QDRO 457(b) Nongovernmental Plan

[DTH]

Hi,

If an alternate payee is a spouse or former spouse, the QDRO distribution is included in the alternate payee’s income. If the alternate payee is a nonspouse, it is included in the participant's income.

How are you tax reporting these distributions for nongovernmental 457(b) plans? I have looked all over for any guidance and have found none.

If the alternate payee is a nonspouse, I assume that the distribution is reported on IRS Form W-2 since it is taxable to the participant.

If the alternate payee is a spouse or former spouse, I assume the distribution is reported on IRS Form 1099-MISC.

Can anyone confirm. Thanks!!

[QDROphile]

Look at Rev. Ruls. 2002-22 and 2004-60.

[ETA Consulting LLC]

This is a good one. I, personally, do not believe the QDRO rules apply to Top Hat Plans as they are not funded by a trust (and, therefore, the anti assignment rules of section 401(a)(13) do not apply). We know if it were a traditional IRA, then the rules of 408(d)(6) would allow a tax-free transfer of assets to the spouse pursuant to a divorce decree; so no QDRO as the IRA is not a trust. I do believe the amounts within the plan are 'valuable' assets with respect to the employees future receivable, but the fact the plan is unfunded (and the assets are, technically, assets of the employer until they are 'made available' or withdrawal by the participant), there would be no enforceable QDRO against this type of plan.

I would stand corrected if wrong, but I don't see how this ties together given the unfunded status of the plan.

Good Luck!

[John Feldt ERPA CPC QPA]

I believe that ETK's comment is technically correct, but I think a 457(b) plan could adopt language that mirrors the usual QDRO rules. That could make administration a bit easier perhaps. Otherwise, the state rules regarding the division of marital assets would have to be applied, which depending on the state, could invoke the QDRO rules anyway, I suppose.

[mbozek]

This is a good one. I, personally, do not believe the QDRO rules apply to Top Hat Plans as they are not funded by a trust (and, therefore, the anti assignment rules of section 401(a)(13) do not apply). We know if it were a traditional IRA, then the rules of 408(d)(6) would allow a tax-free transfer of assets to the spouse pursuant to a divorce decree; so no QDRO as the IRA is not a trust. I do believe the amounts within the plan are 'valuable' assets with respect to the employees future receivable, but the fact the plan is unfunded (and the assets are, technically, assets of the employer until they are 'made available' or withdrawal by the participant), there would be no enforceable QDRO against this type of plan.

I would stand corrected if wrong, but I don't see how this ties together given the unfunded status of the plan.

Good Luck!

Funding under a trust is not required in order to be subject to QDRO. 457b plans are considered to be exec comp plans and exec comp plans have been held to be subject to the QDRO rules (even though they are pension plans exempt from parts II, III and IV of ERISA) because they are subject to ERISA 514(b)(7) which provides that QDROs are not exempt form ERISA preemption. see Bass v. Mid-America 1995 WL 622397 (Exec comp plan subject to QDRO) and Met life v. Wheaton 42 F3d 1080, which held that the QDRO provision applies to all ERISA plans (eg., LI) not just pension plans. Need to check the law of the Federal appeals circuit to determine if Exec comp plans are subject to QDRO rules or if LI benefits are subject to QDRO rules. Only top hat plans are exempt under ERISA from QDRO rules.

[ETA Consulting LLC]

Funding under a trust is not required in order to be subject to QDRO. 457b plans are considered to be exec comp plans and exec comp plans have been held to be subject to the QDRO rules (even though they are pension plans exempt from parts II, III and IV of ERISA) because they are subject to ERISA 514(b)(7) which provides that QDROs are not exempt form ERISA preemption. see Bass v. Mid-America 1995 WL 622397 (Exec comp plan subject to QDRO) and Met life v. Wheaton 42 F3d 1080, which held that the QDRO provision applies to all ERISA plans (eg., LI) not just pension plans. Need to check the law of the Federal appeals circuit to determine if Exec comp plans are subject to QDRO rules or if LI benefits are subject to QDRO rules. Only top hat plans are exempt under ERISA from QDRO rules.

So, where does that leave us since the Top Hat Plans are exempt from ERISA?

