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Division of Roth account in DRO

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I received an executed DRO that assigns a flat $ amount (I will just say for sake of discussion $15,000) of a participant's Roth basis to the alternate payee. It gave me pause as to whether a DRO can award basis only to the AP?

My first thought was from an award perspective it might be fine, but from the ultimate distribution perspective to the AP would it violate 1.402A-1 QA-9 (b) as that regulation clearly calls for a pro rata distribution of basis and earnings for a nonqualified distribution? [This would be a non qualified distribution as both participant and AP are not 59 1/2]

How do these two rules play together, ie ERISA vs the tax code? or maybe I am just overthinking.....

thanks for any suggestions.

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I do not understand the "ERISA v tax code" question. It is all about tax.

I think you should look at the award from the perspective of section 72(m)(10) of the tax code. The language is difficult to unravel and the terminology sucks, but I think the intent is to allocate basis proportionately to the allocation of balance. One might guess that a purpose of 72(m)(10) is to prevent allocation of basis disproportionately to the higher-rate taxpayer. From that I conclude that one cannot allocate only basis to an alternate payee or allocate a designated amount of basis (meaning an amount determined in some way other than pro-rata).

I think Q&A-9(b) applies only after the division and identification of the alternate payee's interest, which means after the application of section 72(m)(10) to the division.

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Internal Revenue Code section 72(m)(10) states: “Under regulations prescribed by the Secretary, in the case of a distribution or payment made to an alternate payee who is the spouse or former spouse of the participant pursuant to a qualified domestic relations order (as defined in section 414(p)), the investment in the contract as of the date prescribed in such regulations shall be allocated on a pro rata basis between the present value of such distribution or payment and the present value of all other benefits payable with respect to the participant to which such order relates.” More than 30 years after the 1984 enactment of the quoted statute, no rule or regulation to interpret section 72(m)(10) has been adopted, or even proposed.

Consider also whether the division sought might be affected by a proposed rule to interpret section 402A. The proposed rule is proposed to apply to distributions from designated Roth accounts made on or after January 1, 2015. This was published at pages 56310-56312 in the September 19, 2014 issue of the Federal Register; it’s available at http://www.regulations.gov/#!documentDetail;D=IRS-2014-0032-0001.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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