QDRO approved, funds disbursed Aug 2018

[Jacksmom]

State of Oregon, parties are now dealing with the reality that they did not withdraw enough from 401K plan to pay off all bills and also pay IRS.  Husband now wants to renegotiate the pension settlement and wife just wants the bills paid off. Can they renegotiate the 401k settlement and file an amended or new QDRO? Is it allowed to go back ? They had done a 50/50 split before but failed to account for the tax consequences of not rolling over into another retirement plan. Plus the bills turned out to be more that they thought after paying lawyers :(

 

[loserson]

You can't unwind the tax consequences from a prior year.  Or in this case, after 60 days.

They can renegotiate and agree to submit another QDRO to further split the remaining 401(k) balance.  Then use that to pay tax.  But will owe more taxes on that distribution if they do not roll it over.

Are they really forced to use the 401(k) to pay their living expenses, taxes due, and/or legal fees?

Do they both owe the tax?  Or just one of them?  If they are fully divorced or have even been separated for a while, then I would expect only one of them owes the tax.  Whoever got the distribution should have gotten several written warnings that they must roll it over into an IRA or another qualified retirement plan, or else pay tax.  They should have also had a portion withheld for taxes.

If they have not done a final division of all the assets, then whoever is stuck with the tax bill could demand more from the other assets to balance it out.

It is not a good idea, if it is at all avoidable, to withdraw MORE money from the 401(k) in order to pay the taxes from the last time they withdrew money from the 401(k).

[QDROphile]

Getting another order from the court depends on state law and the status of the domestic relations proceeding.  It is possible that if the matter is closed, the court will not reopen it for the convenience of the parties.

[Jacksmom]

They are buried to their eyeballs in debt due to paying for a 26 week gestation premature baby. They lived off the CC when wife (major bread winner) was hospitalized for nearly 4 months. Those same CC paid medical bills for Donor & Invitro services. 

They have crawled out of this mess, did NOT file BK but paid. Have no Collections or Charge Offs.  Marriage did not survive the struggle. They are down to needing about another $90,000 to clear everything and taxes.

Attorney who screwed up royally states they can’t renegotiate the 401K settlement and I think that’s BS. Says the judge would not allow it??? Why? People renegotiate Divorce settlements all the time.  I doubt the Judge would care unless this is a IRS thing. They should have asked for a Hardship withdrawal years ago but as the child is now 8 that’s a lesson for another day.

BTW both parties are wanting to do this and feel they just want to clear the field and try to work on their family. 

Can they file an amended QDRO based on this renegotiation and pull additional funds? I’m assuming they would need to amend the property settlement in court first. I read elsewhere on this forum that if the revised settlement listed ALL the correct info they may be able to use the Divorce Decree (and this amended settlement) and have it recognized as a QDRO. Any advice?

[Jacksmom]

Just now, QDROphile said:

Getting another order from the court depends on state law and the status of the domestic relations proceeding.  It is possible that if the matter is closed, the court will not reopen it for the convenience of the parties.

This divorce was finalized last June 2018 and 401k disbursed in August 2018. It’s a done deal. They want to renegotiate and amend the 401k division.

[david rigby]

If the court will reopen the divorce, this looks like a new DRO, not an amended one.  IMHO.

[RatherBeGolfing]

 

2 hours ago, Jacksmom said:

Says the judge would not allow it??? Why? People renegotiate Divorce settlements all the time.  I doubt the Judge would care unless this is a IRS thing.

Once divorce is final, a Judge will usually only reopen if there is a compelling reason.  That the both parties agree will probably go a long way but its not a guarantee.  I'm sure there are judges out there who will say no my docket is full enough as it is.

IF the settlement is changed, can the first QDRO be revised? Probably not, because the benefits have already commenced.  (29 CFR § 2530.206 clearly states that a subsequent order can revise a prior order, but in their example payments have not yet commenced)

IF the settlement is changed, can a new DRO be issued to cover the change in the settlement? Sure.  A DRO does not fail to be a QDRO just because it is issued after benefits have been paid pursuant to another QDRO.

It all really comes down to: will the court reopen and revise the settlement.

 

[Jacksmom]

I guess only the rich and famous get to change their divorce settlements?

[RatherBeGolfing]

2 minutes ago, Jacksmom said:

I guess only the rich and famous get to change their divorce settlements?

Yep.  Each state has wealth written in as a requirement.

[loserson]

I agree with the others that the first QDRO cannot be revised, so what you are looking for is a new QDRO.

If you are not getting the answer you want from the existing divorce lawyer, then search around for a new one and ask each prospective attorney under what situations it would be possible to amend the property settlement and get a judge to sign a new DRO.  If you find one that says yes, and who seems otherwise competent and appropriate, both ex-spouses can engage that attorney or firm (waiving the conflict) in the interests of speed and cost-savings.

If the existing lawyer and a few prospective lawyers all tell you no, it's not likely to happen, then be ready to accept their advice.  And maybe look for other options.

Am I right that this new QDRO hail mary is just you searching for a way to get money out of the wife's 401(k) to pay off taxes?

