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There is no single best way to divide pension benefits
in a QDRO. What will be best in a specific case will depend on many
factors, including the type of pension plan, the nature of the
participant's pension benefits, and why the parties are seeking to divide
those benefits.
In deciding how to divide a participant's pension
benefits in a QDRO, it is also important to consider two aspects of a
participant's pension benefits: the benefit payable under the plan
directly to the participant for retirement purposes (referred to here as
the retirement benefit), and any benefit that is payable under the plan on
behalf of the participant to someone else after the participant dies
(referred to here as the survivor benefit). These two aspects of a
participant's pension benefits are discussed separately in this booklet
only in order to emphasize the importance of considering how best to
divide pension benefits.
A QDRO can give an alternate payee any part or all of
the pension benefits payable with respect to a participant under a pension
plan. However, the QDRO cannot require the plan to provide increased
benefits (determined on the basis of actuarial value); nor can a QDRO
require a plan to provide a type or form of benefit, or any option, not
otherwise provided under the plan. The QDRO also cannot require the
payment of benefits to an alternate payee that are required to be paid to
another alternate payee under another QDRO already recognized by the plan.
Reference: ERISA §§ 206(d)(3)(B)(i)(I), 206(d)(3)(D),
206(d)(3)(E); IRC §§ 414(p)(1)(A)(i), 414(p)(3), 414(p)(4)
Generally, QDROs are used either to provide support
payments (temporary or permanent) to the alternate payee (who may be the
spouse, former spouse or a child or other dependent of the participant) or
to divide marital property in the course of dissolving a marriage. These
differing goals often result in different choices in drafting a QDRO. This
answer describes two common different approaches in drafting QDROs for
these two different purposes.
One approach that is used in some orders is to split
the actual benefit payments made with respect to a participant under the
plan to give the alternate payee part of each payment. This approach to
dividing retirement benefits is often called the shared payment approach.
Under this approach, the alternate payee will not receive any payments
unless the participant receives a payment or is already in pay status.
This approach is often used when a support order is being drafted after a
participant has already begun to receive a stream of payments from the
plan (such as a life annuity).
An order providing for shared payments, like any other
QDRO, must specify the amount or percentage of the participant's benefit
payments that is assigned to the alternate payee (or the manner in which
such amount or percentage is to be determined). It must also specify the
number of payments or period to which it applies. This is particularly
important in the shared payment QDRO, which must specify when the
alternate payee's right to share the payments begins and ends. For
example, when a state authority seeks to provide support to a child of a
participant, an order might require payments to the alternate payee to
begin as soon as possible after the order is determined to be a QDRO and
to continue until the alternate payee reaches maturity. Alternatively,
when support is being provided to a former spouse, the order might state
that payments to the alternate payee will end when the former spouse
remarries. If payments are to end upon the occurrence of an event, notice
and reasonable substantiation that the event has occurred must be provided
for the plan to be able to comply with the terms of the QDRO.
Orders that seek to divide a pension as part of the
marital property upon divorce or legal separation often take a different
approach to dividing the retirement benefit. These orders usually divide
the participant's retirement benefit (rather than just the payments) into
two separate portions with the intent of giving the alternate payee a
separate right to receive a portion of the retirement benefit to be paid
at a time and in a form different from that chosen by the participant.
This approach to dividing a retirement benefit is often called the
separate interest approach.
An order that provides for a separate interest for the
alternate payee must specify the amount or percentage of the participant's
retirement benefit to be assigned to the alternate payee (or the manner in
which such amount or percentage is to be determined). The order must also
specify the number of payments or period to which it applies, and such
orders often satisfy this requirement simply by giving the alternate payee
the right that the participant would have had under the plan to elect the
form of benefit payment and the time at which the separate interest will
be paid. Such an order would satisfy the requirements to be a QDRO.
