While many practitioners are aware that a Qualified Domestic Relations Order (QDRO) can divide property, few practitioners are aware that under IRS Code 414 (p) (b), child support can be collected from ERISA plans, (such as 401 k, or Pension plans) with a QDRO. A QDRO distribution that is paid to the child or other dependent of the plan participant is taxable to the participant., Some plans will even make the check payable to the custodian of the child for the benefit of the child, and report the payment as income to the plan participant making the payment.
Some examples will help understand how child support can be collected and how to structure QDRO’s so that any taxes that the plan withholds do not reduce the amount of the child support payment being made.
- Alphonse owes Marie $20,000 in back support for Suzette. Alphonse works at Chevron and is a participant in the Savings Plan. Marie’s attorney hires an expert to prepare a QDRO which instructs the Savings Plan to pay a lump sum of $25,000, which net of $5,000 federal taxes, pays $20,000. As the payment is for child support the payments are the taxable income of Alphonse.
- Rebecca owes Gerald $20,000 in back support for Yvette. Rebecca is retired from Exxon and is receiving $3,000 per month from the Exxon Pension Plan. Gerald’s attorney hires an expert to prepare a QDRO which instructs the Pension Plan to pay $1,250 per month for 20 months, which net of $250 federal taxes each month, pays $1,000 per month. As the payment is for child support the payments are the income of Rebecca.
- John has agreed to pay Jane $1,200 monthly child support for Lila. John is starting up a new business venture and does not expect to have enough cash flow to make these payments for the next three years. He does, however, have a large 401 (K) and agrees to make the payments from this plan. Jane’s attorney hires an expert to prepare a QDRO instructing the 401 k to pay $1,000 per month, net of any taxes withheld.
There are no limits on the number of Child Support Orders that can be submitted to a plan to pay Child Support, although not more than 100% of the monthly payment or plan balance can be assigned by QDRO.
QDROs only apply to a qualified retirement plan such as a 401(k) or Pension Plan, they do not apply to IRA or non-qualified Annuities, While not a QDRO, child support arrears can be paid by garnishments from Louisiana retirement systems, Federal Retirement Systems, Military Pensions and from Social Security.
Hoffman Divorce Strategies has been assisting attorneys and their clients with the negotiation, preparation, filing and implementation of Court Orders to obtain payment of child support since 1999.
For more information, please read the article by Jacki Roessler, CDFA at the Center for Financial Planning’s website.