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Sometimes a practitioner advises a nonparticipant to take a buyout in lieu of a QDRO. The appeal of such a routine is obvious: the nonparticipant gets the cash or an asset of equal value now in lieu of a future benefit later, and depending upon the finances of the nonparticipant (who is often the wife) this routine seems up front and appealing. Sometimes a buyout appeals to the nonparticipant for emotional reasons -- a line in the sand that reinforces the reality of the end of the marriage.
The problem with it, however, is fairly valuing the buyout, particularly in the case of defined benefit plans.
Generally, in a buyout, the spouses enter into an agreement outside the terms of QDRO rules after an independent actuary determines the current market value of the retirement benefit, and the participant buys out the nonparticipantís interest in the asset with cash or a property offset.
In evaluating a buyout versus a QDRO, a practitioner must consider 1) the type of retirement plan (defined benefit versus defined contribution), 2) the determination of the present value of the benefit (including the current discount rate and mortality tables), and 3) whether immediate payment of a future benefit is required, tax implications and benefit protection.
The market value of a defined contribution plan can be determined from the participantís monthly statements. The value of a defined benefit is much more difficult because the retirement plan, which provides a specific benefit at retirement, does not state the present value of each participantís benefit, and it states only a estimated benefit at normal retirement. Thus, an actuary uses the estimated benefit, and working backwards, determines a present value from which a buyout can be negotiated.
The present value of a defined benefit plan is based on the accrued benefits normally at the time of cut off date of the marriage, credit service as of that date, mortality and interest rates; by comparison, the present value of defined contribution plan is the account balance on a given date.
Disputes in conjunction with buyouts happen because different actuarial assumptions produce different results; for example, different interest rates produce very different results.
Moreover, in defined benefit plans, the life expectancy or mortality of the participant plays a significant factor in determining the present value of the benefit. This consideration must be weighed when the participant is older than the nonparticipant, as it often the case.
The valuation date also must be considered in deciding upon a buyout versus a QDRO. The jurisdictions consider the period of marriage differently. For example, in some states, for purposes of valuing separate and marital property, the marriage ends on the separation date; in others, the marital assets are divided on the date of divorce. Often, a separation date valuation generally works to the advantage of the participant, since the value will be lower; a date of divorce generally works to the advantage of the nonparticipant, since the value will be greater.
A practitioner should also consider the implication of special events, such as the dates when the employer credits profit sharing incentives in the case of a defined contribution plan, or changes in the benefit formula in the case of defined benefit plans.
Another consideration is vesting. Most plans have a vesting requirement, sometimes up to 10 years. If the participant is not vested, a calculation of present value be overstated, if he or she is terminated before becoming vested. This works to the disadvantage of the participant considering offering a buyout to his or her spouse.
The death of the participant, particularly if he or she is not vested, can affect the pension benefit.
A buyout precludes any postdivorce increases that might come to the participant and with a QDRO be shared with the nonparticipant. Suppose, for example, that a participant retires under an early retirement option that includes a subsidy. Had the nonparticipant elected a QDRO in lieu of a cash buyout, she would possibly have shared in that benefit.
Authored By: Theodore K. Long, Jr., President, Pension Appraisers Online, Inc.
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