QDRO distribution options

[K2retire]

We have an executive with one of our plan sponsors who is waivering between manufacturing a hardship situation and getting a DRO to pay for the final annual installment of his alimony. Because we know he would be deliberating creating the hardship, we're a bit uneasy with that option.

His attorney is telling him that the DRO won't work either because it would require the ex to roll the money to an IRA. There is nothing in the plan documents to support that suggestion, and it is contrary to everything I've heard about QDROs. Have I missed something?

[Bill Presson]

If you missed it, so did I. And I don't think we both did.

[mbozek]

Didn't we just discuss the question of a QDRO requiring rollover of a spousal distribution to an IRA which was raised by Austin on June 2- See Weird QDRO question.

[david rigby]

This is the referenced discussion.
http://benefitslink.com/boards/index.php/topic/57386-weird-qdro-question/

[jpod]

Assuming the alimony is alimony that is deductible on his 1040, it seems like he is way better off borrowing the money to pay his alimony than taking a hardship distribution or doing a QDRO. If that's not possible, and if he is younger than 59-1/2, how much would the 10% additional tax on the hardship distribution be? It may be more than what it would cost him to go to the trouble of getting a QDRO.

[K2retire]

The earlier thread was trying to restrict the participant to an IRA rollover. This attorney is saying that the law restricts the alternate payee to an IRA.

Assuming the alimony is alimony that is deductible on his 1040, it seems like he is way better off borrowing the money to pay his alimony than taking a hardship distribution or doing a QDRO. If that's not possible, and if he is younger than 59-1/2, how much would the 10% additional tax on the hardship distribution be? It may be more than what it would cost him to go to the trouble of getting a QDRO.

That's exactly what I said! He is younger than 59 1/2.

[GMK]

An alternate payee has the same distribution choices as a participant.

From http://www.dol.gov/ebsa/faqs/faq_qdro2.html

"What effect does an order that a plan administrator has determined to be a QDRO have on the administration of the plan?

The plan administrator must act in accordance with the provisions of the QDRO as if it were a part of the plan. In particular, if, under a plan, a participant has the right to elect the form in which benefits will be paid, and the QDRO gives the alternate payee that right, the plan administrator must permit the alternate payee to exercise that right under the circumstances and in accordance with the terms that would apply to the participant, as if the alternate payee were the participant.

Reference: ERISA §§ 206(d)(3)(A), 206(d)(3)(E)(i)(III); IRC §§ 401(a)(13)(B), 414(p)(4)(A)(iii)"

[QDROphile]

Never trust the Department of Labor with respect to any of its thinking about QDROs. It has an absolutely shameful record of incompetence and indolence. While the quoted text above is correct as far as it goes under the most conventional of circumstances, it would be incorrect in others. The "as if the alternate payee were the participant" is the problem. It fails to capture correctly the language in the statute. The Department of Labor seems to be unable to understad or imagine how plans actually operate or how they might be designed. As fat as this thread goes, it is irrelevant. Distributions to alternate payees are not required by law to be rolled over.

[mbozek]

Is this what the participant wants to do?

Assuming that the participant can get a DRO to transfer the amount of the final alimony payment to the ex spouse, the plan will establish a beneficiary account under the plan in the spouse's name. The transfer will be non taxable under IRC 1041 and the spouse will have all of the rights of beneficiary under the plan, which includes the right to take a distribution. The spouse can then elect to either receive the distribution or roll it over to her own IRA. If the distribution is received the spouse will pay ordinary income tax at her rate but there will be no 10% tax under 72t which is no different taxwise than if spouse received the payment as alimony.

However by electing to transfer the funds by a DRO the employee loses the opportunity to deduct the alimony payment made to the spouse because once the funds are transferred to the spouse's account under the plan they become the spouse's property in a non taxable event. The employee will also have to pay for the cost of the QDRO.

There is one big tax question for the participant. In order for the transfer of the pension funds to be non taxable to the spouse, under IRC 1041c the transfer must be made within 1 year after the marriage ceases or is related to the cessation of the marriage. If 1041c does not apply then the employee will have to pay income tax on the transfer. Need to consult a tax adviser to see if the transfer is non taxable.

[K2retire]

Is this what the participant wants to do?

Assuming that the participant can get a DRO to transfer the amount of the final alimony payment to the ex spouse, the plan will establish a beneficiary account under the plan in the spouse's name. The transfer will be non taxable under IRC 1041 and the spouse will have all of the rights of beneficiary under the plan, which includes the right to take a distribution. The spouse can then elect to either receive the distribution or roll it over to her own IRA. If the distribution is received the spouse will pay ordinary income tax at her rate but there will be no 10% tax under 72t which is no different taxwise than if spouse received the payment as alimony.

However by electing to transfer the funds by a DRO the employee loses the opportunity to deduct the alimony payment made to the spouse because once the funds are transferred to the spouse's account under the plan they become the spouse's property in a non taxable event. The employee will also have to pay for the cost of the QDRO.

There is one big tax question for the participant. In order for the transfer of the pension funds to be non taxable to the spouse, under IRC 1041c the transfer must be made within 1 year after the marriage ceases or is related to the cessation of the marriage. If 1041c does not apply then the employee will have to pay income tax on the transfer. Need to consult a tax adviser to see if the transfer is non taxable.

This is very helpful.

Yes, the participant loses the ability to deduct the payment, but he also isn't paying the tax and 10% penalty on a hardship withdrawal. Hopefully the attorney fees for the DRO are less than the 10% hit.

I was not aware of the rule that the transfer must be within 1 year of the divorce. That may kill this option.

[QDROphile]

"This is very helpful."

Do you intend to advise the employee of a client about property division options in a divorce and the personal tax consequences that go along with them? I thought you were just reality-checking the incorrect suggestion about distributions to the AP because that is something you are involved in at the plan end.

The plan and its advisers need to maintain appropriate boundaries. Curiosity has very different boundaries, and it can be helpful to see a greater context even if the knowlege is academic. Leave the poor employee to his ill-advised or misunderstood lawyer.

[K2retire]

No, we are not planning to advise him regarding the property settlement issues.

[Ylsclark]

I am recently divorced my husband was supposed to give half of his 401k to me he refuses to give me a copy of the statement as proof of what is in the account how can I get the information before doing the qdro or how can I confirm the amount is there a way to know if money was already withdrawn from it so I don't pay and the money is no longer there?

[Bill Presson]

I am recently divorced my husband was supposed to give half of his 401k to me he refuses to give me a copy of the statement as proof of what is in the account how can I get the information before doing the qdro or how can I confirm the amount is there a way to know if money was already withdrawn from it so I don't pay and the money is no longer there?

Your attorney needs to send a request letter to the Plan Administrator requesting the appropriate information. They are obligated to provide it.

[QDROphile]

Negative. You can ask, but the plan administrator cannot give you personal information without participant

consent. The Department of Labor position otherwise is incorrect, but many plans will provide the information because of the DOL position or will ask the participant for consent. Your divorce probably enables issuance of a subpoena for the information and a plan should respect the subpoena. Also, if your divorce is pending, the spouse can be ordered to provide the information, but a subpoena is easier.