesn't work for some reason, I would chalk it up to being a non-sensical result otherwise, and advise that reporting the distribution as taxable to the AP's beneficiary is a low risk proposition.

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Sorry, I do not see a response about taxation of a distribution to a beneficiary of an alternate payee unless you are saying the general rule applies that a beneficiary is treated as the taxpayer with respect to a benefit of the person who designated the beneficiary. Perhaps the question should have started a new thread.

Under a QDRO, an alternate payee gets an interest under the plan. Think defined contribution plan to make things simple. IRC section 402(e) says that when the interest is distributed, if the alternate payee is a spouse or former spouse of the participant, the alternate payee is treated as the taxpayer and the rates and rules for qualified plans apply (e.g. 20% withholding if distribution is not directly rolled over).

The corollary is that if the alternate payee is not the spouse or former spouse of the participant (e.g. a child of the participant), the participant is treated as the taxpayer (recipient of the income for income tax purposes) and the regular witholding rules apply (not 20%).

If the alternate payee is the spouse or former spouse of the participant, and then designates a beneficiary for the alternate payee's interest (as allowed by the plan) and dies, the distribution to the beneficiary is not a distribution to a spouse or former spouse of the participant. Does 402(e) say that the participant includes the income? Seems to be nonsense, but that is what 402(e) seems to say, on its face. Does some other rule apply?

As I understand it the non alienation provision of the IRS regs provides that if a QDRO transfers the participant's retirement benefit to the AP as a beneficiary, e.g., a separate account in the name of the AP, then the AP becomes the owner of the benefits and can designate a contingent beneficiary in the event of death under the same provisions that apply to any beneficiary. The contingent beneficiary will be taxed under the MRD rules or the rollover rules. See reg. 1.401(a)(9)-8 q/a-6(b)(1) which provides that the beneficiary of the AP will be treated as the designated beneficiary for the purpose of receiving MRDs after the death of the employee.

mjb

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