Federal law does not require the use of either approach
for any specific domestic relations purpose, and it is up to the drafters
of any order to determine how best to achieve the purposes for which
pension benefits are being divided. Further, the shared payment approach
and the separate interest approach can each be used for either defined
benefit or defined contribution plans. However, it is important in
drafting any order to understand and follow the terms of the plan. An
order that would require a plan to provide increased benefits (determined
on an actuarial basis) or to provide a type or form of benefit, or an
option, not otherwise available under the plan cannot be a QDRO.
In addition to determining whether or how to divide the
retirement benefit, it is important to consider whether or not to give the
alternate payee a right to survivor benefits or any other benefits payable
under the plan.
Reference: ERISA § 206(d)(3)(C)(ii) - (iv); IRC §
414(p)(2)(B) - (D)
Understanding the type of pension plan is important
because the order cannot be a QDRO unless its assignment of rights or
division of pension benefits complies with the terms of the plan. Parties
drafting a QDRO should read the plan's summary plan description and other
plan documents to understand what pension benefits are provided under the
plan.
Pension plans may be divided generally into two types: Defined
Benefit Plans and Defined Contribution Plans.
A defined benefit plan promises to pay each participant
a specific benefit at retirement. This basic retirement benefit is usually
based on a formula that takes into account factors like the number of
years a participant works for the employer and the participant's salary.
The basic retirement benefit is generally provided in the form of periodic
payments for the participant's life beginning at what the plan calls
normal retirement age. This stream of periodic payments is generally known
as an annuity. A participant's basic retirement benefit under a defined
benefit plan may increase over time, either before or after the
participant begins receiving benefits, due to a variety of circumstances,
such as increases in salary or the crediting of additional years of
service with the employer (which are taken into account under the plan's
benefit formula), or through amendment to the plan's provisions, including
some amendments to provide cost of living adjustments.
Defined benefit plans may promise to pay benefits at
various times, under certain circumstances, or in alternative forms.
Benefits paid at those times or in those forms may have a greater
actuarial value than the basic retirement benefit payable by the plan at
the participant's normal retirement age. When one form of benefit has a
greater actuarial value than another form, the difference in value is
often called a subsidy.
A defined contribution plan, by contrast, is a type of
pension plan that provides for an individual account for each participant.
The participant's benefits are based solely on the amount contributed to
the participant's account and any income, expenses, gains or losses, and
any forfeitures of accounts of other participants that may be allocated to
such participant's account. Examples of defined contribution plans include
profit-sharing plans (like 401(k) plans), employee stock ownership plans
(ESOPs), and money purchase plans. A participant's basic retirement
benefit in a defined contribution plan is the amount in his or her account
at any given time. This is generally known as the participant's account
balance. Defined contribution plans commonly provide for retirement
benefits to be paid in the form of a lump sum payment of the participant's
entire account balance. Defined contribution plans by their nature do not
offer subsidies.
It should be noted, however, that some defined benefit
plans provide for lump sum payments, and some defined contribution plans
provide for annuities.
Reference: IRS Notice 97-11, 1997-2 IRB 49 (Jan. 13,
1997)
Federal law requires all pension plans, whether they
are defined benefit plans or defined contribution plans, to provide
benefits in a way that includes a survivor benefit for the participant's
spouse. The provisions creating these protections are contained in section
205 of ERISA and sections 401(a)(11) and 417 of the Code. The type of
survivor benefit that is required by Federal law depends on the type of
pension plan. Plans also may provide for survivor (or death) benefits that
are in addition to those required by Federal law. Participants and
alternate payees drafting a QDRO should read the plan's summary plan
description and other plan documents to understand the survivor benefits
available under the plan.