[mbozek]

Funding under a trust is not required in order to be subject to QDRO. 457b plans are considered to be exec comp plans and exec comp plans have been held to be subject to the QDRO rules (even though they are pension plans exempt from parts II, III and IV of ERISA) because they are subject to ERISA 514(b)(7) which provides that QDROs are not exempt form ERISA preemption. see Bass v. Mid-America 1995 WL 622397 (Exec comp plan subject to QDRO) and Met life v. Wheaton 42 F3d 1080, which held that the QDRO provision applies to all ERISA plans (eg., LI) not just pension plans. Need to check the law of the Federal appeals circuit to determine if Exec comp plans are subject to QDRO rules or if LI benefits are subject to QDRO rules. Only top hat plans are exempt under ERISA from QDRO rules.

So, where does that leave us since the Top Hat Plans are exempt from ERISA?

Where did you get the idea that top hat plans are exempt from all provisions of ERISA?

As noted above top hat plans are only exempt from parts II, III and IV of ERISA. They are subject to the Reporting and disclosure requirements of Part I and the claims provisions of part V. Top hat plans are subject to QDROs because most courts have decided that the QDRO provisions apply to all ERISA plans, not just pension plan subject to non alienation provision of ERISA 206.

[Belgarath]

See IRC 414(p)(11) and (12).

P.S. Here's the citation:

(11) Application of rules to certain other plans

For purposes of this title, a distribution or payment from a governmental plan (as defined in subsection (d)) or a church plan (as described in subsection (e)) or an eligible deferred compensation plan (within the meaning of section 457(b)) shall be treated as made pursuant to a qualified domestic relations order if it is made pursuant to a domestic relations order which meets the requirement of clause (i) of paragraph (1)(A).

(12) Tax treatment of payments from a section 457 plan

If a distribution or payment from an eligible deferred compensation plan described in section 457(b) is made pursuant to a qualified domestic relations order, rules similar to the rules of section 402(e)(1)(A) shall apply to such distribution or payment.

[mbozek]

See IRC 414(p)(11) and (12).

P.S. Here's the citation:

(11) Application of rules to certain other plans

For purposes of this title, a distribution or payment from a governmental plan (as defined in subsection (d)) or a church plan (as described in subsection (e)) or an eligible deferred compensation plan (within the meaning of section 457(b)) shall be treated as made pursuant to a qualified domestic relations order if it is made pursuant to a domestic relations order which meets the requirement of clause (i) of paragraph (1)(A).

(12) Tax treatment of payments from a section 457 plan

If a distribution or payment from an eligible deferred compensation plan described in section 457(b) is made pursuant to a qualified domestic relations order, rules similar to the rules of section 402(e)(1)(A) shall apply to such distribution or payment.

IRC 414(p)(12) allows the tax free transfer of NP 457b accounts pursuant to a QDRO. However, ERISA 514(b)(7) authorizes the transfer of the employees interest to the ex spouse under state divorce laws that would otherwise be preempted.

[Charlie]

During divorce participant was supposed to roll over a portion of retirement into the ex-spouse's designated account.  The participant filled out a QDRO from the third-party administrator for a hospital 457 (b) non-government account.  The participant did not let the ex-spouse or the court know that this was a non-qualified account.  The court processed the QDRO only to later find out that the funds could not be rolled over into the ex-spouse's designated account.  The court then ordered another QDRO to return the money to the participant's account.  The employer then refused to return the funds to the participant because the ex-spouse was not a high-earning employee of the company or any employee of the company.  The third party should not have approved the original QDRO to begin with because the participant was not transparent with the order of the court stating the funds need to be rolled over into a designated account.  Should the court rescind the original order for the funds to be placed back into the participant's account? To complicate things, the participant terminated employment shortly after the funds were placed in a parallel account, not the ex-spouse's designated account, her IRA.  The plan does note that unless the Plan is a church plan within the meaning of Code section 414 (e) which has not made the election described in Code section 410 (d), any group of employees specified under any of the options above must be members of a select group of management or highly compensated employees within the meaning of ERISA sections 201 (2), 301 (a) (3), and 401 (a) (1). Such a determination is solely the responsibility of the Employer.