Academic journal article Journal of Accountancy

Small Business Tax Solutions

Academic journal article Journal of Accountancy

Small Business Tax Solutions

Article excerpt

This series is based on questions from AICPA tax certificate of educational achievement (CEA) courses.

Q. Processing a court-issued qualified domestic relations order (QDRO) is a difficult problem for a qualified retirement plan. What happens when the plan makes an incorrect payment under a non-qualified domestic relations order (DRO)?

A. Many things occur, all of them bad, when an employer makes a DRO payment that violates the terms of its plan document. Consequences include tax penalties for participants and possible plan disqualification.

QDROs are one of the few exceptions to the Employee Retirement Income Security Act's anti-alienation provisions under Internal Revenue Code section 401(a) (13), which protect benefits from a participant's creditors. Without a QDRO, a former spouse generally could not collect retirement benefits from a participant's account. Under a QDRO, a spouse, former spouse or alternate payee can be given all or part of the benefits. The order either divides the benefit while keeping it in the plan until a later date or makes a complete distribution of the allocated amount.

A QDRO cannot force a plan to make a lump sum distribution unless the plan permits one, nor can the order force a plan that allows lump sum distributions to make one at a time not allowed by the plan. QDRO payments generally are made when other benefits are distributed. For example, some plans delay benefits until a participant retires or dies, also delaying QDRO payments.

These rules aren't always followed, especially when a plan administrator is ordered to make a distribution, or be held in contempt. This may happen when QDROs are written by those unfamiliar with qualified plans or with the plan in question. The order frequently is written by a lawyer concerned with having plan benefits paid to his or her client quickly, so payments sometimes are made when they should not be.

There is no easy way to avoid the problems of handling a DRO. Each plan administrator should have procedures for ascertaining whether an order is qualified and follows the plan terms. If an error is discovered, the plan administrator would apply to the Internal Revenue Service's closing agreement program and pay a significant penalty to have the plan brought back into compliance with ERISA.

Q. Can the leased employees of a not-for-profit organization (NPO) participate in the 401(k) retirement plan of the leasing company? …

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