QDRO Tax Implications & Benefits Planning Flashcards

When an alternate payee receives a distribution from a qualified plan pursuant to a QDRO, who is responsible for paying the federal income tax on that distribution?

Answer: The alternate payee

Under IRC Section 402(e)(1)(A), the alternate payee — not the participant — is taxed on distributions received directly from the plan pursuant to a valid QDRO.

An alternate payee who receives a QDRO distribution directly from a qualified plan (without rolling it over) and is under age 59½ is:

Answer: Exempt from the 10% early withdrawal penalty

IRC Section 72(t)(2)(C) provides a special exception to the 10% early withdrawal penalty for QDRO distributions received by alternate payees, regardless of the alternate payee's age.

If an alternate payee receives a QDRO distribution and chooses to roll it over to a traditional IRA, the tax consequence at the time of the rollover is:

Answer: No immediate tax; taxes are deferred until IRA withdrawals are made

Rolling a QDRO distribution into a traditional IRA is a tax-free event; income taxes are deferred until the alternate payee takes distributions from the IRA.

When a plan makes a direct distribution to an alternate payee under a QDRO, the mandatory federal income tax withholding rate applied to eligible rollover distributions is:

Answer: 20%

Plans are required to withhold 20% federal income tax on eligible rollover distributions paid directly to an alternate payee unless the distribution is sent directly to an IRA or another plan via a direct rollover.

For a participant in a qualified plan, the transfer of funds to an alternate payee pursuant to a QDRO is treated for tax purposes as:

Answer: A non-taxable transfer with no income recognized by the participant at the time of transfer

The participant does not recognize income when the plan transfers funds to the alternate payee under a QDRO; the tax consequence falls entirely on the alternate payee upon distribution.

An alternate payee who rolls a QDRO distribution into a Roth IRA (rather than a traditional IRA) will:

Answer: Owe income taxes on the converted amount in the year of the rollover

Converting a pre-tax QDRO distribution into a Roth IRA is treated as a Roth conversion, requiring the alternate payee to include the converted amount in gross income for that tax year.