Page 84 - Family Law Services

IRAs, Simplified Employee Pension Plans, and Savings Incentive Match Plans for Em-
ployees

IRAs, simplified employee pension plans (SEPs), and savings incentive match plans for employees
(SIMPLE) can be transferred pursuant to a divorce decree or a marital settlement agreement. The simple
presentation of the filed court document to the investment firm possessing the assets will authorize the
transfer of the assets. The CPA should ensure that no penalties are associated with a transfer. The trans-
fer may require the liquidation of an existing investment and a rollover into a new investment.

If a party to a divorce receives an IRA in a property settlement, there are several options regarding the
short-term use of the proceeds. The monies can be rolled over into another IRA. This option, if accom-
plished within 60 days, will not generate a current income tax consequence. Once the funds are inside a
new IRA, they are again subject to all the income tax and penalty provisions that accompany regular
IRAs. Provisions in IRC Section 72(t) will allow the balance in the IRA to be annuitized over the re-
maining life expectancy of the owner of the account. The annuity is computed using the balance in the
account, a reasonable interest rate, and the right rate of withdrawal that can be maintained over the own-
er’s remaining life expectancy. If these conditions are met and the payments continue for at least 5
years, the withdrawals are exempt from the 10% early withdrawal penalty, regardless of the age of the
account holder.

Nonqualified Plans

Several significant issues must be addressed if nonqualified plans are transferred pursuant to a divorce
or separation. Because of the position taken by the IRS regarding the assignment of income, it is possi-
ble to cause the distributions of nonqualified plan assets to the nonemployee spouse to be taxed to the
employee spouse in the resolution of a family law case. These plans are a contract between the company
and employee to pay benefits at some future date. They may or may not be currently funded, are always
discriminatory, and are subject to risks of forfeiture. Even if the plans are funded, generally, the assets of
the plan are subject to creditor claims of the employer and are, in most circumstances, nontransferable.

QDROs do not apply to nonqualified retirement plans. In Letter Ruling 9340032, the IRS has held that
upon payment to a taxpayer’s ex-spouse of amounts due under a nonqualified deferred compensation
plan, the taxpayer realized income in the amount paid to the ex-spouse.

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