Private DBP

Defined Benefit Plan QDROs Explained


Overview
What is a defined benefit plan?

Defined benefit plans are either (1) traditional pension or retirement plans (usually monthly payments over time) or (2) cash balance plans (lump sum payment with the option for monthly payments over time).

What is a traditional defined benefit plan?

A pension plan qualified under ERISA and the IRC that provides a specific pre-determinable amount of benefits to a participant at the individual’s projected date of retirement. In other words, a form of pension that guarantees the employee a stated benefit at their retirement. Usually the benefits are based on a formula that incorporates the participant’s years of service and final average compensation. The form of benefit paid under this type of plan is generally a monthly annuity.

What is a cash balance plan?

A form of qualified defined benefit plan under ERISA that has many features of a qualified defined contribution plan. It expresses the benefit in the form of a cash amount rather than as a monthly accrued benefit. Unlike most qualified defined benefit plans the final benefit is payable as a single lump sum although the alternate payee may elect for monthly payments over alternate payee’s life.

Separate Interest QDRO versus Shared Interest QDRO?

When dividing a defined benefit plan, it is critical to know whether or not a participant has retired and begun to receive benefits. If the participant has not commenced benefits, generally, the plan will be divided as a “separate interest” QDRO in almost all cases. However, there are a few plans (mostly union) which will require a “shared interest” QDRO. If the participant has commenced benefits, then in almost all cases, the QDRO must be a “shared interest” QDRO.

QDRO Division Options

The plans can be divided based on sertain con
  • Separate Interest QDROs
  • Shared Interest QDROs
Separate Interest QDROs

(Generally, participant has not yet commenced receipt of benefits in a traditional defined benefit plan; however, there are a few plans that deviate.)

How should alternate payee’s share be allocated?

Language: The following language or similar language is in most QDROs awarding the Alternate Payee’s marital interest based on the Marital Fraction (Time Rule) as follows:

The denominator shall exclude any credits earned by Participant after Participant has earned the maximum retirement benefit under the Plan.

Explanation:


Division by Marital Fraction:

A defined benefit plan (monthly annuity over a lifetime) is almost always divided in divorce by a “marital fraction” (also interchangeably referred to as a “coverture fraction,” “proportionate share,” “prorata share,” or “time-rule formula” depending on the state). The Date of Division is the applicable marital division date (based on your state’s law, court order or the parties’ agreement). Depending on your state, there are two different approaches to applying the marital fraction.

Most States Include Enhancements

Most states define the community/marital estate as outlined in the award above. Division in this manner provides the alternate payee with post-marital growth on their proportionate share of the pension. It also provides the participant with a separate property percentage of the plan, if applicable.


Under a defined benefit pension plan, a participant is promised a future projected retirement benefit (known as an accrued benefit). This benefit (which commences on an unreduced basis at the participant’s normal retirement age) is calculated in accordance with a plan formula that often incorporates years of service, final average salary, or, if an hourly plan, the benefit level in effect as of the participant’s date of retirement. Employers then make regular annual contributions to the plan during their employees’ working careers in accordance with actuarial projections of the sums needed to fund such future promised pension benefits.


Apportionment on the basis of the marital fraction is appropriate when the amount of the retirement benefits is substantially related to the number of years of service. The longer the member accrues benefits after marriage, the smaller the fraction defining the total marital interest of which the alternate payee is entitled to 50%, but the larger the value of the pension. An alternate payee who owns a marital property interest in a member’s retirement benefits, owns a marital property interest in those benefits as subsequently enhanced.

Frozen Marital Fraction

A handful of states define the community/marital estate as follows:


Marital Fraction: The numerator is the number of months of the Participant’s credited service in the Plan during the marriage up to and including the applicable marital division date based on your state’s law, and the denominator is the total number of months of the Participant’s credited service in the Plan up to (generally) date of divorce.That Marital Fraction is then multiplied by a percentage (generally 50%) and then multiplied by the Participant’s vested accrued benefit valued as (generally) date of divorce.


Division in this manner freezes the division as of the date of divorce as if the participant ceased participant in the plan as of the date of divorce. (Note if the participant did not accrue benefits before marriage, the marital fraction is “1” so that award can be written as whatever percentage (e.g. 50%) of the participant’s accrued benefit as of the date of divorce. Division in this manner is also referred to as the “bright-line approach.” The alternate payee does not benefit from any increases in service or pay that occur after the divorce.

Division of Some Union Plans

For some union defined benefit plans (multi-employer trust funds), the “time rule” formula is not the appropriate method of division. For some union plans, the plan’s benefit formula is based on contributions made to the plan by contributing employers. Those contributions are based on “covered earnings.” The benefit is not based on “time” (e.g. months/years of credited service) but contributions related to earnings. Typically, the time rule is used when a participant’s benefits are computed entirely upon age and credited service at the time of retirement and where the amount of the pension is dependent upon the total number of years of service. The division of the community or marital interest is based on the benefit attributable to contributions (and indirectly earnings) between the parties’ Date of Marriage and applicable marital division date (based on your state’s law, court order or the parties’ agreement) (Date of Division).


The award for some union plans will be the following or something similar: “The Alternate Payee is awarded a portion of the Participant’s Accrued Benefit under the Plan based on 50% of contributions credited by the Plan on behalf of the Participant with respect to the Participant’s covered employment between Date of Marriage and Date of Division.”

50% of Marital Interest Presumption

QDROCounsel defaults to the marital interests being divided 50/50 in our QDROs. If the parties have agreed or the court so orders a different percentage of the marital interest to be awarded to alternate payee, then you must change that percentage.

How is alternate payee’s share impacted when the participant works past the maximum retirement benefit payable?

Explanation: If a participant reaches the maximum monthly benefit payable under the plan but the participant continues to accrue service credits, courts have found that that service credits in the denominator of the fraction should not continue to increase because the value of the monthly pension benefit will NOT increase. QDROCounsel forms provide the exclusion. (Note that AON Hewitt and Fidelity will reject a QDRO with this exclusion.)

When can the Alternate Payee commence benefits?

Language: The following language or similar language is in most QDROs:

Alternate Payee’s benefits may commence as soon as administratively feasible following the Alternate Payee’s request for payment on or after the Participant’s attainment of “earliest retirement age” as defined in Internal Revenue Code §414(p)(4)(B) or an earlier date if the Plan so provides. But in no event shall Alternate Payee’s benefits commence later than the date the Participant’s benefits commence.

Explanation: In most plans, the earliest retirement age is 55 for a participant. Benefits may commence to alternate payee at any time when the alternate payee wishes to start receiving the benefits after participant’s earliest retirement age. An alternate payee does not need to wait for the participant to retire. Participant’s benefit is not affected if alternate payee wants to commence benefits before participant. However, in most cases once the participant retires, the plan requires that the alternate payee also must commence benefits.

What do the references to actuarial reduction mean?

