Drafting QDROs 101

In a divorce there is no single best way to divide a pension. In a given case, the division depends upon the type of pension plan, the nature of the participant’s pension benefits, and the reason the parties are dividing them.

In dividing a pension, the parties must consider two elements of a participant’s pension benefits: the retirement benefit paid directly to the participant for retirement and any survivor benefit paid under the plan on behalf of the participant to someone else after the participant dies.

The alternate payee can be awarded some or all of the pension benefits payable under a pension plan, but the QDRO cannot require the plan to provide increased benefits, nor can a QDRO require a plan to provide a type or form of benefit not otherwise provided under the plan. When a participant has had two spouses, for example, a QDRO also cannot provide benefits to one alternate payee that are paid to another alternate payee under another QDRO already recognized by the plan.

The reasons for dividing the pension benefits are important. Generally, a QDRO effects temporary or permanent support payments to the alternate payee, who is usually the spouse or former spouse but may be a child or other dependent of the participant, or it brings about the division of marital property in a divorce. Differing goals demand differing approaches; usually, the parties use either a shared payment or a separate interest model.

The shared payment model splits the benefit payments to give the alternate payee part of each payment. Under this regime, the alternate payee does not receive payments unless the participant receives a payment or is already in pay status. This approach is often used when a QDRO is being drafted after a participant has begun to receive a stream of payments from the plan, such as a life annuity.

A shared payment QDRO must specify the amount or percentage of the participant’s benefit payments assigned to the alternate payee or the manner in which such amount or percentage is calculated and the number of payments or period to which it applies. In the shared payment QDRO, the duration is particularly important; the order must specify when the alternate payee’s right to share the payments begins and ends. For example, a child support QDRO might require payments to the alternate payee that begin immediately and continue until he or she reaches maturity. A spousal support QDRO may stipulate that payments to the alternate payee end when he or she remarries. If payments end upon the occurrence of an event, notice and reasonable substantiation must be provided for the plan to comply with the terms of the QDRO.

A separate interest QDRO, on the other hand, divides a pension as marital property upon divorce or legal separation. These orders usually divide the participant’s retirement benefit into two separate accounts to give the alternate payee a separate right to a share of the retirement benefit to be paid at a time and in a form different from that chosen by the participant.

Like the shared payment routine, a separate interest QDRO specifies the amount or percentage of the participant’s retirement benefit to be assigned to the alternate payee or how such amount or percentage is to be calculated and the number of payments or period to which it applies. These orders often give the alternate payee the same right that the participant had to elect the form of benefit payment and the time at which the separate interest is paid.

Attorneys and clients must decide how best to achieve the purposes of the pension division. Federal law does not require the use of either approach for any specific domestic relations purpose. Moreover, the shared payment approach and the separate interest approach can be used for either defined benefit or defined contribution plans. However, it is important that any order follows the terms of the plan, for example, a QDRO requiring a plan to provide increased benefits as a type or form of benefit, or an option, not otherwise available cannot be approved.

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