Employment Benefits and Divorce Journal of Accountancy (02/02) No. 56 p.40; Earles, Melanie James; Maples, Larry
Baby boomers have billions of dollars invested in employee benefit plans, thus dividing those assets in the event of a divorce can prove complicated. There are several rules CPAs should be privy to before tackling this issue. Section 1041 provides tax-free treatment for property transfers in a divorce, but if there is income that is yet unpaid--such as accrued interest on bonds--the IRS applies the assignment of income doctrine to tax the person transferring the accrued income regardless of who gets the actual income. Two main concerns in transfers of employment benefits are whether a court-issued qualified domestic relations order (QDRO) is in effect and the timing of the order. In cases of IRA or qualified plan transfers, QDRO can override the assignment of income doctrine, but the IRS will continue to apply assignment principles to other types of benefits like nonqualified plans. Under IRC section 401(a)(13)(B), QDRO overrides the assignment of income doctrine for qualified plans, therefore, an alternate payee who is a spouse or former spouse will generally be taxed as the "distributee". Meanwhile, it is possible to avert the rule that a taxpayer may not escape the tax burden on income assigned to another, if a taxpayer transfers the property that is the source of that income. The taxation of employee benefits in a divorce has been the subject of much litigation; the entry of QDRO, the timing of transfers, community property laws, and the harmful tax consequences of transferring some types of employment benefits are all contributing factors.