Retirement Accounts as a Source of Support Payments – Tax Considerations

We’ve all had cases where one party owes child support or alimony arrears but does not have the cash in the bank to make the lump sum payment nor the income available to make substantial payments toward those arrears.

Defined contribution plans, such as 401k, 403b, etc. that ERISA governs can be used as a source to pay these arrears in a lump sum. The retirement plan must receive a QDRO stating the amount to be paid and the purpose of the payment.

The QDRO needs to state the purpose of the payment because it will impact who is responsible for the tax payment on the funds. Specifically, if the payment is to pay child support arrears, the account holder will be responsible for the tax on the funds. This is because child support is usually paid with after-tax funds earned through normal employment income. Therefore, the account holder will maintain the responsibility of paying the tax on the funds if they are paid via QDRO.

With respect to alimony arrears, the agreement or judgment of divorce is an essential document. Before the 2017 change to the tax laws, tax payment on alimony could be shifted to the alimony recipient or remain with the payor. The QDRO would have to state the tax responsibility for any agreement entered into prior to 2017 concerning alimony arrears to ensure the tax responsibility remained the same. Currently, the law states that the payor is responsible for the tax on alimony. However, the tax law is scheduled to sunset in 2025, so the ability to shift the tax will return unless Congress decides to extend the life of this law.

Any QDRO preparer, and attorney negotiating this issue, will need to pay attention to the date the agreement is made to properly allocate the tax on alimony arrears paid from a retirement account.

If you need a QDRO prepared for the payment of support arrears, please contact our office at 240-396-4373 to discuss what your specific case might need.