NUA with QDRO
Client is eligible for NUA with a QDRO. She worked with a financial advisor through the transaction.
She received a 1099-R showing the rollover portion code G. Fine.
She received the second 1099-R with NO NUA reported in box 6. The distribution is listed in box 2a as taxable, total distribution. taxable amount not determined box is NOT checked.
She called the company for a corrected 1099-R showing the NUA.
They told her the 1099-R is correct and no NUA should be reported on the 1099-R because it was under a QDRO.
I don’t believe this is correct. Has anyone seen this before? How do I reflect the NUA if the issuing company didn’t report it? Won’t this cause a discrepancy notice with the IRS?
Permalink Submitted by Alan - IRA critic on Wed, 2024-02-21 22:06
Been sort of waiting for a situation where the 1099R does not show NUA in Box, but this is the first one I have heard of. This is a major problem – is the client the alternate payee or the participant? Is the plan claiming that because both interests were not distributed, this was not a qualified LSD? If so, I don’t believe that is correct since neither party has any control over the other party’s interest in the plan.
The larger problem if the 1099R is not corrected is the expiration of the 60 day period for a rollover, leaving the entire distribution as currently taxable at ordinary income rates, plus perhaps an early withdrawal penalty. In that case, a possible solution could be reason a) in Rev Proc 2020-46 linked below:
Microsoft Word – rp-20-46.docx (benefitslink.com)
Permalink Submitted by Kimberly Fejzo on Thu, 2024-02-22 18:51
The plan administrator is saying, “that is the way it is reported for a QDRO, and its up to the taxpayer and their CPA to report it correctly on the tax return.” They acknowledged she was eligible for the NUA transaction, however it is reported in this way “because it is a QDRO.” I disagree with this. It is my understanding that NUAs, even from QDROs should be reported in the same manner as a “normal” NUA transaction. Further, I don’t see how it is expected to be put on the tax return with a different taxable amount than what is listed in box 2a, particularly if the “taxable amount not determined box isn’t checked.”Do you agree? Or is there a different method of reporting for NUAs under QDROs that I’m not aware of?If the administrator refuses to issue a corrected 1099-R, and it truly was treated in all facts and circumstances as an NUA, would you just report the correct amounts on the tax return and explain when/if the discrepancy notice comes?
Permalink Submitted by Alan - IRA critic on Thu, 2024-02-22 19:45
Read the following link. Although it does not provide a citation, if Natalie Choate is not sure then I don’t know who is. The plan is not providing any citation either, and their explanation of the 1099R is not helpful. Post back any questions, and I still do not know whether your client is the participant or the alternate payee. That makes a difference per the attachment.
Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial
Permalink Submitted by Kimberly Fejzo on Thu, 2024-02-22 21:59
Thank you. I did actually come across that same article during my initial research. My client is the alternative payee. How does that come into play with the attachment you sent over? I appreciate your feedback thus far for this quite unusual situation.
Permalink Submitted by Alan - IRA critic on Thu, 2024-02-22 23:50
It appears that for the alternate payee to be eligible for an NUA LSD, the participant must be eligible, just as the RMD RBD for the alternate payee is that of the participant. The following portion of code Sec 402(e)(4) (NUA) appears to confirm this as copied below. Therefore, the plan is likely correct despite their inability to explain this and despite their failure to alert the alternate payee that they will not report NUA on the 1099R, leaving the alternate payee with a costly taxable distribution which was not evident until the 1099R was received more than 60 days after the distribution. I wonder if the participant would have qualified for NUA, although it is very likely they either may not have a triggering event or negated it with an intervening distribution:
“(vii)Lump-sum distributions of alternate payeesIf any distribution or payment of the balance to the credit of an employee would be treated as a lump-sum distribution, then, for purposes of this paragraph, the payment under a qualified domestic relations order (within the meaning of section 414(p)) of the balance to the credit of an alternate payee who is the spouse or former spouse of the employee shall be treated as a lump-sum distribution. For purposes of this clause, the balance to the credit of the alternate payee shall not include any amount payable to the employee.”
Permalink Submitted by Kimberly Fejzo on Fri, 2024-02-23 13:51
Thank you for that information. Although, the participant DID have a triggering event before the NUA transaction, seperation from service, allowing the alternate payee to be eligible for NUA.
Permalink Submitted by Alan - IRA critic on Fri, 2024-02-23 16:05
It’s not clear if the participant had a triggering event, but also erased it by taking a partial distribution, how the alternate payee would be affected. The AP may want to consider using Form 4852 to alter the 1099R to show the NUA if they know the NUA amount, now that the plan refuses to report NUA for any alternate payee. While the IRS may dispute this, the AP should consider just how value the NUA would be and the total amount of the distribution v. trying to use RP 2020-46 for the purpose of a delayed rollover of the entire distribution per the prior link provided above.