Alt Payee Also a Participant

[in-house ERISA]

If an alternate payee is also a participant in the 401(k) plan that is subject to a QDRO (i.e. the divorcing couple work for the same employer and both participate in the same plan), must the plan create a separate account for the alt payee, or may the plan transfer her QDRO award into her existing account under the plan?

Thanks for any insight on this issue.

[ESOP Guy]

I would make a separate account for the Alt Payee funds.  There is most likely different rules regarding how the money will be treated.  The most notable would be when the funds can be paid out.   Most likely the Alt Payee can take the funds at any time but if restricted it is linked to the former spouse's age/date of termination.  There could be different tax treatment when paid depending on the age of the Alt Payee. 

The times I have had this situation we always put them in a separate account and keep them separate. 

[in-house ERISA]

Thanks very much, ESOP Guy. Your answer makes sense to me. Appreciate the insight. 

[david rigby]

Prior discussion might help.

https://benefitslink.com/boards/index.php?/topic/26068-alternate-payee-is-also-a-plan-participant-can-they-take-the-distribution/

[fmsinc]

I have been told by at least 3 Plan Administrators that a QDRO transfer to an Alternate Payee cannot be rolled over into that Alternate Payee's own 401(k) Plan regardless of whether it is at the same Employer of the Participant or to another Employer for whom the Alternate Payee works. 

The attached, they say, applies only to a transfer from a one account in which a party is a Participant to another Plan in which that same party is a participant.   They all say that the attached chart does not apply to QDRO transfers.  I cannot cite the applicable Code or Regs.    

The exception is a TSP where, if both parties work for the Federal Government they will permit a rollover from the Participant's TSP account to the Alternate Payee's TSP account.  

IRS Rollover Chart.pdf

[Kevin C]

A spouse or former spouse under age 59.5 who is receiving a distribution under a QDRO should be careful before deciding to roll it to an IRA or a qualified plan.  A QDRO distribution is not subject to the 10% early withdrawal penalty [IRC 72(t)(C)]. Once it has been rolled to an account in the alternate payee's name, that exception is gone.

A distribution under a QDRO to the spouse or former spouse is treated the same as a distribution to the employee when determining if it is an eligible rollover distribution [1.402(c)-2 Q&A 3 and Q&A 12].