QDRO Issues - General Overview for Defined Benefit Plans

The preparation of a QDRO for a defined benefit pension is much more demanding and difficult than one for a defined contribution plan because there are more issues that must be carefully considered. Among the issues that must be determined are...

1. The date of the accrued benefit. This date may vary from jurisdiction to jurisdiction, based on state law; but in many states the date is set as either the date of divorce or the date of separation, and some states use the date of retirement.

2. The apportionment of the accrued benefit. The method of apportionment is dictated by state law. The methods determine how much of the accrued benefit is attributable to the marriage and subject to distribution. The two most common are the percentage amount (for example, 50 percent as of the accrual date), if the benefit is entirely marital as of the cutoff date, and the fractional method using a coverture fraction, if the benefit has a nonmarital component.

3. A disposition of contingent benefits. For example, early retirement subsidies, may or may not be included in the accrued benefit that is being divided between the spouses. This determination depends on QDRO rules, state law and the language of the QDRO.

4. A determination of what is called the "measuring life." This means make a decision whether the life of the participant or the life of the alternate payee will used as the basis for determining the benefit. The alternate payee who wants to receive a benefit for life should use his or her life as the measuring life. If he or she wants a larger benefit, he or she should use the participantís life as the measuring life, particularly if the participant is older. Benefits stop when the participant is the measuring life; benefits to the alternate payee continue after the participant dies if he or she is the measuring life.

5. The participantís death. The QJSA rules, those governing Qualified Joint and Survivor Annuity (QJSA), and certain other factors determine the impact of the participantís death. If the participant is not married at the date of the benefit commencement starting date, the normal form of payment is a single-life annuity; thus the former spouse receives nothing because he or she is not the surviving spouse. If the participant is married to the nonparticipant spouse at the date of the benefit commencement starting date, the form of the retirement must be a QJSA unless both the spouses consent to a waiver.

6. The nonparticipantís death. In a stream of payment QDRO the nonparticipant receives a share of each payment received by the participant; thus when the nonparticipant dies, his or her share can revert to the participant, or may be paid to the alternative payeeís estate, depending upon the plan rules. In a separate interest routine, the nonparticipant spouse may elect a beneficiary. The stream of payment routine is normally used when the participant is in pay status.

7. The surviving spouse. A determination must be made whether the nonparticipant will be named the surviving spouse for purposes of a Qualified Joint and Survivor Annuity (QJSA) or a Qualified Preretirement Survivor Annuity (QPSA). A QDRO can be written to designate a former spouse as the surviving spouse for any or all of the survivor benefits payable upon the death of the participant.

8. Allocation of accrued benefits to surviving spouse. A determination, if the alternate payee is named the surviving spouse, must be made as to whether it is for the entire accrued benefit or that portion accrued before the divorce to him or her.

9. A proper description of the earliest retirement age rule. The earliest retirement age rule permits the nonparticipant to receive benefits if the QDRO requires payments on or after the earliest possible age of retirement.

10. Any special features that should be included in the QDRO.

11. A 100 percent allocation of all benefits. The QDRO must allocate all of the benefit to the participant and the nonparticipant.

Authored By: Theodore K. Long, Jr., President, Pension Appraisers Online, Inc.

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