Language: The following language or similar language is in most QDROs:

Except as provided below, benefits which begin before the Participant’s normal retirement date will be adjusted by the Plan’s standard actuarial factors related to earlier commencement of benefits. Further, for benefits which begin before the Participant’s normal retirement date (except as noted in the following section) the Plan shall have no obligation to pay Alternate Payee any benefits in excess of those calculated on the basis of a fractional interest as if the Participant had retired on the date on which such payment is to begin (but taking into account only the present value of the benefits already accrued and not taking into account the present value of an employer subsidy, if any, for early retirement).


Explanation: ERISA provides that a defined benefit plan may reduce benefits payable to a participant taken before Normal Retirement Age to account for Early Retirement. ERISA also provides that the most the plan can reduce benefits is one half of one percent (.5%) for each month by which the participant’s age precedes Normal Retirement Age. The earlier the alternate payee commences benefits, the larger the reduction in the monthly benefit payable to the alternate payee which makes sense because the benefit is estimated to be paid over a longer period of time.

What are subsidized early retirement benefits?

Language: The following language or similar language is in most QDROs:

Should the Plan provide a subsidized early retirement benefit, and if Alternate Payee’s benefits commence, before or concurrently with commencement of benefits to Participant, then upon Participant’s retirement, monthly payment amounts to Alternate Payee will be computed or re-computed prospectively in accordance with the Plan Administrator’s practices and the Plan’s actuarial principals to include a prorate share of Participant’s subsidized early retirement benefits.

Explanation: As discussed above, the most the plan can reduce benefits is one half of one percent (.5%) for each month by which the participant’s age precedes Normal Retirement Age. However, most plans provide for an “early retirement subsidy” to be applied if a participant retires early before Normal Retirement Age. For example, the monthly benefit may be reduced by only one fourth of one percent (.4%) for each month by which the participant’s age precedes Normal Retirement Age. The percentage of the reduction if plan specific.

Almost all ERISA plans allow for an alternate payee to receive the early retirement subsidy on the alternate payee’s marital interest once a participant commences benefits. If the alternate payee retires before the participant, many plans allow for alternate payee’s monthly benefit to be recalculated to receive the early retirement subsidy (if applicable) upon participant’s later commencement of benefits. And some allow for an alternate payee to receive the early retirement subsidy upon alternate payee’s early retirement regardless of when the participant retires.

A QDRO cannot force the plan to pay an early subsidy to an alternate payee without also paying the subsidy to the participant which means that that the subsidy cannot be paid to the alternate payee until the participant has also retired.

The Department of Labor and the PBGC both provide language to allow for the early retirement subsidy once a participant retires. Also, the legislative history of REA fully supports this notion:

“If an alternate payee begins to receive benefits under the order and the participant subsequently retires with subsidized early retirement benefits, the order may specify that the amount payable to the alternate payee is to be recalculated so that the alternate payee also receives a share of the subsidized benefit to which the participant is entitled. The payment of early retirement benefits with respect to a participant who has not yet retired or the increase in benefits payable to the alternate payee after the recalculation is not to be considered to violate the prohibition against a qualified domestic relations order providing for increased benefits.”

What form of benefit is payable to the alternate payee?

Language: The following language or similar language is in most QDROs:

Alternate Payee may elect to receive the actuarial equivalent of Alternate Payee’s Separate Interest portion of Participant’s Plan benefits in any form available to Participant, with Alternate Payee as the measuring life, except in the form of a joint and survivor annuity with a subsequent spouse named as beneficiary. Further, any benefit elected by Alternate Payee shall bear an actuarial adjustment under the Plan’s standard assumptions for any election which Alternate Payee may select.


Explanation:  The alternate payee may elect to receive benefits in any form available to participant payable over alternate payee’s life. Other than a lifetime benefit to alternate payee which will stop at alternate payee’s death, each plan may have additional offerings of the form of benefit. The most common is to offer the alternate payee a guaranteed period of payment (e.g. 10-year guarantee). For example, the plan may offer an election such that the alternate payee’s monthly benefit is guaranteed to be paid for the first 10 years so if alternate payee dies during that 10 years, a monthly payment will continue to alternate payee’s beneficiaries. A small minority of plans offer a lump sum payment rather than a monthly benefit. The form of benefit is plan specific. Regardless of the guaranteed period, the monthly payment will be paid for alternate payee’s life.

Any benefit elected by alternate payee will be actuarial adjusted depending on which election the alternate payee selects.

Once the QDRO is served on the plan, the alternate payee should contact the plan to obtain estimates based on the form of benefit offered. Under ERISA, the alternate payee is not allowed to elect a joint and survivor annuity with a subsequent spouse. (A joint and survivor annuity refers to payment made over a participant’s life and if participant dies married, that annuity continues to be paid over the participant’s spouse’s life.)

What happens in the event of participant’s death?

Language. The following language or similar language is in most QDROs:

F. Death of Participant.

  1. Pursuant to Treas. Reg. § 1.401(a)-13(g)(4)(i)(B)(2) and (C)(2), the death of Participant shall have no effect on the distribution of Alternate Payee’s separate interest Allocated Portion.
  2. If, notwithstanding the above-cited authority in paragraph III.F(1), it is determined for any reason that Alternate Payee must be treated as the Participant’s surviving spouse in order to receive benefits attributable to Alternate Payee’s separate interest Allocated Portion, then Alternate Payee shall also be so treated and the following shall apply:
  3. (a) Alternate Payee’s assigned benefit reverts to Participant if Alternate Payee should die before commencing benefits.
  4. (b) In consideration, in the event that the Participant predeceases the Alternate Payee, and neither the Participant nor the Alternate Payee has commenced their benefits under the Plan, Alternate Payee shall be designated as the surviving spouse of the Participant for purposes of establishing Alternate Payee’s entitlement to receipt of the monthly Qualified Preretirement Survivor Annuity (“QPSA”) to the extent of 100% of the marital fraction (as defined in paragraph III.B herein) of the Participant’s accrued benefit. In the event the Participant is not married to a qualifying spouse at Participant’s time of death, the Alternate Payee shall be entitled to 100% of the QPSA.
  5. (c) If the Plan does pay Alternate Payee the separate interest Allocated Portion pursuant to above-cited authority in paragraph III.F(1), then Alternate Payee shall have no interest in the QPSA paid on account of Participant’s remaining benefit.
  6. The death of the Participant after Alternate Payee commences receipt of benefits shall not have any effect on the right of Alternate Payee to receive those benefits to which Alternate Payee is awarded in Section III.B above.


Explanation: What happens in the event of participant’s death before retirement? ERISA attorneys generally interpret the award of survivor benefits two different ways: (1) The alternate payee will receive their share regardless of participant’s death; or (2)  If the participant dies preretirement, for an alternate payee to receive any benefits the QDRO must specifically include language treating the alternate payee as the surviving spouse with respect to a portion/all of Participant’s accrued benefit.

