Qualified Domestic Relations Orders
Qualified retirement plans are divided with a Qualified Domestic Relations Order (QDRO). This is a judgment, decree or order for a retirement plan to pay all or a portion of benefits to a spouse, former spouse, child or other dependent of the participant. This can be done for the purposes of child support, alimony or marital property rights.
Based on the regulatory provisions in ERISA §206(d) and IRC §414(p), a QDRO must specify the following:
- The name and last known mailing address of the Participant and Alternate Payee
- The amount, percentage or formula that is to be used in for determining the Alternate Payee’s share of the benefit
- The number of payments or period to which the order applies
- Each plan to which the order applies
Additionally, a QDRO must not:
- Require payment that is not otherwise provided under the plan
- Require the plan to pay actuarially increased benefits
- Require payment of benefits that were previously assigned to an Alternate Payee under another QDRO
The content of the rest of the QDRO will depend on the type of plan, the nature of the participant’s retirement benefits, the purpose of the order, the intent of the parties and any specific reasonable procedures established by the Plan Administrator.
Defined Benefit Plans
If you represent the alternate payee, you should not base their share of the pension on the participant’s frozen accrued benefit at divorce. This is especially true if the Coverture methodology rules your state based on caselaw precedence. Traditional Coverture determines the marital portion of the pension based on the years earned during the marriage divided by the total years of service at the participant’s date of retirement (or the alternate payee’s elected benefit commencement date, if earlier). However, Coverture works only if the participant continues to work after the divorce and the participant’s pension increases with his continued participation in the plan. If the participant is already terminated, his pension is frozen, and the alternate payee’s share of the pension would be frozen whether you use the coverture fraction or not.
However, it may still be helpful for you to use coverture if it is likely that the participant will return to work for the same employer at some time in the future. For example, many unions lay off employees from time to time based on workload demands. These employees are often brought back when necessary. If the participant is simply laid off when the divorce is pending, you would not want to freeze the alternate payee’s share of the pension benefits. If the participant returns to employment, his pension would continue to increase and coverture could properly afford the alternate payee the requisite inflationary protection.
Separate Interest vs. Shared Payment
What’s the Difference?
This is one of the most confusing QDRO areas which can often lead to failed QDROs. Or even worse, it could lead to an accepted QDRO that does not carry out the intentions of the parties. For the alternate payee, it’s the difference between receiving a lifetime annuity or nothing at all.
For the alternate payee’s attorney, it could be much worse. It is critical to understand the major difference between the two basic approaches to drafting QDROs for defined benefit pension plans. The sole distinction rests on whose life expectancy the alternate payee’s share of the benefits are based.
The ‘Separate Interest’ QDRO
Under a separate interest QDRO, the alternate payee’s share of the benefits is “actuarially adjusted” to her own life expectancy. In essence, the assigned portion of the benefits is carved out and actuarially adjusted to provide the alternate payee with her own separate interest in a lifetime annuity.
Also, unlike the shared payment QDRO, the alternate payee can commence her share of the benefits before the participant actually retires. For example, assume that a participant retires with a pension of $2,000 per month, and it is the intention of the parties to provide the participant with $1,000 per month and the alternate payee with $1,000 per month.
However, one must remember that pension plans are funded to provide the “participant” and not the alternate payee with a lifetime annuity. If the alternate payee was ten years younger than the participant, the plan would likely have to pay the alternate payee’s $1,000 share of the benefit over a longer period of time if the actuarial tables hold true.
If the QDRO in our example included language that simply provided the alternate payee with $1,000 per month (1/2 of the pension) for the remainder of her lifetime, this would violate ERISA’s prohibition of providing increased benefits under a QDRO and it would be rejected.
Under a separate interest QDRO, the alternate payee who is ten years younger than the participant may receive only $800 per month rather than $1,000 for the rest of her life to reflect her longer life expectancy.
This life expectancy issue is also important from a QDRO survivorship perspective. If your QDRO utilizes the separate interest approach and instructs the plan administrator to pay the alternate payee on an actuarially adjusted basis for the rest of her lifetime, the death of the participant after the alternate payee’s benefit commencement date should not affect the alternate payee’s rights to continued benefits. It is critical for family law attorneys to understand the ramifications of ERISA’s joint & survivor benefits depending on whose life expectancy the alternate payee’s benefits are based.
If you use the separate interest approach, you do not have to include post-retirement joint & survivor protection in the QDRO for the benefit of the alternate payee. Because the alternate payee is already guaranteed a lifetime of actuarially adjusted benefits (once they commence), the QDRO should not require the participant to elect benefits in the form of a reduced joint & survivor annuity.
The participant is free to elect any form of benefits available under the plan with respect to his share of the benefits, including perhaps a single-life annuity without any reduction. If the participant is remarried, he can elect a joint & survivor benefit for the new spouse. This is one of the advantages of the “separate interest” QDRO. It provides a lifetime of benefits for the alternate payee while at the same time permitting the participant to elect any form of benefits for his remaining share.
