Which exception applies if the distribution is made to an alternate payee under a qualified domestic relations order?

The correct understanding revolves around the application of a specific rule within tax law regarding distributions made under a qualified domestic relations order (QDRO). When a distribution is made to an alternate payee, such as a spouse or dependent, the Internal Revenue Code provides a unique exception that permits these distributions to avoid certain penalties typically associated with early withdrawals from retirement plans.

In this context, the 72(t) exception is highly relevant. It allows for penalty-free early withdrawals from qualified retirement plans when distributions are made to an alternate payee as stipulated in a QDRO. This is particularly important in divorce proceedings, where assets may be divided and transferred between spouses. The flexibility provided by this exception ensures that the alternate payee has direct access to the funds diverging from traditional early withdrawal penalties.

Other exceptions mentioned, such as those related to total disability, separation from service, or educational expenses, do not specifically pertain to the stipulations surrounding QDROs and their implications for alternate payees. These exceptions serve different purposes and criteria outside the scope of what is specifically allowed under a QDRO, which is tailored for situations of divorce and the equitable distribution of retirement assets.