ERISA protects certain rights of spouses and surviving spouses in the form of a lifetime annuity for the surviving spouse. If a participant dies before retirement with a surviving spouse, the survivor annuity to the surviving spouse is called a “Qualified Preretirement Survivor Annuity (“QPSA”). ERISA 205(a)(2), 29 U.S.C. 1055(a)(2). To obtain spousal rights for the alternate payee, ERISA permits in the QDRO to designate a former spouse as the surviving spouse and any actual spouse shall not be treated as the surviving spouse with respect to the awarded amount. ERISA 206(d)(3)(F)(i), 29 U.S.C. 1056(d)(3)(F). Under ERISA, the minimum benefit payable from a QPSA is 50% of the monthly benefit that would have otherwise been payable to the participant if participant had retired on date of death.

Regardless of how the plan interprets ERISA, to the extent possible, QDROCounsel forms award alternate payee the same amount the alternate payee would receive if the participant had not died.  Under ERISA in the event an alternate payee dies preretirement before participant, alternate payee’s share would revert to Participant. Alternate payee cannot leave alternate payee’s share to a beneficiary or estate in the event of alternate payee’s preretirement death. For that reason, and as consideration for possibility for participant receiving 100% of the pension in the event of alternate payee’s preretirement death, we believe, along with most QDRO attorneys, that it is most equitable for alternate payee to be treated as the surviving spouse for 100% of the martial interest fraction in order for alternate payee to receive the same amount that alternate payee would have received if the participant had not died. If the alternate payee is only awarded 50% of the marital fraction, then alternate payee monthly benefit would be reduced to 25% from what alternate payee would have received if the participant had not died. The foregoing award does cut into the participant’s marital property interest in survivor benefits should participant die preretirement. However, the participant has the potential to receive 100% of the benefit in the event of alternate payee’s preretirement death while alternate payee’s potential interest in the event of participant’s preretirement death is only 50%. This issue in balancing the constraints of federal law against state’s marital property law has not been litigated.

In addition, for almost all plans, if the participant dies preretirement and is not married, there is no survivor benefit payable to anyone other than alternate payee. The QPSA can only be paid to a spouse or former spouse. The plan receives a windfall not having to pay the funds which would have been paid to the participant had the participant retired. For that reason, to the extent possible, QDROCounsel forms capture funds from the plan in the foregoing scenario that would not been paid to anyone else and awards those funds to the alternate payee.

Division of ERISA plans is never perfect, but we try to provide as fair a division as possible.


Explanation:  What happens in the event of participant’s death after retirement?  Once the alternate payee commences benefit payments, the participant’s death does not impact the alternate payee’s award.

What happens in the event of alternate payee’s death before retirement?

Language: The following language or similar language is in most QDROs:

If Alternate Payee predeceases Participant before Alternate Payee has begun to receive benefit payments on the Allocated Portion, then the Allocated Portion shall revert to the Participant.


Explanation: Under ERISA, in almost all cases the alternate payee cannot leave alternate payee’s share to a beneficiary or alternate payee’s estate if alternate dies before commencement of benefits. In almost all cases, plan administrators’ interpret ERISA that alternate payee’s share must revert back to the participant in the event of participant’s preretirement death. In some cases, plans interpret ERISA that the alternate payee’s share must revert back to the plan NOT the participant. That’s a big win for the plan! And there are a few rare plans that interpret ERISA that the alternate payee may leave alternate payee’s share to a beneficiary preretirement for a traditional defined benefit plan.

Note that if the defined benefit plan is a cash balance plan, then alternate payee may leave alternate payee’s share to a beneficiary. See below for a discussion on cash balance plans.

What happens in the event of alternate payee’s death after retirement?

Language: The following language or similar language is in most QDROs:

Upon the Alternate Payee’s death after benefit commencement, the form of benefit selected by the Alternate Payee shall determine whether any amounts are owed to any beneficiary upon the Alternate Payee’s death.


Explanation: After the alternate payee starts the annuity, the form of benefit elected by the alternate payee determines whether there is any additional amount payable to a beneficiary.

What about COLAs and other benefit changes?

Language: The following language or similar language is in most QDROs:

Whenever the Plan awards a post-retirement cost of living adjustment, ad hoc increase, or any other post-retirement increase generally to its participants, Alternate Payee shall receive the same percentage increase as Participant receives, or would have received.


Explanation: This paragraph just means that any increase or adjustment in the monthly benefit payable to the participant shall also be payable to the alternate payee.

What about the participant’s share?

Language: The following language or similar language is in most QDROs:

Except as set forth hereinabove, Alternate Payee shall have no rights with respect to election or form of payment on Participant’s portion of the benefits under the Plan, and Participant is free to elect any form of benefit then permissible on such benefit. All of Participant’s accrued benefits not allocated to Alternate Payee herein shall be Participant’s separate property.


Explanation: Often a participant wants to make sure that participant maintains all rights to participant’s share of the pension benefit. Guide the participant to this paragraph..

What if my prior plan was a traditional defined benefit but now I have a cash balance benefit?

There are a few plans that deviate from the general rule that if a participant has not yet retired, benefits should be paid as a separate interest QDRO. In fact, most plans will NOT accept a shared interest QDRO when a participant has not yet retired.

However, there are some plans (mostly union) that will only accept a shared interest QDRO when the participant has not yet retired. Generally, these plans engage in a “hybrid shared interest” approach. These plans are similar to separate interest QDROs as follows: (1) They allow the alternate payee to commence benefits any time after the participant’s earliest retirement date (usually age 55). (2) They allow the alternate payee to elect the same form of benefit options available to the participant. (3) They calculate the martial interest in same manner as the appropriate marital division options outlined in Paragraph 1 under separate interest QDROs above. However, the form of benefit can ONLY be based on participant’s life or based on the joint lives of both parties as a joint and survivor annuity. The form of benefit elected by the alternate payee does not impact the participant.  Unless specifically addressed as a deviation below, review “Separate Interest QDROs” above to understand your QDRO.


What form of benefit is payable to the alternate payee?


The alternate payee may elect the form of benefit on alternate payee’s share, but it must be a single life annuity based on the participant’s life or as a joint and survivor annuity based on the joint lives of the participant and alternate payee. The participant is free to elect any form of benefit at participant’s retirement on participant’s remaining share of the pension.

If the alternate payee elects a joint and survivor annuity, the survivor annuity will be calculated based solely on alternate payee’s share and the cost will be deducted from the alternate payee’s share.

If the alternate payee elects a single life annuity based on participant’s life, payments will continue to be paid to alternate payee for the participant’s life (and any period certain period elected, if applicable). If the participant dies before the alternate payee, generally the benefit stops.


What is a period certain? A single life annuity (also called a straight life annuity) provides payments until the participant’s death. In a single life annuity with a guaranteed period (also called a period certain), the participant’s beneficiary may still receive the participant’s monthly annuity payments through the date the period certain expires. The most common periods for a period certain annuity are 5 years (60 months) or 10 years (120 months). A common example is a 10-year certain annuity. Monthly payments are paid to the participant for life. However, if the participant dies, the participant’s designated beneficiary would receive any monthly payments for the remainder of the certain period – in this case, 10 years.

What happens in the event of participant’s death?


Explanation: What happens in the event of participant’s death before retirement? Generally, for this type of hybrid shared interest QDRO, ERISA attorneys generally require that if the participant dies preretirement, for an alternate payee to receive any benefits the QDRO must specifically include language treating the alternate payee as the surviving spouse with respect to a portion/all of Participant’s accrued benefit.

