QDRO and 401K Distribution Revisited

[mcb39]

In Divorce Marital Settlement Division under Property Division:

Item vii. All monies in Respondent's 401k with.........if Respondent is sentenced to 16 years or more on current/pending criminal charges. IF THE SENTENCE IS 15 YEARS OR LESS, PETITIONER IS AWARDED ALL OF THE FUND EXCEPT...$10,000.

Note: If he is sentenced to 15 years and one day, she receives the entire 401K as well as his entire pension. This is in addition to almost all other assets.

Note2: The decree is very specific as to the filing of tax returns for both 2008 and 2009 and there is no question of her filing MFS.

The parties shall file joint returns for tax year 2008.

Sorry to keep bothering all of you with this, but I feel that she has a legitimate QDRO.

[mgmea]

Does your client have a copy of the QDRO? A couple of lines in the property settlement agreement does not constitute a QDRO. I've always been told by attorneys that a QDRO is a separate document prepared by the attorney and then signed by the judge and then submitted to the plan administrator. The QDRO document must meet very stringent requirements under ERISA for it to be affective.

In every QDRO distribution I've ever seen, the 1099R is always issued to the alternate payee, who in this case would be the wife. I get the impression from what you've disclosed here that your client's attorney doesn't quite know what he or she is doing. I would have your client ask her attorney for a copy of the QDRO. When she gets a blank stare back when she asks for it, I personally would tell the attorney that they are going to fix this by amending the property settlement for free so that she can file MFS(HOH) and get stuck for only half the taxes caused by the attorney's screwup. But that's just me, your client may not be as upset as I would be if I were in her situation.

What does your client's divorce decree say about filing status for 2009? Believe it or not, I have a client coming in who swears her divorce decree required them to file MFJ for the year the divorce was final, when the divorce was final in August of 2007, and that's the way they filed.

[mcb39]

Community Property State, they are ordered to split Jan and Feb; which is rediculous because he won't have any income and has no money to pay tax. This would be for 2009. No, her attorney does NOT know what he is doing. I spoke to him once and will not approach him again. He didn't even know that there was an early withdrawal penalty for the 401K. That is what I am trying to work around; that blasted penalty. She IS very angry, but she can't deal with him either. He was supposed to execute the quit claim deed to the home, which he didn't do. We spent 2 hours on the internet yesterday doing it ourselves so she could take it to the courthouse and proceed with her refinancing of the house.

[jasdlm]

Hi, Marilyn. The very line you highlight from the property settlement agreement assures me that the distribution was not made pursuant to a QDRO. Because of the nature of the instructions for the 401(k) divison, the attorneys will not even be able to do a QDRO until after his sentencing. No fund company/plan administrator is going to accept a 'contingent QDRO', and if the attorneys know what they're doing, they won't even try, because if the Judge actually reads the PSA and QDRO, he won't sign the QDRO.

A QDRO is a separate document from a PSA (property settlement agreement). It is done after the Court signs off on the PSA. By definition, the QDRO can not be done until after the PSA is signed by the Judge, because it is the Judge who actually orders the QDRO to be done based on his/her approval of the PSA. I would never take a QDRO to Court until I had a signed PSA back from the Judge. The Judge might get annoyed because it would indicate that I 'assumed' he would sign off on the PSA with no changes. (They almost always do, but they don't like to be second guessed.)

Unless I misremembered the facts from your first post, unfortunately, there's no way this distribution is pursuant to a QDRO.

Also, agree with MGMEA about the 1099, if it was pursuant to a QDRO, coming in the name/ssn of the alternate payee.

Sorry, Marilyn!

[JohnH]

I resurrected this thread because I'm looking at one of these situations now. The taxpayer just gives me a blank stare when I try to explain any of this, of course.

The 1099R is issued in the name of the recipient (who is under 59-1/2) and it has a Code 2. I have a copy of the PSA but it says that the 401K will be liquidated "with each party being responsible for one-half of any penalties and taxes owed for early withdrawal." Since the trustee used Code 2 on the 1099R, I suppose I could assume that a QDRO was prepared after the judge signed off on the PSA, but then that might be an assumption which could be costly if I'm wrong. Anyone have any thoughts on this? Should I push for a copy of the QDRO before completing the return?

