If an alternate payee takes a distribution from an ERISA qualified plan, does he or she have to pay a penalty?
According to Section 72(t)(2)(C) of the Internal Revenue Code (“IRC”), the answer is “No.” Many believe that if an alternate payee elects a distribution from an ERISA qualified plan prior to age 59 ½, that he or she is subject to income tax and penalty. However, under Section 72(t)(2)(C) of the IRC, any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1) of the IRC), shall not be subject the additional 10% tax. Please note that the alternate payee may be subject to regular income tax on the distribution.
Richard Johnston Jr. is a Pension & Profit Sharing Plan Specialist at QDRO Services, L.L.C. that will work with you and your family law practitioner with the division of retirement benefits and a QDRO solution. He can be reached at 1-877-531-8333.