ERISA protects certain rights of spouses and surviving spouses in the form of a lifetime annuity for the surviving spouse. If a participant dies before retirement with a surviving spouse, the survivor annuity to the surviving spouse is called a “Qualified Preretirement Survivor Annuity (“QPSA”). ERISA 205(a)(2), 29 U.S.C. 1055(a)(2). To obtain spousal rights for the alternate payee, ERISA permits in the QDRO to designate a former spouse as the surviving spouse and any actual spouse shall not be treated as the surviving spouse with respect to the awarded amount. ERISA 206(d)(3)(F)(i), 29 U.S.C. 1056(d)(3)(F). Under ERISA, the minimum benefit payable from a QPSA is 50% of the monthly benefit that would have otherwise been payable to the participant if participant had retired on date of death.

Regardless of how the plan interprets ERISA, to the extent possible, QDROCounsel forms award alternate payee the same amount the alternate payee would receive if the participant had not died.  Under ERISA in the event an alternate payee dies preretirement before participant, alternate payee’s share would revert to Participant. Alternate payee cannot leave alternate payee’s share to a beneficiary or estate in the event of alternate payee’s preretirement death. For that reason, and as consideration for possibility for participant receiving 100% of the pension in the event of alternate payee’s preretirement death, we believe, along with most QDRO attorneys, that it is most equitable for alternate payee to be treated as the surviving spouse for 100% of the martial interest fraction in order for alternate payee to receive the same amount that alternate payee would have received if the participant had not died. If the alternate payee is only awarded 50% of the marital fraction, then alternate payee monthly benefit would be reduced to 25% from what alternate payee would have received if the participant had not died. The foregoing award does cut into the participant’s marital property interest in survivor benefits should participant die preretirement. However, the participant has the potential to receive 100% of the benefit in the event of alternate payee’s preretirement death while alternate payee’s potential interest in the event of participant’s preretirement death is only 50%. This issue in balancing the constraints of federal law against state’s marital property law has not been litigated.

In addition, for almost all plans, if the participant dies preretirement and is not married, there is no survivor benefit payable to anyone other than alternate payee. The QPSA can only be paid to a spouse or former spouse. The plan receives a windfall not having to pay the funds which would have been paid to the participant had the participant retired. For that reason, to the extent possible, QDROCounsel forms capture funds from the plan in the foregoing scenario that would not been paid to anyone else and awards those funds to the alternate payee.

Division of ERISA plans is never perfect, but we try to provide as fair a division as possible.

Explanation:  What happens in the event of participant’s death after retirement?  Once the alternate payee commences benefit payments, the participant’s death does not impact the alternate payee’s award. The benefit payable is based on the elections made by alternate payee at retirement.

What happens in the event of alternate payee’s death?

These “hybrid shared interest” plans generally limit the alternate payee’s award. The alternate payee may only elect the form of benefit based on the participant’s life or as a joint and survivor annuity based on the joint lives of the participant and alternate payee which is costly. For that reason, most of these types of plans allow for successor alternate payees to be paid in the event the alternate payee death before the participant whether before or after alternate payee’s retirement.


Generally, if an alternate payee predeceases a participant after the participant has retired, QDROCounsel defaults to the benefits reverting to the Participant for the reasons discussed in #4 above.

However, because of the potential that alternate payee will NOT receive benefits for alternate payee’s lifetime or receive a much lower benefit to pay for the cost of the joint and survivor annuity, many parties find it is more equitable to award successor alternate payees who must be a child or dependent of the participant. If there are no qualified successor alternate payees, then benefits must be paid pursuant to the terms of the plan (which is most cases is reversion to the participant).

There is no perfect way to divide a private plan governed by federal law (Employee Retirement Income Security Act, as amended aka ERISA). Depending on the facts of a case, it may make sense to name successor alternate payees.

QDROCounsel’s forms will default to the reversion to the participant. However, if there are children or dependents of the participant that should be named as successor alternate payees, please contact QDROCounsel Support to provide the information for the successor alternate payees. QC will then provide you with the applicable successor alternate payee paragraph from your particular plan.

Shared Interest QDROs

(Generally, participant has retired and commenced receipt of benefits in a traditional defined benefit plan; however, there are a few plans that deviate.)

How should alternate payee’s share be allocated?

Language: The following language or similar language is in most QDROs awarding the Alternate Payee’s marital interest in three possible ways: (1) Marital Fraction (Time Rule), (2) PERCENTAGE, or (3) SET AMOUNT as follows:

Marital Fraction (Time Rule):

Percentage:

The Alternate Payee shall be allocated [insert percentage]% of Participant’s monthly vested accrued benefit under the Plan.


Set Amount:

The Alternate Payee shall be allocated $[insert amount] of Participant’s monthly vested accrued benefit under the Plan.


Explanation:


Marital Fraction (Time Rule) Award

For a retired Participant, the division is usually by the marital fraction (also interchangeably referred to as a coverture fraction, proportionate share, prorata share, or time-rule formula depending on the state). The Date of Division is the applicable marital division date (based on your state’s law, court order or the parties’ agreement). A marital fraction division is how most states allocate marital property to an alternate payee for a defined benefit plan. Division in this manner provides the alternate payee with post-marital growth on their proportionate share of the pension. It also provides the participant with a separate property percentage of the plan, if applicable.


Under a defined benefit pension plan, a participant is promised a future projected retirement benefit (known as an accrued benefit). This benefit (which commences on an unreduced basis at the participant’s normal retirement age) is calculated in accordance with a plan formula that often incorporates years of service, final average salary, or, if an hourly plan, the benefit level in effect as of the participant’s date of retirement. Employers then make regular annual contributions to the plan during their employees’ working careers in accordance with actuarial projections of the sums needed to fund such future promised pension benefits.


Apportionment on the basis of the marital fraction is appropriate when the amount of the retirement benefits is substantially related to the number of years of service. The longer the member accrues benefits after marriage, the smaller the fraction defining the total marital interest of which the alternate payee is entitled to 50%, but the larger the value of the pension. An alternate payee who owns a marital property interest in a member’s retirement benefits, owns a marital property interest in those benefits as subsequently enhanced.


A few states follow the coverture fraction approach but freeze the value of the benefit payment to the value of the pension at date of divorce. If the participant is already retired at divorce, freezing the value of the benefit at divorce has no impact.


50% of Marital Interest Presumption

QDROCounsel defaults to the marital interests being divided 50/50 in our QDROs. If the parties have agreed or the court so orders a different percentage of the marital interest to be awarded to alternate payee, then you must change that percentage.


Percentage or Set Amount Award

A percentage or set amount award is likely used in the following situations:


(1) 100% of the benefit accrued during marriage so the award is 50% to the Alternate Payee.


(2) The parties have offset the pension against another asset and adjusted the percentage or amount accordingly. A set amount or percentage from an equalization/offset is likely a result of the parties’ agreement or court order.