Federal law generally requires that defined benefit
plans and certain defined contribution plans pay retirement benefits to
participants who were married on the participant's annuity starting date
(this is the first day of the first period for which an amount is payable
to the participant) in a special form called a qualified joint and
survivor annuity (QJSA) unless the participant elects a different form and
the spouse consents to that election. When benefits are paid as a QJSA,
the participant receives a periodic payment (usually monthly) during his
or her life, and the surviving spouse of the participant receives a
periodic payment for the rest of the surviving spouse's life upon the
participant's death. Federal law also generally requires that, if a
married participant with a non-forfeitable benefit under one of these
types of plans dies before his or her annuity starting date, the plan must
pay the surviving spouse of the participant a monthly survivor benefit.
This benefit is called a qualified pre-retirement survivor annuity (QPSA).
Those defined contribution plans that are not required
to pay pension benefits to married participants in the form of a QJSA or
QPSA (like most 401(k) plans) are required by Federal law to pay any
balance remaining in the participant's account after the participant dies
to the participant's surviving spouse. If the spouse gives written
consent, the participant can direct that upon the participant's death any
balance remaining in the account will be paid to a beneficiary other than
the spouse, for example, the couple's children. Under these defined
contribution plans, Federal law does not require a spouse's consent to a
participant's decision to withdraw any portion (or all) of his or her
account balance during the participant's life.
If a participant and his or her spouse become divorced
before the participant's annuity starting date, the divorced spouse loses
all right to the survivor benefit protections that Federal law requires be
provided to a participant's spouse. If the divorced participant remarries,
the participant's new spouse may acquire a right to the Federally mandated
survivor benefits. A QDRO, however, may change that result. To the extent
that a QDRO requires that a former spouse be treated as the participant's
surviving spouse for all or any part of the survivor benefits payable
after the death of the participant, any subsequent spouse of the
participant cannot be treated as the participant's surviving spouse. For
example, if a QDRO awards all of the survivor benefit rights to a former
spouse, and the participant remarries, the participant's new spouse will
not receive any survivor benefit upon the participant's death. If such a
QDRO requires that a defined benefit plan, or a defined contribution plan
subject to the QJSA and QPSA requirements, treat a former spouse of a
participant as the participant's surviving spouse, the plan must pay the
participant's benefit in the form of a QJSA or QPSA unless the former
spouse who was named as surviving spouse in the QDRO consents to the
participant's election of a different form of payment.
It should also be noted that some pension plans provide
that a spouse of a participant will not be treated as married unless he or
she has been married to the participant for at least a year. If the
pension plan to which the QDRO relates contains such a one-year marriage
requirement, then the QDRO cannot treat the alternate payee as a surviving
spouse if the marriage lasted for less than one year.
In addition, it is important to note that some pension
plans may provide for survivor benefits in addition to those required by
Federal law for the benefit of the surviving spouse. Generally, however,
the only way to establish a former spouse's right to survivor benefits
such as a QJSA or QPSA is through a QDRO. A QDRO may provide that a part
or all of such other survivor benefits shall be paid to an alternate payee
rather than to the person who would otherwise be entitled to receive such
death benefits under the plan. As discussed above, a spouse or former
spouse can also receive a right to receive (as a separate interest or as
shared payments) part of the participant's retirement benefit as well as a
survivor's benefit.
Reference: ERISA §§ 205, 206(d)(3)(F); IRC §§
401(a)(11), 414(p)(5), 417
An order dividing a retirement benefit under a defined
contribution plan may adopt either a separate interest approach or a
shared payment approach (or some combination of these approaches). Orders
that provide the alternate payee with a separate interest, either by
assigning to the alternate payee a percentage or a dollar amount of the
account balance as of a certain date, often also provide that the separate
interest will be held in a separate account under the plan with respect to
which the alternate payee is entitled to exercise the rights of a
participant. Provided that the order does not assign a right or option to
an alternate payee that is not otherwise available under the plan, an
order that creates a separate account for the alternate payee may qualify
as a QDRO.
Orders that provide for shared payments from a defined
contribution plan should clearly establish the amount or percentage of the
participant's payments that will be allocated to the alternate payee and
the number of payments or period of time during which the allocation to
the alternate payee is to be made. A QDRO can specify that any or all
payments made to the participant are to be shared between the participant
and the alternate payee.
