Category: Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Qualified retirement plan paid child support benefits to a plan participant's child under a qualified domestic relations order (QDRO). There was no withholding on the child support payments. Issues 1. Was the plan's decision not to withhold from the child support payment justified? 2. How is the payment reported for purposes of Form 1099-R? Answers 1. Child support payments under a QDRO are treated for tax purposes as if paid to the participant. The participant has the right to elect out of withholding. If such an election is effective, then the Plan's actions were justified. If there was no election in effect, the Plan should have withheld tax at the rate of 10%. 2. Since child support payments are treated as made to the participant, the 1099-R should go to the participant, not the child. It appears that distribution code "2" is appropriate. Discussion Following is an excerpt from Notice 89-25, 1989-1 CB 662, that addresses the withholding issues. 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. Regarding the distribution code, this issue does not appear to be directly addressed. I believe distribution code "2" is appropriate in this case--early distribution, exception applies. Under section 72(t)(1)(C), payments to alternate payees pursuant to a QDRO are not subject to the penalty for early withdrawal. |