(3) A separate property interest exists and the Plan will NOT calculate the Marital Fraction (Time Rule) percentage. In most cases the Marital Fraction division is calculated by the Plan. Our QDROs will presume the Marital Fraction (Time-Rule) division will be calculated by the Plan unless we are aware that the Plan will NOT provide this calculation. You should presume the Plan will calculate the Marital Fraction (Time Rule) unless (1) the plan is a cash balance plan, (2) the Third Party Administrator is Alight or Fidelity, or (3) you are notified otherwise. It is always a good idea to obtain Plan preapproval, if possible. The Plan may have switched custodians before we are notified and that new custodian may only allow for the award in the QDRO to be a percentage or set amount. The Plan will let you know if the Plan will NOT calculate the Marital Fraction (Time Rule).


If the Plan will NOT calculate the Marital Fraction (Time Rule), you can calculate that percentage using the Calculation Suite – Marital Fraction (Time Rule) Calculator for a Retired Participant to determine the Alternate Payee’s share. The Calculation Suite Report will provide the different options you should select for drafting divorce judgment language and drafting (Q)DROs. The Instructions in the Calculation Suite will let you know in detail the documents you need to complete the Calculator.

If the participant is already retired, what is the form of benefit paid to alternate payee?

Language: The following language or similar language is in most QDROs:

The Alternate Payee is not entitled to elect a form of benefit. The Alternate Payee’s Allocated Portion will be paid from the Participant’s monthly benefit payment in accordance with the form of benefit elected by the Participant at the time of benefit commencement.


Explanation:  In almost all cases, the form of benefit elected by participant is irrevocable. Alternate payee can only receive alternate payee’s marital interest based on that election. The form of benefit selected by the participant at retirement may or may not include survivor benefits depending on whether the parties were married at the time of retirement and options elected at retirement.

If you represent the alternate payee, you may want to know whether there are any survivor benefits payable on the retired participant’s plan. The form of benefit in almost all cases cannot be modified at divorce. To verify the form of benefit elected, you can obtain a copy of the participant’s retirement application from the Plan or Participant.

What happens if participant dies before alternate payee?

Language: The following language or similar language is in most QDROs:


Death of Participant.

  1. Should Participant predecease Alternate Payee and retired without a joint and survivor annuity, then pursuant to the election made by Participant at retirement, Alternate Payee shall receive a pro rata share of any death benefits payable following the death of Participant (including any lump sum benefit or any remaining period certain payments) if payable under the terms of the Plan and the form of benefit selected by Participant at retirement. If no death benefits are payable following Participant’s death on Participant’s account, then no further benefits are payable to Alternate Payee.
  2. However, in the event the Participant retired with a joint and survivor annuity and the Alternate Payee had been designated as a surviving spouse at the commencement of the Participant’s retirement benefits, the Alternate Payee will receive a survivor annuity in accordance with the terms of the Plan based upon the option chosen at commencement. If the Alternate Payee was not the designated survivor annuitant when Participant commenced retirement benefits and a joint and survivor annuity was elected with a subsequent spouse, then the shared interest award to the Alternate Payee will terminate upon the earlier of Participant’s or Alternate Payee’s death.


Explanation:


Situations when survivor benefits are payable to alternate payee if participant predeceases alternate payee:

  1. If the participant retired before the parties divorced and the alternate payee never signed a waiver before a notary waiving alternate payee’s interest in survivor benefits (referred to as joint and survivor annuity or joint survivor annuity), then under ERISA the plan must pay benefits in the form of a 50% joint survivor annuity based on participant’s life and alternate payee’s life.  Divorce will not impact an alternate payee’s right to receive 50% of the benefits payable for the rest of alternate payee’s life in the event of participant’s post retirement death.
  2. If alternate payee signed a waiver before a notary to receive more than a 50% joint survivor annuity for alternate payee’s life in the event of participant’s death (e.g. 75% joint survivor annuity or 100% joint survivor annuity), divorce will NOT impact that election as well.
  3. See Carmona v. Carmona,603 F.3d 1041 (9th Cir. 2010) and Hopkins v. AT&T Global Information Solutions Co., 105 F.3d 153 (4th Cir. 1997), which is followed by most circuits throughout the United States.


Situations when alternate payee’s marital interest stops at participant’s death:

  1. If alternate payee signed a waiver before a notary so that the participant would receive benefits based on participant’s life only, then benefits will stop if participant dies before alternate payee unless participant elected a guaranteed period of benefits to be paid to a beneficiary. Our QDROs provide that alternate payee will receive a pro rata share of any death benefits payable.
  2. If the participant retired with joint survivor annuity with another spouse (not alternate payee), then benefits will stop at the earlier of alternate payee or participant’s death. If there is a loss of survivor benefits, some parties agree or the court orders term life insurance to provide a survivor benefit to alternate payee.


What happens if alternate payee dies before participant?

Language: The following language or similar language is in most QDROs:

Should Alternate Payee predecease Participant, the Allocated Monthly Portion shall revert to Participant.


Explanation:


If an alternate payee predeceases a participant after the participant has retired, QDROCounsel defaults to the benefits reverting to the Participant for the following reasons:

(1) In almost all cases the alternate payee’s share must revert to the participant due to federal case law (Branco v. UFCW-N. Cal Emplrs. Joint Pension Plan, (2002) 279 F.3d 1154);

(2) The reversion usually is the most equitable division for the following reasons: (1) In most divorce cases, the participant retires with a 50% joint and survivor annuity with alternate payee as the surviving spouse. The 50% joint and survivor annuity is the required form of benefit for a participant who retires married and cannot be changed after retirement. To opt out of this form of benefit, the then spouse (which is most cases is the alternate payee) would have to sign a waiver before a notary. There is an actuarial cost to the 50% joint and survivor annuity which reduces the overall monthly benefit. In effect the participant and alternate payee each will pay for a portion of the actuarial cost of the survivor annuity in exchange for a possible benefit. Alternate payee is deriving a benefit from the possibility of receiving 50% of participant’s monthly benefit for the rest of alternate payee’s life should participant predecease alternate payee. Likewise, participant is deriving a benefit from the possibility of receiving the reversion of alternate payee’s interest for the rest of participant’s life should alternate payee predecease participant;

(3) The tax code specially mentions that an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order (as defined in section 414(p)). 26 U.S.C. 402(e))(1)(A). There is no mention of how to treat an adult child who is a successor alternate payee in the tax code. But by implication, the participant is likely to pay taxes on the payments to any non-spouse successor alternate payee.

A few plans will interpret federal law to allow a “successor alternate payee” to be named in the QDRO if an alternate payee predeceases the participant but almost all will not. Successor alternate payees can only be the children (or dependents) of the participant. If you name a successor alternate payee in the QDRO, be sure to obtain plan preapproval because there is high likelihood the plan will not approve the award. You can then revise the QDRO appropriately.

There is no perfect way to divide a private plan governed by federal law (Employee Retirement Income Security Act, as amended aka ERISA). Depending on the facts of a case and the plan’s interpretation of ERISA, it may make sense to name successor alternate payees; but in almost all cases, the plan will reject the QDRO citing federal case law and it is likely less equitable as discussed above.

