Notice to Alternate Payees Receiving a Marital Share of an ADR Pension Pursuant to a DRO
Please be advised that there will be a change to the tax reporting of marital portion of Accident Disability Retirement (ADR) pensions Alternate Payees receives pursuant to a Domestic Relations Order (DRO); this tax change will take effect January 1, 2013. As ADR pensions are largely tax-free to the member, the Police Pension Fund has treated the tax status of the Alternate Payee’s portion similarly. The Fund, however, recently became aware of a Tax Court decision in 2012 that prompted a review of these tax practices. After seeking legal advice from tax counsel, it was determined that distributions made to Alternate Payees pursuant to a DRO required a change in tax treatment, as the marital share the Alternate Payee receives is taxable. This does not change the member’s retirement allowance or the tax status of member’s pension.
In Fernandez v Commissioner of Internal Revenue, 138 T.C. No. 20, the Tax Court held that service connected disability benefits paid to an Alternate Payee are taxable to the Alternate Payee, even though a portion (or in some cases, all) of the benefit paid to the member is not taxable to the member. Accordingly, the Fund will begin withholding Federal taxes from Alternate Payees’ monthly benefit beginning in January 2013 and will issue IRS Form 1099-Rs in January 2014. Alternate Payees may elect tax withholding by submitting an IRS Form W-4P to the Fund; failure to submit a W-4P will result in withholding as “Married, 3.” The Form W-4P may be downloaded by clicking here or visiting the Fund’s website at www.nyc.gov/nycppf and clicking the “Forms” tab on the left side of the page.
If you have any questions, do not hesitate to contact the Fund at (212) 693-2699.