Making use of a revocable interest with a QDRO. This regime can be used to fund alimony agreements, provide for child support payments, provide for security interests or provide for a limited number of benefit payments.
Most QDROs stipulate the terms and conditions of an outright, unconditional assignment of present or future monetary interests in the participant’s benefits to an alternate payee in exchange for his or her marital property rights.
Under the Internal Revenue Code, the term assignment includes any direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest in a plan or any part of a plan benefit payment payable to the participant or beneficiary. A revocable assignment is an assignment providing that the assignment of benefits terminates or changes in time or the happening of some defined event.
Traditionally, QDROs involving defined benefit plans (DB plans) assign separate interest or stream of interest benefits to an alternate payee that are permanent and nonrevocable interests. The benefits are normally payable for the life of the alternate payee. When the alternate payee dies the benefits cease and the participant’s benefits continue at the reduced rate.
In the case of alimony, when a DB plan is in or near pay status, an assignment of an interest can serve as a funding vehicle for or a substitute for alimony, which converts the alimony from an unsecured order or promise to pay into a guaranteed order. Although uncommon, there is no prohibition that prevents an interest to an alternate payee from terminating upon the death of the alternate payee or any other contingency, such as the remarriage of the former spouse. In order for an assignment of this type to work, however, the assignment must be a stream-of-payments interest, that is, the payments do not begin to the alternate payee until the participant receives benefits. The alternate payee cannot make any elections under the plan. The happening of the first of any contingency in the order or agreement terminates the payments and the benefits “pop-up” to the participant.
Sometimes couples negotiate limited payments payee contingent upon the death of the alternate payee. The assigned interest takes a stream-of-payments benefit, that is, they do not begin until the participant begins receiving benefits, and he or she is not allowed to make any elections under the plan. For example, when it is likely that the participant will outlive the alternate payee by a number of years, an interest in the participant’s plan can be assigned to an alternate payee contingent upon the alternate payee’s death. The assigned interest takes a stream-of-payments benefit, that is, it does not begin until the participant begin receiving benefits, and he or she is not allowed to make any elections under the plan. When the death contingency takes place, the payments would “pop-up” to the participant. This type of arrangement could be used as a substitute for a short-term alimony arrangements where funding of the alimony is guaranteed by the plan. Under this type of arrangement, the defined benefit plan must be near or in pay status.