Is the plan withholding alternate payee’s share?

Language: The following language or similar language is in most QDROs:

The Plan may have withheld from Participant’s pension the Allocated Portion pending receipt of a QDRO. This assignment to Alternate Payee hereinabove shall include all of the Allocated Portion withheld by the Plan.


Explanation: Some plans withhold alternate payee’s share of benefits until a QDRO is filed and served on the plan and some do not. An ERISA plan only has an obligation to withhold an alternate payee’s share once it is served with a filed domestic relations order which can be determined as to whether it is a qualified domestic relations order. 29 U.S.C. § 1056(d)(3)(H). Often the QDRO procedures for a plan will indicate if the plan will withhold. If the plan is withholding, our QDROs default to the provision that alternate payee be awarded alternate payee’s interest in the amounts withheld.

When will alternate payee’s payments begin?

Language: The following language or similar language is in most QDROs:

Direct monthly benefit payments shall commence to the Alternate Payee following acceptance and implementation of the order by the Plan.


Explanation:  Once the QDRO is filed and served on the plan, the alternate payee should contact the plan to arrange for payment.

Will alternate payee’s share include COLAs and any other benefit changes?

Language: The following language or similar language is in most QDROs:

Whenever the Plan awards a post-retirement cost of living adjustment, ad hoc increase, or any other post-retirement increase generally to its participants, Alternate Payee shall receive the same percentage increase as Participant receives, or would have received.


Explanation: This paragraph just means that any increase or adjustment in the monthly benefit payable to the participant shall also be payable to the alternate payee.

What happens when the participant has not commenced benefits, and the plan will only accept a shared interest QDRO?

There are a few plans that deviate from the general rule that if a participant has not yet retired, benefits should be paid as a separate interest QDRO. In fact, most plans will NOT accept a shared interest QDRO when a participant has not yet retired.

However, there are some plans (mostly union) that will only accept a shared interest QDRO when the participant has not yet retired. Generally, these plans engage in a “hybrid shared interest” approach. These plans are similar to separate interest QDROs as follows: (1) They allow the alternate payee to commence benefits any time after the participant’s earliest retirement date (usually age 55). (2) They allow the alternate payee to elect the same form of benefit options available to the participant. (3) They calculate the martial interest in same manner as the appropriate marital division options outlined in Paragraph 1 under separate interest QDROs above. However, the form of benefit can ONLY be based on participant’s life or based on the joint lives of both parties as a joint and survivor annuity. The form of benefit elected by the alternate payee does not impact the participant.  Unless specifically addressed as a deviation below, review “Separate Interest QDROs” above to understand your QDRO.


What form of benefit is payable to the alternate payee?


The alternate payee may elect the form of benefit on alternate payee’s share, but it must be a single life annuity based on the participant’s life or as a joint and survivor annuity based on the joint lives of the participant and alternate payee. The participant is free to elect any form of benefit at participant’s retirement on participant’s remaining share of the pension.

If the alternate payee elects a joint and survivor annuity, the survivor annuity will be calculated based solely on alternate payee’s share and the cost will be deducted from the alternate payee’s share.

If the alternate payee elects a single life annuity based on participant’s life, payments will continue to be paid to alternate payee for the participant’s life (and any period certain period elected, if applicable). If the participant dies before the alternate payee, generally the benefit stops.


What is a period certain? A single life annuity (also called a straight life annuity) provides payments until the participant’s death. In a single life annuity with a guaranteed period (also called a period certain), the participant’s beneficiary may still receive the participant’s monthly annuity payments through the date the period certain expires. The most common periods for a period certain annuity are 5 years (60 months) or 10 years (120 months). A common example is a 10-year certain annuity. Monthly payments are paid to the participant for life. However, if the participant dies, the participant’s designated beneficiary would receive any monthly payments for the remainder of the certain period – in this case, 10 years.

What happens in the event of participant’s death?


Explanation: What happens in the event of participant’s death before retirement? Generally, for this type of hybrid shared interest QDRO, ERISA attorneys generally require that if the participant dies preretirement, for an alternate payee to receive any benefits the QDRO must specifically include language treating the alternate payee as the surviving spouse with respect to a portion/all of Participant’s accrued benefit.

ERISA protects certain rights of spouses and surviving spouses in the form of a lifetime annuity for the surviving spouse. If a participant dies before retirement with a surviving spouse, the survivor annuity to the surviving spouse is called a “Qualified Preretirement Survivor Annuity (“QPSA”). ERISA 205(a)(2), 29 U.S.C. 1055(a)(2). To obtain spousal rights for the alternate payee, ERISA permits in the QDRO to designate a former spouse as the surviving spouse and any actual spouse shall not be treated as the surviving spouse with respect to the awarded amount. ERISA 206(d)(3)(F)(i), 29 U.S.C. 1056(d)(3)(F). Under ERISA, the minimum benefit payable from a QPSA is 50% of the monthly benefit that would have otherwise been payable to the participant if participant had retired on date of death.

Regardless of how the plan interprets ERISA, to the extent possible, QDROCounsel forms award alternate payee the same amount the alternate payee would receive if the participant had not died.  Under ERISA in the event an alternate payee dies preretirement before participant, alternate payee’s share would revert to Participant. Alternate payee cannot leave alternate payee’s share to a beneficiary or estate in the event of alternate payee’s preretirement death. For that reason, and as consideration for possibility for participant receiving 100% of the pension in the event of alternate payee’s preretirement death, we believe, along with most QDRO attorneys, that it is most equitable for alternate payee to be treated as the surviving spouse for 100% of the martial interest fraction in order for alternate payee to receive the same amount that alternate payee would have received if the participant had not died. If the alternate payee is only awarded 50% of the marital fraction, then alternate payee monthly benefit would be reduced to 25% from what alternate payee would have received if the participant had not died. The foregoing award does cut into the participant’s marital property interest in survivor benefits should participant die preretirement. However, the participant has the potential to receive 100% of the benefit in the event of alternate payee’s preretirement death while alternate payee’s potential interest in the event of participant’s preretirement death is only 50%. This issue in balancing the constraints of federal law against state’s marital property law has not been litigated.

In addition, for almost all plans, if the participant dies preretirement and is not married, there is no survivor benefit payable to anyone other than alternate payee. The QPSA can only be paid to a spouse or former spouse. The plan receives a windfall not having to pay the funds which would have been paid to the participant had the participant retired. For that reason, to the extent possible, QDROCounsel forms capture funds from the plan in the foregoing scenario that would not been paid to anyone else and awards those funds to the alternate payee.

Division of ERISA plans is never perfect, but we try to provide as fair a division as possible.

Explanation:  What happens in the event of participant’s death after retirement?  Once the alternate payee commences benefit payments, the participant’s death does not impact the alternate payee’s award. The benefit payable is based on the elections made by alternate payee at retirement.

What happens in the event of alternate payee’s death?


These “hybrid shared interest” plans generally limit the alternate payee’s award. The alternate payee may only elect the form of benefit based on the participant’s life or as a joint and survivor annuity based on the joint lives of the participant and alternate payee which is costly. For that reason, most of these types of plans allow for successor alternate payees to be paid in the event the alternate payee death before the participant whether before or after alternate payee’s retirement.