There are a few other ways to get money out, though they are far from ideal.  One is to change jobs, which will allow her to elect a 401(k) distribution - which will be taxable, same as before.  The formula to figure out how much you need to withdraw is:

[total amount you must withdraw] = [tax debt being paid off] / (1 - [tax rate plus penalty rate])

So if you need to pay off $10k in taxes and the tax rate plus penalty rate is 30%, just for example, then you need to withdraw 10,000/0.7 or around $14,286.

Another is to take a 401(k) loan, which she would repay on payroll (or, if her employment ends, she would probably have to repay in a lump sum or else get hit with a bunch of taxes).  The benefit of a plan loan is the interest is usually low and at the end her plan still has money in it.

But ultimately this sounds like a budgeting situation.  Did they reach out to the IRS to negotiate a payment plan?  The IRS charges interest but they will work with taxpayers, based in large part on your financial situation.

I am guessing that their financial situation and credit scores are too weak to allow for additional mortgage, home equity line of credit, or unsecured personal loans?  If none of those are possible, there are also the high-rate loans like auto title loans and payday loans.  In those cases, a 401(k) loan would have a much better interest rate and relatively convenient loan administration.

Also, as I pointed out before, it seems quite possible that only the alternate payee (the husband?  whoever didn't have the 401(k)) owes the taxes on the failed rollover.  Unless the divorce shared the bill for the taxes here, then when they filed their 1040s separately for 2018, I am guessing only the alternative payee had income from the 401(k), right?  So if they have agreed to both share the tax debt, then they might need to execute some documents formalizing their agreement.

If only the husband owes the tax, and he is low- or no-income, then he might be able to get a lot of the tax debt reduced.  If the wife has steady decent income then her chances for tax debt reduction are not as good.

 

[fmsinc]

In 32 years of preparing QDROs I have never seen a judge refuse to enter a Consent Amended QDRO.  Most of the judges don't know what they are looking at anyway. 

If for some reason the law of the forum state will not permit the original divorce case to be reopened, then file a new case.  There is nothing in ERISA that requires a QDRO to issue from the original divorce court.  I have prepared plenty of QDRO for cases where the divorce was entered in another state, then enrolled in Maryland where I practice, and the QDRO was issued by the Maryland court.

The amount left in the Plan account is available for transfer to the Alternate Payee via QDRO.  It will be taxable income and 20% will be withheld (not sure if the Alternate Payee has the ability to opt out of withholding by checking Line 1 on W-4P).  Since it's incident to the divorce ,the distribution will not be subject to the 10% early withdrawal penalty.  

Remember, you can discharge almost all of your obligations in bankruptcy, except for what you owe the IRS.   

[RatherBeGolfing]

On 7/3/2019 at 4:15 PM, fmsinc said:

In 32 years of preparing QDROs I have never seen a judge refuse to enter a Consent Amended QDRO

After the original QDRO was executed and payment to AP completed?

[fmsinc]

I should have been more precise in my language.  What I meant to say is that judges will sign pretty much anything the parties put in front of them by consent, whether it's an original QDRO or an Amended QDRO or a Revised QDRO or a Supplemental QDRO.  An Amended, Revised or Supplemental could revise the amount to be paid "less amounts previously transferred by the Plan pursuant to a previous QDRO enterd by the Court on ____________, 2017."  

There is no reason why a second original QDRO could not address account balances remaining in the Participant's account after funds were removed via another/previous QDRO.   A second QDRO could be used to recover "alimony" or "child support" arrears rather that an allocation or marital property.  To my knowledge, neither ERISA or state laws require that only one QDRO be used per case.  Creativity is required.   

In cases where the Alternate Payee wants to take a taxable distribution rather than a rollover, I have on a number of occasions used two QDROs for the purpose of having one transfer made in the year in which the divorce is granted and the second transfer made in the following year, thereby reducing the amount paid in each year and lessening the tax burden by keeping the Alternate Payee in a lower tax bracket in each year.   

In Maryland and in many other states a QDRO is viewed as an enforcement tool, like a garnishment or an attachment.  There is no limit on the number of garnishments or attachments that a judgement creditor can file, nor is there any limit to the number of QDROs that can be issued.  See The Rohrbeck case at - https://scholar.google.com/scholar_case?case=6821439692749566017&q=rohrbeck&hl=en&lr=lang_en&as_sdt=20006&as_vis=1 

You might want to review these 6 cases that cite Rohrbeck.  https://scholar.google.com/scholar?q=+Rohrbeck+v.+Rohrbeck,+318+Md.+28,+566+A.2d+767,+774+(1989)&hl=en&lr=lang_en&as_vis=1&as_sdt=fffffffdffffe04

Note that many courts have been creative in issuing nunc pro tunc QDROs that could modify the original QDRO.    If it's by consent, this should not be a problem.

As far as the court's jurisdiction is concerned, I have seen cases where courts have used the statute of limitations to preclude the collection of pension or retirement benefits via a QDRO.  But other courts have said that the S/L does not begin to run until the payment of benefits is due, so, if you are dealing with a defined benefit plan, the Participant's benefit commencement date can be years after the divorce and the S/L does not begin to run until that time.  I have prepared D/B QDROs for cases where the divorce was as far back as 1982.  I have never had a problem (except for the Court's ability to locate in the file).