Category: Employee Benefits
Subject: Qualified Plan Distributions, Withholding Requirements
Title: Withholding on QDRO Payments
IRC Sections: 3405
Date Produced: 1/98
Copyright 1998, The Tax Resource Group. All
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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.
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?
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.
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
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
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.
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.