Generally, if an alternate payee predeceases a participant after the participant has retired, QDROCounsel defaults to the benefits reverting to the Participant for the reasons discussed in #4 above.

However, because of the potential that alternate payee will NOT receive benefits for alternate payee’s lifetime or receive a much lower benefit to pay for the cost of the joint and survivor annuity, many parties find it is more equitable to award successor alternate payees who must be a child or dependent of the participant. If there are no qualified successor alternate payees, then benefits must be paid pursuant to the terms of the plan (which is most cases is reversion to the participant).

There is no perfect way to divide a private plan governed by federal law (Employee Retirement Income Security Act, as amended aka ERISA). Depending on the facts of a case, it may make sense to name successor alternate payees.

QDROCounsel’s forms will default to the reversion to the participant. However, if there are children or dependents of the participant that should be named as successor alternate payees, please contact QDROCounsel Support to provide the information for the successor alternate payees. QC will then provide you with the applicable successor alternate payee paragraph from your particular plan.

Other Information

Cash Balance Plan QDROs
How is a cash balance plan different from other plan types?

A cash balance plan is a form of defined benefit plan that has many features of a defined contribution plan. It expresses the benefit in the form of a cash amount rather than as a monthly accrued benefit. The final benefit unlike most traditional defined benefit plans is payable in a single lump sum.

Because it looks like a defined contribution plan, don’t be fooled and treat it like one! On a cash balance plan statement, you will see a promised benefit with a stated account balance. That amount is based on a participant projected benefit at age 65 without any actuarial reduction. Without going into any detail on how a cash balance plan works, it is generally a defined benefit plan that maintains hypothetical individual employee accounts with “interest credits.” These accounts are often referred to as “hypothetical accounts” because they do not reflect actual contributions to an account or actual gains and losses allocable to the account. Interest credits on the account balance are not dependent on the stock market but determined by the plan.

Cash balance plans can be paid as a lump sum payout to alternate payee which can be rolled over to an IRA. Or, cash balance plans can be paid as a monthly annuity over the alternate payee’s lifetime if alternate payee so chooses.

How is a cash balance plan divided if the Participant has retired and started receiving retirement benefits?

In most cases, when a cash balance plan participant retires, the participant elects the lump sum distribution option offered by the plan. In some cases, the participant may elect the form of benefit as a monthly annuity payable over participant’s lifetime. If the participant retired and is receiving a monthly annuity from the cash balance plan before divorce, the division will be the same as a traditional defined benefit plan. See the discussion above SHARED INTEREST QDROS (Participant has retired and commenced receipt of benefits).

How should alternate payee’s share be allocated?

EXPLANATION: QDROCounsel provides the following different drafting options to divide a cash balance plan:

Default Option: In general, the most common award (Default Option) to an alternate payee is 50% of the participant’s accrued benefit as of the end of the applicable marital division date(based on your state’s law, court order or the parties’ agreement) (“Date of Division”) plus applicable interest credits thereon. The DEFAULT OPTION should be used only if there is no separate property interest before the Date of Division.

Option 1: However, it may be that the Alternate Payee should be awarded a percentage other than 50% of the Participant’s total account balance as of a date other than the Date of Division, plus any applicable interest credits thereon. If that is the case, you will likely select Option 1. This Option is usually selected when there is an equalization and offset or separate property interest in the Plan before the Date of Division. Cash balance plans will not calculate any separate property interest to determine the marital/community property interest. However, you can handle that calculation utilizing the Calculation Suite and will be provided with an alternate payee’s awarded percentage or amount as of the date calculated. In short, while the Date of Division is usually the applicable marital division date (based on your state’s law, court order or the parties’ agreement), percentages and dates above may differ due to necessary separate property interest calculations, equalization/offset, parties’ agreement, or court order.

Note for a few states, the marital property interest includes all accruals on the separate property interest before the Date of Division. In that situation, the marital property interest is the marital property interest at the Date of Division less the separate property interest. If you are not sure if your state’s law includes accruals on separate property, contact QDROCounsel Support.

Option 2: If the Participant is no longer working for the employer for this Plan and you know the percentage of the Plan that is marital property (e.g. 100%), it may be that the award to Alternate Payee should be 50% (or whatever percentage is agreed upon by the parties) of the Participant’s total account balance as of the date of account segregation, plus applicable interest credits thereon. You may want to select Option 2 and select 50% (or whatever percentage was agreed to by the parties) in this situation.

Option 3: The award to alternate payee may also be a SPECIFIC DOLLAR AMOUNT of the Participant’s total account balance as of a SPECIFIC DATE, plus any applicable interest credits thereon. This Option is selected when the parties agree or the court so orders an amount to be awarded as of a specific date, plus applicable interest credits thereon. Option 3 generally is selected when there is an equalization and offset or separate property calculation. You may have utilized the Calculation Suite to calculate any separate property interest to determine the marital/community interest or to calculate an equalization/offset.

Option 4: The award to Alternate Payee may be a SPECIFIC DOLLAR AMOUNT of the Participant’s total account balance as of the date a separate benefit is established for Alternate Payee. This Option is usually selected when the parties agree or the court so orders an amount to be awarded as of the date a separate benefit is established for Alternate Payee. Option 4 generally is selected when there is an equalization and offset or separate property calculation. You may have utilized the Calculation Suite to calculate any separate property interest to determine the marital/community interest or to calculate an equalization/offset. If the date a separate benefit is established for Alternate Payee was selected, it is likely because the parties have agreed to a set amount without any interest credits in an equalization or offset. The amount awarded should be based on the parties’ agreement or court order.

As with all awards, there are exceptions to the foregoing especially if the cash balance plan is part of a complex retirement scheme, for example a company like Deloitte LLP. If you believe that may be your situation, please contact QDROCounsel Support.

Will alternate payee receive any interest on the award?

Language: The following language or similar language is in most QDROs:

As soon as administratively feasible after qualification of the Order, the Alternate Payee’s share shall be accounted for separately under the Plan for the exclusive benefit of Alternate Payee. The Alternate Payee’s share shall also be adjusted to reflect any applicable interest credits from the Valuation Date through the date of benefit commencement to Alternate Payee.


Explanation


Interest credits on the account balance are not dependent on the stock market but determined by the plan when the plan is established. The Interest Credit rate is either a fixed rate, determined by the plan, or linked to an index such as the one-year treasury bill rate. There are IRS guidelines that govern the acceptable variations of these two options.

In almost all cases, the plan will calculate interest credits on the alternate payee’s marital interest from the Date of Division until the date of distribution to the alternate payee, so any separate property accrued after Date of Division will remain the separate property of the participant. On rare occasions, the plan will calculate interest credits only from a date after the Date of Division. We see this occur when the plan changes custodians, or perhaps the plan was involved in a corporate merger.