[mcb39]

Hi John........I'm glad you DID bring this to light again. My case was just recently (early August) settled and the ex-husband was found guilty and sentenced to 35 years without parole. Therefore, my client will be receiving the other half of the 401K in its entirety. I have cautioned her to make sure that the funds are deposited into an IRA for her. If her less than brilliant lawyer messes up again, there is really nothing I can do as he won't talk to me because I insulted him when I told him that the first dispersal was done incorrectly., and taxes were not withheld properly. This will be different because she does not "need" the money now. The first half was needed to pay lawyer fees for herself as well as the defendant. Just interesting to read all these old posts and see how slowly the legal wheels have turned. Good luck with yours.

[jainen]

>>the first dispersal was done incorrectly., and taxes were not withheld properly<<

The fact that it did not provide your client the greatest tax advantage does not mean it was wrong. There are two sides to the settlement, and that usually means some give and take. Apparently the petitioner was hoping to benefit from a longer prison sentence, which probably did not encourage the respondent to offer any favors. Meanwhile the attorney probably wishes you would just do your job and let him do his job.

[jainen]

>>they are ordered to split Jan and Feb; which is rediculous because he won't have any income and has no money to pay tax.<<

Why is that a problem for your client? Hasn't her attorney just managed to shift half the Jan/Feb tax to the other party?

>>He didn't even know that there was an early withdrawal penalty for the 401K.<<

Why is that a problem for your client? Hasn't her attorney just managed to shift the entire tax and penalty to the other party? The only problem I see is if you tell your client to put the money in an IRA, which apparently would be an excess contribution.

[mcb39]

>>the first dispersal was done incorrectly., and taxes were not withheld properly<<

The fact that it did not provide your client the greatest tax advantage does not mean it was wrong. There are two sides to the settlement, and that usually means some give and take. Apparently the petitioner was hoping to benefit from a longer prison sentence, which probably did not encourage the respondent to offer any favors. Meanwhile the attorney probably wishes you would just do your job and let him do his job.

You have the entire story wrong. My client was not the petitioner, nor was she hoping for anything other than a divorce once she found out what the defendant had done. The petitioner in this case was the District Attorney and an entire family was nearly destroyed. The attorney had no clue that there was a 10% early withdrawal penalty; nor did he ask for state tax to be withheld. My client had no idea of what the tax advantages or disadvantages were. Her attorney was only involved in the divorce portion of the litigation. She had to pay over $10,000 of the first distribution to pay the attorney fees for a wastrel husband. On top of that, she was ordered to file a joint return with him and guess who had to come up with the funds to pay the penalties and tax on that distribution. I am trying to do my job and IMO, he did not do his as well as he could have. He has nothing to do with the criminal portion of the proceedings. Sometimes, Jainen, there are human beings involved with needs and feelings. Sometimes they are innocent bystanders to terrible things. Sometimes, we need to have compassion and do the best job we can for them when they are not in a position to make sensible decisions, or the knowledge to do so. You come down hard on something that you know nothing about. Many attorneys know very little about tax law and if that is the case, they should not have so much pride that they are unwilling to ask about or discuss the possibilities. You are welcome to your opinion, but in this case it is misplaced.

[JohnH]

Should I push for a copy of the QDRO before completing the return?

[jainen]

>>she was ordered to file a joint return<<

I admit I'm being pretty tough on this. You are going to need to get tough too, to win anything for your client. Focus on the result you want, and stop blaming other members of the same team. I still don't see that the attorney did anything wrong--geez, he got her almost everything! Some of it came with deferred tax liability, but that's just what it was. A QDRO would have made your client indisuputably responsible for the tax. She may pay it anyway, but at least this way she has a chance to stick it to the prisoner.

So file an injured spouse claim. Even though the money was transferred to her, it was only to pay HIS separate legal obligation, not hers. For her it was simply a property division, not income. At least, that's what I would say.

[mcb39]

Should I push for a copy of the QDRO before completing the return?

Yes........

[JohnH]

Follow-up on this, for what it's worth. I insisted on a copy of the QDRO, carefully explaining what it was and why it's a separate document. But client seemed to be unusually confused on what I wanted and kept saying they had given me everything they had. I finally just gave their info back to them and told them I didn't want to risk being the goat if the penalty (over $5K) applied. Also gave them some blank forms.

Sometimes you "gotta know when to hold 'em and know when to fold 'em; know when to walk away and know when to run".

[mcb39]

You are right, John. Good for you. I am going to take Jainen's advice and file an Injured Spouse claim. Things can't get much worse for my client. She got slammed with all the bills. He goes to prison, but she is left with the bills and two children to get through school as well as counseling.