Child Support QDRO - voluntary 10% withholding

[BombyxMori]

The division of child support wants essentially the participant's entire account for back child support, and there is not enough left in his account to gross up to account for the 10% voluntary withholding that applies under 3405(b). Under 3405(b), 10% is the default (because this is not rollover eligible) but the participant is permitted by that statute to elect anywhere from 0% to 100% withholding. This does not do much to help the division of child support get the exact amount that they want. 

It seems that this only works if a QDRO may also order the participant to elect no withholding on this distribution so that the plan may pay the full amount "net" of (0%) withholding. 

But I cannot find any guidance or even examples of this being ordered. I figure it must be possible or else child support QDROs have a sort of intractable issue. Has anyone ever encountered this or seen any guidance on whether a QDRO can order a taxpayer to elect not to withhold taxes?

[david rigby]

First, go to the head of this Forum at https://benefitslink.com/boards/index.php?/forum/89-qualified-domestic-relations-orders-qdros/, then search for "withholding".  See whether any prior discussions help you.

If withholding is applied, it would seem that does not alter the participant's child support obligation.  Normally, the "participant" is (probably) entitled to elect a withholding other than the default.  However, the agency is the payee, not the participant, so that may alter who gets to make a withholding election.  So, does the plan give the participant or the payee the withholding election?  The PA may want an opinion from its ERISA attorney.  (The TPA should not make this decision.)

[RatherBeGolfing]

Good question. 

Does it matter that there isn't enough left over for voluntary withholding?  I don't think so.   The QDRO orders you to pay 95% of the participant's account to a non-spouse alternate payee, leaving only 5% for the participant.  The participant wants to pay 10% in taxes, but there aren't enough assets for a 10% payment.  The participant is short, and will have to settle for the 5%.  It is not the responsibility of the non-spouse alternate payee to make sure that the participant can satisfy tax payments with account assets.  

 

[Larry Starr]

2 hours ago, BombyxMori said:

The division of child support wants essentially the participant's entire account for back child support, and there is not enough left in his account to gross up to account for the 10% voluntary withholding that applies under 3405(b). Under 3405(b), 10% is the default (because this is not rollover eligible) but the participant is permitted by that statute to elect anywhere from 0% to 100% withholding. This does not do much to help the division of child support get the exact amount that they want. 

It seems that this only works if a QDRO may also order the participant to elect no withholding on this distribution so that the plan may pay the full amount "net" of (0%) withholding. 

But I cannot find any guidance or even examples of this being ordered. I figure it must be possible or else child support QDROs have a sort of intractable issue. Has anyone ever encountered this or seen any guidance on whether a QDRO can order a taxpayer to elect not to withhold taxes?

I have extensive resources regarding QDROs (including child support issues) in my office but won't be back until 8/20.  If you have not received a useful answer by next Monday, just repost in this thread and I will see it and see what I can find for you.

[BombyxMori]

Thanks Larry, that's very kind of you. 

RatherBeGolfing: I think it is a concern for the plan, as IRC 3405 makes the payor liable for depositing the withholding. If the participant does not elect out of the 10%, then the payor (the plan) would be liable for it, in my view. I don't think that a QDRO draining his account and the plan paying it out accordingly would constitute an election on the participant's part, I think it has to be affirmative.

[Mike Preston]

2 minutes ago, BombyxMori said:

Thanks Larry, that's very kind of you. 

RatherBeGolfing: I think it is a concern for the plan, as IRC 3405 makes the payor liable for depositing the withholding. If the participant does not elect out of the 10%, then the payor (the plan) would be liable for it, in my view. I don't think that a QDRO draining his account and the plan paying it out accordingly would constitute an election on the participant's part, I think it has to be affirmative.

I'm sure the qdro directs the participant to execute the documents necessary to implement the dro. An election to withhold 5% as a precursor is no different. If the participant doesn't elect 5% or less withholding the participant is not doing as directed. The judge won't like it!

[RatherBeGolfing]

24 minutes ago, BombyxMori said:

RatherBeGolfing: I think it is a concern for the plan, as IRC 3405 makes the payor liable for depositing the withholding. If the participant does not elect out of the 10%, then the payor (the plan) would be liable for it, in my view. I don't think that a QDRO draining his account and the plan paying it out accordingly would constitute an election on the participant's part, I think it has to be affirmative.

The participant cannot make an election to pay taxes out of assets that are not his.  It doesn't matter whether he wants to withhold 10% or 100%.  The plan does not have a responsibility pay it just because the participant does not have the assets left to use.  

Participant has $10,000 in his account.  QDRO assigns $9,500 for back child support.  Participant now has $500. The plan distributes $9,500 as directed by the QDRO, creating a tax liability to the participant since its a non-spouse AP.  Participant wants to withhold the default 10% of the distribution, or $950.  Participant only has $500 to withhold. The plan is only liable for depositing what can actually be withheld.

Can the QDRO itself order less than the default?  Maybe, but in my opinion it doesn't have to since the participant can only withhold from assets that are actually his.

[QDROphile]

There are prior posts relating to withholding on distributions to APs that are not spouses or former spouses. They do not cover the question as posed, but they deal with the relevant rules and principles.  Some of those have been touched on already in this post piecemeal, but not in a particularly coherent way for an overall picture.  It is a matter with little prescriptive guidance in the literature and requires understanding of both the relevant local domestic relations law and QDRO law and federal tax withholding law in order to achieve a particular outcome.  Competent counsel is required, but it would be enlightening to wait for Larry Starr to return and ‘splain it all for y’all.

Mike Preston holds one key — the ability and willingness of the court to order the participant to elect zero withholding on the distribution (and do not overlook state tax withholding, BTW), and to enforce the order.  But his is an example of a post that does not express the concept in a prescriptive manner.

[Adi]

IRS Notice 89-25 provides some helpful guidance:

Q-3: What withholding rules apply to qualified plan distributions to nonspouse alternate payees?

A-3: Section 3405 of the Code provides that federal income tax must be withheld from all designated distributions unless the individual elects not to have withholding apply. In general, a designated distribution is any payment or distribution from or under an employee deferred compensation plan but does not include the portion of a distribution which it is reasonable to believe is not includible in gross income.

Section 402(a)(9) of the Code provides that, for purposes of section 402(a)(1) and 72, any alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order as defined in section 414(p). The withholding rules therefore are applied as if the spouse or former spouse were the employee. However, there is no similar provision for distributions to nonspouse alternate payees. Therefore, distributions to a nonspouse alternate payee during the lifetime of the participant are not includible in such payee's gross income, but instead are included in the gross income of the plan participant. Consequently, amounts shall be withheld from the distribution as if the plan participant were the payee, unless the plan participant elects not to have the withholding rules apply.

--

And so, I read this as support for the view that the plan must withhold taxes from the distribution to the AP (unless the participant elects otherwise).  The court can certainly order the participant to make a certain election.  But it would appear the plan is bound to withhold pursuant to the election the participant actually makes (presumably on the plan's form or in whatever manner the plan accepts elections, which may not be through a QDRO).  

[Larry Starr]

Folks, at request of Ratherbegolfing, I have checked my resources.

Without a doubt, the 10% withholding applies at the plan level unless waived by the PARTICIPANT, which would be stupid, since the total dollars would still go to the child and the participant would have NO CREDIT towards his ultimate tax liability. At least this way, he gets a jump on his tax liability. 

One of my reference sources on QDROs has substantive discussion of this very issue.  The author called it an "ironic twist".There also is reference to IRS Notice 89-25, Q3 which appears to be right on point. 

Hope this helps.

Larry.