My form 1099-R distribution code shows a 1 rather than a 6, indicating Alternate Payee Under QDRO. Can I still use the QDRO to eliminate the 10% penalty?

[mmclean]

@dmertz - i had the same initial impression about the example being flawed because it simply ignored tax ramifications, risk, and other limitations of each source of the $750K.  But all that aside, I have been fishing around forever for any cases that have dealt with multiple distributions.  I would hate to predicate an agreement based on a non-penalty assumption and then find out the waiver is disallowed by the IRS.

I have recorded conference calls w three Fidelity benefits consultants familiar with the plan; all of them have stated that a QDRO account in the plan allows for on-demand, non-uniform withdrawals to be made through their online request portal and they are transferred in a matter of days (subject to 20% mandatory withholding).

Given the plan allows it, my only hesitation surrounds how the IRS will view it.  Have you seen any cases upholding the non-penalty view? 

[dmertz]

This is a bit like trying to prove a negative.  You wouldn't expect to find tax cases discussing something that the IRS doesn't challenge.  As I pointed out previously, the tax code which the IRS must follow exempts "any payment" made to an alternate payee under a QDRO.  I don't see how a plain reading of that could be interpreted as saying "only the first payment."

The closest thing that I can find where the IRS mentions anything related to this is in PLR 9013007 where it essentially quotes section 72(t)(2)(C) by referring to "any distribution to an alternate payee pursuant to a qualified domestic relations order."  (It actually refers to section 72(t)(2)(D) as the section was numbered in 1990.).

IRS Pub 560 includes the sentence, "Payments to an alternate payee under a QDRO before the participant attains age 59½ aren't subject to the 10% additional tax that would otherwise apply under certain circumstances."  Note the use of the plural "payments" and the lack of any mention of the first payment.

You would have to go to a lawyer if you want in actual legal opinion from someone who could be held accountable for their opinion.  Nothing in this forum constitutes a legal opinion.  Contact your lawyer who would have been involved in drafting or reviewing the QDRO.

You could also contact the plan to see what code that they will use for distributions made to an alternate payee under a QDRO.  For reporting any payment to an alternate payee under a QDRO they should use code 2 which indicates that the distribution is exempt from penalty.

[kyle3]

Maybe I can help, CDFA by trade. It is not stated explicitly. That is what causes a lot of confusion. IRS is silent on the topic. However, I can tell you how things typically work.

When you take a QDRO distribution, most plan providers will require that you distribute (rollover) the remaining balance to another plan (IRA). They want the plan cleaned out of their system. Thus you are typically limited to one QDRO distribution.

I suppose if you found a plan provider that allowed you to keep the money in the plan, you theoretically could do multiple distributions that would be exempt from the 10% penalty. But I have not seen a plan that is willing to do this.  Know that I have also discussed this extensively with a local QDRO attorney that does extensive work with preparing QDROs for Fortune 500 companies that use Fidelity.  And I will add, that just because you might be able to do something, it doesn't mean that you should. That same QDRO attorney recommends that if you plan on taking a QDRO distribution that you do it within the first year of the QDRO being funded, even though there is no real guidance on the subject. But as stated above, when it doubt, talk to the attorney.

Kyle Eaton, CDFA
www.counterbalancedivorce.com