In drafting orders dividing benefits under defined
contribution plans, parties should also consider addressing the
possibility of contingencies occurring that may affect the account balance
(and therefore the alternate payee's share) during the determination
period. For example, parties might be well advised to specify the source
of the alternate payee's share of a participant's account that is invested
in multiple investments because there may be different methods of
determining how to derive the alternate payee's share that would affect
the value of that share. The parties should also consider how to allocate
any income or losses attributable to the participant's account that may
accrue during the determination period. If an order allocates a specific
dollar amount rather than a percentage to an alternate payee as a shared
payment, the order should address the possibility that the participant's
account balance or individual payments might be less than the specified
dollar amount when actually paid out.
Reference: ERISA §§ 206(d)(3)(C); IRC § 414(p)(2)
As indicated earlier, an order may adopt either the
shared payment or the separate interest approach (or a combination of the
two) in dividing pension benefits in a defined benefit plan.
If shared payments are desired, the order should
specify the amount of each shared payment allocated to the alternate payee
either by percentage or by dollar amount. If the order describes the
alternate payee's share as a dollar amount, care should be taken to
establish that the payments to the participant will be sufficient to
satisfy the allocation, and the order should indicate what is to happen in
the event a payment is insufficient to satisfy the allocation. The order
must also describe the number of payments or period of time during which
the allocation to the alternate payee is to be made. This is usually done
by specifying a beginning date and an ending date (or an event that will
cause the allocation to begin and/or end). If an order specifies a
triggering event that may occur outside the plan's knowledge, notice of
its occurrence must be given to the plan before the plan is required to
act in accordance with the order. If the intent is that all payments made
under the plan are to be shared between the participant and the alternate
payee, the order may so specify.
A defined benefit plan may provide for subsidies under
certain circumstances and may also provide increased benefits or
additional benefits either earned through additional service or provided
by way of plan amendment. A QDRO that uses the shared payment method to
give the alternate payee a percentage of each payment may be structured to
take into account any such future increases in the benefits paid to the
participant. Such a QDRO does not need to address the treatment of future
subsidies or other benefit increases, because the alternate payee will
automatically receive a share of any subsidy or other benefit increases
that are paid to the participant. If the parties do not wish to provide
for the sharing of such subsidies or increases, the order should so
specify.
If a separate interest is desired for the alternate
payee, it is important that the order be based on adequate information
from the plan administrator and the plan documents concerning the
participant's retirement benefit and the rights, options, and features
provided under the plan. In particular, the drafters of a QDRO should
consider any subsidies or future benefit increases that might be available
with respect to the participant's retirement benefit. The order may
specify whether, and to what extent, an alternate payee is to receive such
subsidies or future benefit increases.
Reference: ERISA §§ 206(d)(3)(C), 206(d)(3)(D); IRC
§§ 414(p)(2), 414(p)(3)
A QDRO that provides for a separate interest may
specify the form in which the alternate payee's benefits will be paid
subject to the following limitations:
-
The order may not provide the alternate payee with
a type or form of payment, or any option, not otherwise provided under
the plan
-
The order may not provide any subsequent spouse of
an alternate payee with the survivor benefit rights that Federal law
requires be provided to spouses of participants under section 205 of
ERISA
-
For any tax-qualified pension plan, the payment of
the alternate payee's benefits must satisfy the requirements of
section 401(a)(9) of the Code respecting the timing and duration of
payment of benefits. In determining the form of payment for an
alternate payee, an order may substitute the alternate payee's life
for the life of the participant to the extent that the form of payment
is based on the duration of an individual's life. The timing and forms
of benefit available to an alternate payee under a tax-qualified plan
may be limited by section 401(a)(9) of the Code
Alternatively, a QDRO may (subject to the limitations
described above) give the alternate payee the right that the participant
would have had under the plan to elect the form of benefit payment. For
example, if a participant would have the right to elect a life annuity,
the alternate payee may exercise that right and choose to have the
assigned benefit paid over the alternate payee's life. However, the QDRO
must permit the plan to determine the amount payable to the alternate
payee under any form of payment in a manner that does not require the plan
to pay increased benefits (determined on an actuarial basis).