Some Plan Administrators Vary in their Treatment of Separate Interest QDROs
Once the alternate payee commences her benefits under a separate interest QDRO, she will continue to receive them for the remainder of her lifetime. However, it is still usually necessary to include “pre-retirement” survivorship protection in the QDRO to secure the alternate payee’s benefits in the event of the participant’s death “before retirement”. Then, if the participant dies before retirement, the alternate payee will receive a pre-retirement survivor annuity in lieu of her regular assigned share of the benefits. The alternate payee will not generally receive both the assigned interest and the pre-retirement survivor annuity. It is one or the other.
However, some plan administrators do not even require pre-retirement survivorship protection in a separate interest QDRO. Once it is clear that the QDRO provides the alternate payee with an actuarially adjusted benefit, the alternate payee’s benefits are “secure.” The participant’s death, either before or after retirement, will not impact the alternate payee’s rights to continued benefits.
A word of caution. If you determine that a plan administrator does not require any pre-retirement survivorship language in their separate interest QDROs, you should include an affirmative statement in the QDRO that “It is understood that the plan administrator utilizes a totally severed approach to administering their separate interest QDROs and the participant’s death, either before or after retirement, will not affect the alternate payee’s rights to her benefits as set forth herein.” This is recommended in the event the plan administrator ever modifies their QDRO procedures.
In cases where the plan administrator does not require pre-retirement survivorship language in order to secure the alternate payee’s benefits, they may nonetheless accept this language in the QDRO, which could then provide the alternate payee with a windfall. She would receive both her assigned separate interest in the participant’s pension regardless of the participant’s death, and an additional pre-retirement survivor annuity in the event of the death of the participant before retirement. Clearly, this is never the intent of the parties, and in this case, you should remove the pre-retirement survivor annuity language from the QDRO.
Potential Drawback for Participant of Separate Interest QDRO: Reversionary Issues
As stated above, in many cases, the separate interest approach can be an advantage for the participant. It allows the participant to elect any form of benefit under the plan.
However, under the separate interest approach, once the plan administrator actuarially adjusts the alternate payee’s benefits to her own lifetime, the chance for a reversion to the participant is lost once the alternate payee’s benefits go into pay status.
In other words, if the alternate payee predeceases the participant after her benefit commencement date, the alternate payee’s share of the benefits evaporates rather than reverting back to the participant. This is where some strategy should enter the picture when you negotiate QDRO issues for your client.
If you represent the participant who has a former spouse in ill-health for example, you should probably not use a separate interest QDRO. The “shared payment” QDRO discussed below, could be in your client’s best interest.
Under the shared payment QDRO, the alternate payee’s share of the benefits would revert back to the participant in the event of the premature death of the alternate payee. This is true even if the alternate payee predeceases the participant after her benefit commencement date.
The ‘Shared Payment’ QDRO
The shared payment approach is the second type of QDRO for a defined benefit pension plan. In essence, the alternate payee simply shares a portion of the participant’s benefits when they go into pay status. Generally, under this approach, the alternate payee must wait until the participant actually retires before she can commence her portion of the benefits. Further, because the alternate payee’s share of the benefits is not actuarially adjusted to her life expectancy, her share of the benefits will generally revert to the participant upon the alternate payee’s death.
While this reversion issue could play an important part in the negotiation strategy, the participant should understand that there is a trade-off. In order to maintain full reversionary rights in the event of the alternate payee’s death, the participant would typically be required to elect benefits in the form of a reduced joint & survivor annuity upon retirement.
Because the alternate payee’s share of the benefits is not actuarially adjusted, the only means of securing the alternate payee’s benefits (ie: providing a lifetime of benefits to the alternate payee) is to require the participant to elect a reduced joint & survivor annuity at retirement for the benefit of the alternate payee. Without a post-retirement joint & survivor election by the participant, the alternate payee’s share of the benefits would cease at the death of the participant.
In this case, if the participant died just one month after retirement, the alternate payee would not receive any benefits unless the participant had elected a reduced joint & survivor annuity and the QDRO included proper language that treated the alternate payee as the participant’s surviving spouse.
Defined Contribution Plans
The task of dividing Defined Contribution (DC) plans can be significantly easier than dealing with the division of Defined Benefit plans. This type of plan has an individual account balance which can be divided in divorce. In general, an Alternate Payee is awarded a percent or dollar amount from the participant’s account balance as of a specific assignment date, plus investment gain/losses from that date to the date of total distribution of funds to the Alternate Payee.
Since this type of plan allows Participants to take loans from their account balance, loans should be addressed when the plan is divided using a percentage. Two options exist. The first option is to determine the Alternate Payee’s share excluding the loan, which means the assigned portion is calculated after the loan is subtracted from the account balance. The second option is to include the loan, or calculate the Alternate Payee’s share before the loan is subtracted from the account balance.
Unique to DC plans is the Plan Administrator’s right to deduct QDRO review and processing fees from the Participant’s balance. These fees can range from $250 – $2,000 depending on the recordkeeper. A QDRO for a DC should include instruction for how any applicable fees should be split between the Participant and Alternate Payee. Should a QDRO be silent in regards to this, there is likely a plan default which should be described in the plan’s written QDRO procedures.