Category: Compensation & Employee Benefits;
Subject: Qualified Domestic Relations Order (QDRO)
Title: Section 72(t) Penalty on QDRO Distributions
IRC Sections: 72(t)
Date Produced: 07/95
Copyright 1998, The Tax Resource Group. All rights reserved.
Telephone 800-578-3498. Internet: www.taxresourcegroup.com
Are qualified domestic relations order (QDRO) distributions from
a qualified plan to the former spouse of the plan participant
subject to the 10% early withdrawal penalty tax under Section
Provided the distribution is from a qualified retirement plan
and not an IRA, the 10% penalty tax does not apply.
Section 72(t) imposes a 10% penalty tax on early withdrawals from
qualified retirement plans and individual retirement accounts.
Various exceptions apply. Section 72(t)(2)(C) provides that the
penalty tax does not apply with respect to alternate payees under
a qualified domestic relations order as defined in Section 414(p)(1).
Section 72(t)(3)(A) goes on to say that the exception does not
apply (in other words the penalty tax is imposed) with respect
to QDRO distributions from an individual retirement account.
The scope of Section 72(t) does not limit its effect to plan
participants only. If that were the case, there would be no QDRO
rules in Section 72(t) because QDRO payments are not made to plan
participants themselves. Moreover, the first sentence Section
72(t) announces its scope..."if any taxpayer receives
any amount...". [Emphasis added.]
Section 72(t) was enacted by the Tax Reform Act of 1986. The
Committee Reports clearly state that QDRO payments to alternate
payees are exempt from the penalty tax.
Notice 87-13, 1987-1 CD 432, was issued to clarify various
points in connection with the penalty tax. It clearly provides
that the penalty tax does not apply to QDRO payments to alternate
You mentioned IRS Publication 504, Divorced and Separated Individuals,
which contains the following excerpt under the headings Qualified
Domestic Relations Order, Rollover Distributions.
If you receive an eligible rollover distribution under a QDRO
as the plan participant's spouse or former spouse, you can generally
roll it over tax free into an individual retirement arrangement
(IRA) or another qualified retirement plan. This applies to taxable
distributions other than required distributions (generally, distributions
that must begin once you reach age 70 1 ÷ 2) and certain
long-term periodic payments. You can choose to have the distribution
paid directly to the new plan. If any part of the taxable distribution
is paid to you, 20% will be withheld for federal income tax. You
can still make a tax-free rollover to another plan or an IRA within
60 days, but for a complete rollover you must add funds from another
source equal to the tax withheld.
If you roll over only part of the taxable distribution, you
cannot use the special lump-sum distribution rules to figure the
tax on the part you keep. If you are under age 59 1 ÷
2, any taxable distribution you keep may be subject to an additional
10% tax on early distributions. [Emphasis added.]
The foregoing text implies that some QDRO distributions are
subject to the 10% penalty tax under Section 72(t). I agree. Since
QDRO distributions from an IRA are explicitly excluded from the
exception to the penalty rules, such distributions would seem
to be the logical object of the contingency set forth in the text
above, "... may be subject to an additional 10%...".
You also mention IRS Publication 575. I see nothing in that
publication inconsistent with the conclusion stated above. In
fact, the publication explicitly states the conclusion that QDRO
payments to alternate payees are not subject to the 10% penalty
tax except for QDRO payments with respect to individual retirement