A plan may by its own terms provide alternate payees
with additional types or forms of benefit, or options, not otherwise
provided to participants, such as a lump-sum payment option, but the plan
cannot prevent a QDRO from assigning to an alternate payee any type or
form of benefit, or option, provided generally under the plan to the
participant.
Reference: ERISA §§ 206(d)(3)(A), 206(d)(3)(D),
206(d)(3)(E)(i)(III); IRC §§ 401(a)(9), 401(a)(13)(B), 414(p)(3),
414(p)(4)(A)(iii)
A QDRO that provides for shared payments must specify
the date on which the alternate payee will begin to share the
participant's payments. Such a date, however, cannot be earlier than the
date on which the plan receives the order. With respect to a separate
interest, an order may either specify the time (after the order is
received by the plan) at which the alternate payee will receive the
separate interest or assign to the alternate payee the same right the
participant would have had under the plan with regard to the timing of
payment. In either case, a QDRO cannot provide that an alternate payee
will receive a benefit earlier than the date on which the participant
reaches his or her earliest retirement age, unless the plan permits
payments at an earlier date.
The plan itself may contain provisions permitting
alternate payees to receive separate interests awarded under a QDRO at an
earlier time or under different circumstances than the participant could
receive the benefit. For example, a plan may provide that alternate payees
may elect to receive a lump sum payment of a separate interest at any
time.
Reference: ERISA §§ 206(d)(3)(C), 206(d)(3)(D),
206(d)(3)(E); IRC §§ 401(a)(9), 414(p)(2), 414(p)(3), 414(p)(4)
For QDROs, Federal law provides a very specific
definition of earliest retirement age, which is the earliest date as of
which a QDRO can order payment to an alternate payee (unless the plan
permits payments at an earlier date). The earliest retirement age
applicable to a QDRO depends on the terms of the pension plan and the
participant's age. Earliest retirement age is the earlier of two dates:
Drafters of QDROs should consult the plan administrator
and the plan documents for information on the plan's earliest retirement
age. The following examples illustrate the concept of earliest retirement
age.
Example 1 -
The pension plan is a defined contribution
plan that permits a participant to make withdrawals only when he or she
reaches age 59½ or terminates from service. The earliest retirement age
for a QDRO under this plan is the earlier of:
-
When the participant actually terminates employment
or reaches age 59½
-
The later of the date the participant reaches age
50 or the date the participant could receive the account balance if
the participant terminated employment
Since the participant could terminate employment at any
time and thereby be able to receive the account balance under the plan's
terms, the later of the two dates described in above is age 50. The
earliest retirement age formula for this plan can be simplified to read
the earlier of:
-
Actually reaching age 59½ or terminating
employment or
-
Age 50. Since age 50 is earlier than age 59½, the
earliest retirement age for this plan will be the earlier of age 50 or
the date the participant actually terminates from service
Example 2 -
The pension plan is a defined benefit plan
that permits retirement benefits to be paid beginning when the participant
reaches age 65 and terminates employment. It does not permit earlier
payments. The earliest retirement age for this plan is the earlier of:
-
The date on which the participant actually reaches
age 65 and terminates employment, or
-
The later of age 50 or the date on which the
participant reaches age 65 (whether he or she terminates employment or
not)
Because age 65 is later than age 50, the second part of
the formula can be simplified to read age 65 so that the formula reads as
follows, the earliest retirement age is the earlier of:
Under this plan, therefore, the earliest retirement age
will be the date on which the participant reaches age 65.
Reference: ERISA § 206(d)(3)(E); IRC § 414(p)(4)
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