Q and A on a QDRO for a Profit Sharing Plan
By: Marvin Snyder
When can Wife get a payout from the plan?
By the federal laws concerning QDRO's and profit sharing plans, and the rules and regulations of the Internal Revenue Service and the Department of Labor, as soon as the plan administrator approves the QDRO and completes routine administrative processing, the plan can issue a check to Wife.
However, it is up to the plan administrator to interpret the terms of the plan and to decide if the a payout is allowed before Husband employee would be eligible to receive a distribution. If the plan administrator determines that the plan does not permit an earlier payout, then Wife has to wait unless she chooses to force the issue by legal action against the plan.
If Wife is not interested in getting a payout soon, but is willing to wait several years, that can be done with no problem.
What are tax effects if Wife receives a lump-sum payout?
There is no tax effect on the Husband when Wife receives a distribution. Wife is subject to personal, ordinary income tax for the year in which she receives the lump sum unless she uses a rollover to an IRA.
There is no premature distribution tax penalty on Wife regardless of her age when she receives a lump sum distribution from a QDRO.
Can Wife take her pay-out in installments?
Yes, upon application to the plan administrator and approval, Wife can ask for a pay-out under any of the options permitted in the plan. There is an exception: she cannot choose a joint and survivor form of payment with a new husband.
The taxation on installment payments to Wife is as personal, ordinary income for each year in which payments are received. If payments extend beyond one year, then no rollover to an IRA is permitted.
What is a roll-over to an IRA?
Wife would establish a new, separate personal Individual Retirement Account at a bank, mutual fund, insurance company or stockbroker of her choice. Within sixty days of the issuance of the payment check from the plan to her, she would contribute the amount received to the IRA. This defers taxation until such time as she withdraws funds from the IRA.
Funds may be withdrawn from a rollover IRA without penalty between ages 59 1/2 and 70 1/2. All withdrawals are subject to personal, ordinary income tax for the year in which received. There are penalty taxes for withdrawals before age 59 1/2 or after age 70 1/2.
If Wife does not ask for (or is not granted) a current distribution from the plan, then the amount awarded to her by QDRO will be segregated in a separate account for her in the plan. Her account will grow with tax-sheltered investment gains in the plan. There will be no contributions of new money, nor sharing of employee's forfeitures, nor expenses.
Can the distribution received as a lump sum under a QDRO be split: partial rollover to IRA and part as taxable income?
Generally yes, but this is a question that has received different answers from tax reference sources over the past few years. On this specific point, as well as on all of the other tax discussions in this letter, advice should be sought from tax counsel.
Does the timing of the QDRO affect the amount?
Possibly. There may be a contribution pending for the current year as well as investment gains to be posted to Husband's account. The actual effective date of when his account is to be attached by the QDRO should be set forth in the QDRO.