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Hi - We are about to receive a DRO directing our client's plan to pay child support to a state agency that (lawfully) represents the children of a Participant. We've never processed a QDRO for anyone other than former spouses. Can you please share your insights on the following:

1. Can the check be paid to a state agency? I think yes; it seems akin to paying to an IRA custodian.

2. Should the 1099 be issued to the Participant? I think yes, because child support payments are generally made with non-deductible income of the participant.

Thank you very much.

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The order should state how the payments should be made, but the plan can only pay an an alternate payee or agent. Typically a child support agency will assert that it is the agent, but sometimes not a lot of sophistication is demonstrated. Use the power of disqualification to make sure the order says what you need it to say.

The particpant is responsible for the taxes, which makes withholding an intersting question. Smart QDRO procedures will require the order to speak to the question of withholding as a matter of detemining the amount to paid to the alternate payee. You can imagine some friction if the participant elected withholding at a very high rate.

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Thanks! Your point about rate of withholding is excellent! Our plan is to notify all parties about the issue; follow your concept of having the court specify the withholding rate; and let the parties fight it out.

I think you are in agreement that the distribution will not be an "Eligible Rollover Distribution", and therefore, withholding will be subject to the 10% presumed rate; subject to a "right" to elect another rate.

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Consider that Internal Revenue Code section 3405(e)(10)(B) commands a "payor" to "transmit to the payee notice of the right to make an election" concerning withholding.

Concerning a distributee who is not the payee, consider whether a payer need not afford an opportunity to make a withholding election.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The state agency is acting under the authority of 42 USC 666(b)(8) which requires state child support agencies to collect back child support from a participants 401k plan account, IRA or other retirement benefits. It is not acting under the QDRO provisions of ERISA. The statute specifically states that ERISA preemption is waived. There are at least 2 DOL interpretative rulings that spell out how the plan is to comply with the order, e.g., they are to subject to the same rules for QDROs except that the payee is the state agency. You should ask counsel to review the request for the benefits. Only benefits in pay status can be paid out under 666(b)(8).

Under the tax law the payment to the state agency is an assignment of interest and the distribution is taxed to the participant.
I don't think withholding applies because the state agency as payee is exempt from taxation.

I would not obstruct the state agency with arguments that the state agency is not an alternate payee or agent because they are acting as a collection agency under specific authority of both federal and state law and they collect child support from banks and pension plans every day and eat HR and plan administrators for lunch. 666b was enacted specifically to collect back child support from deadbeat parents because congress was tired of having to payout funds under Aid to families with dependent children because the ex spouse was not paying child support and made each state establish a Child support collection unit under penalty of having AFDC reduced for failure to collect the back child support.

mjb

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Mbozek - thanks for this information - I was not aware of this. What constitutes "pay status" (for purposes of this law) for a DC plan - does it mean, for example, that if you are entitled to receive an in-service distribution of your profit sharing account if you request it, that this would be considered "pay status" or are the requirements more rigid?

Thanks.

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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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I don't know if its possible. QDROS are limited to spouses and dependents. Spouse is taxed on distribution which paid under a qdro. 666b is a separate law which mandates that the funds collected are remitted to the state child support agency, not the child. I don't believe the state agency could get a QDRO approved by a domestic relations court to have the participants benefits paid to the state agency because under the QDRO rules the benefits have to be paid for the benefit of the child.

mjb

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Even if an order meets all other conditions, a QDRO cannot require a plan to pay an alternate payee (or the alternate payee's agent) before the participant is entitled to a distribution or reaches age 50 and would be entitled to a distribution if he or she severed from employment, unless the plan provides a QDRO distribution before that time.

How much flexibility does a prototype or volume-submitter document allow in turning on or off such a before-50 provision?

Does a preapproved document allow a user to choose to provide a before-50 QDRO distribution for some kinds of QDROs while not providing it for others?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Every plan I have reviewed allows payment to the AP under the rules for a beneficiary before the participant is eligible because they do not want the AP requesting a plan loan, a hardship distribution or badgering the plan administrator for the benefits because counsel needs to be paid. Its easier to payout the benefits.

mjb

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My experience about what practitioners advise and what plan sponsors provide is similar to the two described above.

But I'm curious: does a preapproved document's adoption-agreement form even allow a choice?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Sample from a pre-approved document:


20.5 QDRO Distributions. Benefits payable pursuant to a Qualified Domestic Relations Order are distributable as selected below.

(a) [ ] Such benefits cannot be distributed until the affected Participant has reached the Earliest Retirement Age

(b) [ ] Such benefits can be distributed at any time (even if the affected Participant has not yet reached the Earliest Retirement Age)

...but then again, What Do I Know?

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Our EGTRRA and PPA VS documents don't allow a choice. Alternate payees can receive a distribution at any time, unless specified otherwise in the QDRO. If we had a choice, that's what we would have used anyway.

I've never seen a plan document that varied (or allowed you to vary) the distribution timing based on the type of QDRO.

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Reflecting on all of the above I am now of the impression that, more likely than not, a QDRO can direct a plan to withhold tax on a payment to an Alternate Payee; particularly, when the Alternate Payee is a child. (I think the DOL 's opinion provides good support, and that IRS would likely give some deference to the DOL's position.)

Acknowledging that there is always room for doubt, does anyone feel my impression is so wrong as to create concern of disqualification?

Thanks everyone.

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  • 1 year later...
On 6/30/2015 at 2:48 PM, Fiduciary Guidance Counsel said:

Consider that Internal Revenue Code section 3405(e)(10)(B) commands a "payor" to "transmit to the payee notice of the right to make an election" concerning withholding.

Concerning a distributee who is not the payee, consider whether a payer need not afford an opportunity to make a withholding election.

Are you sure a "payee" under section 3405 can be different from the "distributee" under sections 402 and 72?  I couldn't find a definition of "payee," but wouldn't the "payee" be the individual responsible for taxes, even if he did not receive the payment, much like the participant is the "distributee" for tax purposes under a QDRO with a child alternate payee, even though he did not receive the distribution?  The few articles, etc. that I have seen that mentioned withholding in this context have referenced the participant making the withholding election, although they did so without really addressing the question.

If the child AP is the "payee" under section 3405 (in a situation not involving a child support enforcement agency) shouldn't the "payor" provide a Form W-4P to the child AP, which would allow the child AP to waive tax withholding?  If the participant is the "payee," (1) would a "payor" have to adhere to a QDRO provision that prohibits tax withholding from the distribution, or (2) could a QDRO order the participant to waive withholding by filing Form W-4P with the payor and, if so, is it realistic that courts would enforce this type of provision if the participant is not cooperative?

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