In most cases, you will NOT know if there is an issue with whether the plan can calculate interest credits until you send a proposed QDRO dividing as of the Date of Division to the plan for preapproval. For this reason, we strongly advise you to seek preapproval of the QDRO before filing. The plan will tell you if there is an issue and provide the earliest valuation date it will calculate interest credits. You can then use the Calculation Suite for Separate Property Interest in Cash Balance Plans to determine the alternate payee’s marital interest as of the date the plan will calculate interest credits if warranted and revise the proposed QDRO.


What is the form of benefit paid to alternate payee?

Language: The following language or similar language is in most QDROs:

Form of Benefit.

1. The Alternate Payee may choose any form of payment available under the Plan (including a lump sum payment) except a “Joint and Survivor Annuity” with a subsequent spouse.

2. Any actuarial adjustment necessary to base the Alternate Payee’s unconverted annuity benefit on the Alternate Payee’s lifetime shall be applied to the Alternate Payee’s benefit.

3. In the event the Participant has not yet become vested in the Plan, the benefit payable to the Alternate Payee is subject to the Plan’s vesting schedule and may not be distributed until such time as the vesting service under the Plan has been completed. In the event the Participant terminates prior to becoming vested in the Plan, no benefits will be payable to either the Participant or the Alternate Payee.

Explanation: Most alternate payees choose the lump sum payment option from a cash balance plan. However, the plan is required to offer a lifetime benefit payable to alternate payee and the alternate payee may elect that form of benefit. In addition to a lifetime payment, the plan may also offer additional forms of lifetime benefit. The most common is to offer the alternate payee a guaranteed period of payment (e.g. 10-year guarantee). For example, the plan may offer an election such that the alternate payee’s monthly benefit is guaranteed to be paid for the first 10 years so if alternate payee dies during that 10 years, a monthly payment will continue to alternate payee’s beneficiaries. Any benefit elected by alternate payee will be actuarial adjusted depending on which election the alternate payee selects. Once the QDRO is served on the plan, the alternate payee should contact the plan to obtain estimates based on the form of benefit offered.

Under ERISA, the alternate payee is not allowed to elect a joint and survivor annuity with a subsequent spouse. (A joint and survivor annuity refers to payment made over a participant’s life and if participant dies married, that annuity continues to be paid over the participant’s spouse’s life.)

The participant must be fully vested before benefits can be paid to the alternate payee.

What about COLAs and early retirement subsidies?

In general cash balance plans do not offer cost of living increase or early retirement subsidies.

What happens if the participant dies?

Language: The following language or similar language is in most QDROs:

The death of the Participant shall have no effect on the payment of the benefit assigned by this Order to the Alternate Payee.

Explanation:  The participant’s death will not impact alternate payee’s award with a cash balance plan.

What happens if alternate payee dies before commencing benefits?

Language: The following language or similar language is in most QDROs:

If the Alternate Payee dies before the amount assigned in accordance with this Order is distributed to the Alternate Payee, such amount shall be paid in a lump-sum distribution to the designated beneficiary as soon as administratively practicable after the date of death. If no valid designation exists at the date of death for the Alternate Payee, the balance shall be distributed as provided by the Plan.


Explanation:  For a cash balance plan, if an alternate payee dies prior to commencement of benefits, alternate payee may leave alternate payee’s share to a beneficiary. If there is no beneficiary on file with the plan, then it will be distributed as provided by the plan.  Once the QDRO is filed and served on the plan, the alternate payee should contact the plan and complete the plan’s beneficiary designation form.


What happens in the event of alternate payee’s death after retirement?

Language: The following language or similar language is in most QDROs:

Upon the death of the Alternate Payee after benefit commencement, the Alternate Payee’s awarded benefit shall be paid based on the option elected at commencement.


Explanation: After the alternate payee starts the annuity, the form of benefit elected by the alternate payee determines whether there is any additional amount payable to a beneficiary.


What about the participant’s interest?

Language: The following language or similar language is in most QDROs:

The Participant may choose another form of payment available under the terms of the Plan for any portion of Participant’s benefit that is not subject to this Order.

Explanation: Often a participant wants to make sure that participant maintains all rights to participant’s share of the pension benefit. Guide the participant to this paragraph.

What if my prior plan was a traditional defined benefit but now I have a cash balance benefit?

Conversion from a traditional defined benefit plan to a cash balance plan may be the result of: (1) a comprehensive redesign of an employer’s compensation package as a means for easily ascertaining future pension obligations; (2) a need to attract and retain workers in a mobile environment; and (3) a desire to avoid the complexities involved in explaining traditional defined benefit plan annuity benefits and their often complex formulas.

Conversion to a cash balance plan may be accompanied by improvements to other benefit plans. When some employers institute a conversion, they increase their nonelective or matching contributions to their current employees’ 401(k) plans to offset any reduction in benefits that would occur otherwise. There are other reasons why cash balance plans may appeal to employers. As with traditional defined benefit plans, employers still bear the risk and receive the reward from plan investment strategy. But cash balance plans may not subject employers to the same degree of risk of preretirement inflation that can occur with terminal earnings formulas.

Typically, you will either continue to maintain the prior traditional defined benefit plan (but it will be frozen in terms of additional years of service) and you will begin a new cash balance plan benefit, or the prior traditional defined benefit plan will be converted in its entirety to a lump sum and deposited into your new cash balance benefit. The amount of the conversion cannot be less than the value of the benefit as accrued under the traditional defined benefit plan.

What about taxes?

Language: The following language or similar language is in most QDROs:

For purposes of Sections 402 and 72 of the Internal Revenue Code, any alternate payee who is the spouse or former spouse of a participant will be treated as the distributee of any distributions or payments made to the alternate payee under the terms of this Order, and as such, will be required to pay the appropriate federal and/or state income taxes on such distribution. The Plan shall provide to Participant and Alternate Payee in accordance with its customary procedures such information as is normally provided to Participants in the Plan with respect to the taxability of distributions from the Plan. Any payments to the Alternate Payee made by the Plan shall be subject to withholding for Federal and State tax, unless a valid current election to waive withholding is on file with the Administrators of the Plan.

Explanation: This paragraph just means that alternate payee pays taxes on whatever payment is made to alternate payee from the plan. The participant does NOT pay taxes on alternate payee’s share (unless the alternate payee is a child or dependent of the participant in which case the payments are taxable to the participant).


What happens if the plan terminates?

Language: The following language or similar language is in most QDROs:

If the Plan is terminated, whether on a voluntary or involuntary basis, and the Participant’s benefits become guaranteed by the Pension Benefit Guaranty Corporation (“PBGC”), the Alternate Payee’s benefits under this Order will also be guaranteed to the same extent in accordance with the Plan’s termination rules and in the same ratio as the Participant’s benefit is guaranteed by the PBGC. In the event the Participant’s benefits are reduced or limited as a result of termination or partial termination of the Plan, or as a result of the application of the Code section 415 or 401(a)(17), the amounts assigned to the Alternate Payee hereunder shall be reduced or limited in the same ratio as the Participant’s benefits under the Plan are reduced or limited.

Explanation: If the plan is terminated and the federal government (PBGC) takes over managing the plan, this paragraph just provides that this QDRO will be applicable to the PBGC.



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