QDRO's

There are generally just two types of survivor benefits offered under ERISA-governed defined benefit pension plans. One is a survivor annuity that "kicks in" if the participant dies before retirement, and the other provides a survivor annuity based on the participant's election at retirement. In other words, one is a "pre-retirement" death benefit (known as the Qualified Pre-retirement Survivor Annuity, or "QPSA") and the other is a "post-retirement" death benefit (known as the Qualified Joint and Survivor Annuity, or "QJSA"). Under Section 414(p) of the Internal Revenue Code, an alternate payee under a QDRO could be treated as a surviving spouse of the participant for either or both the QPSA or the QJSA. It is critical that family law attorneys understand the distinction and address them separately, as applicable, under a QDRO.

The Qualified Pre-retirement Survivor Annuity ("QPSA")

Regardless of the QDRO approach you utilize (separate interest approach vs. shared interest approach), your QDRO should include qualified pre-retirement survivorship protection for the alternate payee. This is the only way to secure the alternate payee's benefits in the event of the death of the participant before their benefit commencement date. Even for QDROs that utilize the separate interest approach (ie: those that actuarially adjust the alternate payee's benefits to his/her own life expectancy), the alternate payee could forfeit his/her rights to any benefits should the participant die before the alternate payee commences benefits. The key issue here is whether or not the alternate payee has already commenced benefits. If the alternate payee has already commenced benefits under a separate interest QDRO, the QPSA is a moot point. The alternate payee's benefits should continue for life in any event. However, if the alternate payee has not yet commenced benefits, the QPSA is the only means of protecting the alternate payee's interest in the pension.

Many attorneys simply include language in their QDRO that states "the alternate payee is treated as a surviving spouse for purposes of the plans pre-retirement survivor annuity." This language is rather vague and could be rejected by the plan administrator. It is not good enough to simply state that the alternate payee is entitled to such pre-retirement survivorship protection. A QDRO must also include the extent to which the alternate payee is to receive such pre-retirement survivor benefits. In other words, how much of the QPSA benefit will the alternate payee receive? Your QDRO could provide that the alternate payee receives any and all QPSA benefits that may become payable under the plan in the event of the participant's death before retirement. However, this may not be considered "equitable." For example, if the participant is remarried, perhaps some of the pre-retirement death benefits should become payable to his/her new spouse, while a proportionate share becomes payable to the alternate payee based on the marital portion of the participant's benefits.

Alternatively, you could include language in the QDRO that provides the alternate payee with a pre-retirement survivor annuity "to the extent of her assigned interest." Then, any remaining survivor annuity benefits could become payable to the participant's subsequent surviving spouse. To take it one step further, you could include language in the QDRO that provides the alternate payee with all of the QPSA benefits if the participant is not remarried on the date of his death and then limit the alternate payee's QPSA benefits to the extent of his/her assigned interest if the participant is remarried. Usually, QPSA benefits under a pension plan are based on a 50% joint & survivor annuity. The plan would base such benefits on the amount that the participant would have received had he retired on the day before his death and elected his benefits in the form of a reduced 50% joint & survivor annuity. If you limit an alternate payee's benefits to the extent of his/her assigned interest, and the participant is not remarried on the date of death, any QPSA benefits in excess of the alternate payee's assigned share will inure to the plan. It may make sense in this case to provide the alternate payee with maximum QPSA benefits rather than having the excess benefits evaporate.

Usually the QPSA benefit is a "free" benefit. In other words, the participant's benefits are not reduced to reflect the fact that he/she had this coverage in place during his/her working career. In the pension vernacular, this is considered a fully subsidized benefit. The reasons are simple. If the plan were to administer a charge for this QPSA coverage, they would have to allow the participant to opt into and out of this coverage at any point during his career and as many times as he/she may elect. This poses a huge administrative burden for the plan administrator. They would have to maintain records for plan participants for their entire career to monitor their QPSA elections and then calculate the charges accordingly upon their dates of retirement. Because the "insurance-type" charge for a QPSA is relatively small (ie: a participant's benefits might only be reduced by .2% for each year of coverage) most companies believe that subsidizing this small charge outweighs the time and expense associated with monitoring the QPSA election procedures.

The (Post-retirement) Qualified Joint and Survivor Annuity (QJSA)

This is the form of survivor benefit that most attorneys are familiar with. When a participant retires, he/she elects a form of benefit from among several options available under the plan. Under federal law, a married participant at retirement must elect his/her benefits in the automatic form of a 50% qualified joint and survivor annuity (the "QJSA"). The participant could elect an alternative form of benefit with the written, notarized consent of the spouse. Under the 50% joint & survivor annuity, the participant will receive a reduced monthly benefit during his/her lifetime, and upon his/her death, the surviving spouse will receive 50% of such reduced amount for the remainder of the spouse's lifetime.

Under section 414(p) of the Internal Revenue Code, an alternate payee under a QDRO could be treated as the surviving spouse of the participant with respect to any or all of this post-retirement survivor coverage. If you utilize the "shared interest" approach for your QDRO, and you represent the alternate payee, it also better include QJSA protection for the alternate payee. Without proper post-retirement survivorship language, the alternate payee will forfeit all rights to any benefits upon the death of the participant.

If your QDRO utilizes the "separate interest" approach, you do not have to include post-retirement survivorship protection for the alternate payee. This is because the alternate payee's benefits are actuarially adjusted to his/her own lifetime and the participant's death after the alternate payee's benefit commencement date will not affect the alternate payee's rights to continued benefits.

Like the qualified pre-retirement survivor annuity (the "QPSA"), your QDRO must also include the extent to which the alternate payee is entitled to such post-retirement joint & survivor annuity coverage. You could include language that provides the alternate payee with post-retirement survivorship protection "to the extent of his/her assigned interest." Any remaining QJSA benefits could then become payable to the subsequent spouse of the participant.

In situations where the alternate payee is younger than the participant (and will likely, from an actuarial perspective, out-live the participant) it may be in the best interests of the participant to utilize the "separate interest" or actuarially adjusted QDRO. In this manner, the participant will not be required to elect a reduced joint & survivor annuity upon retirement and will be free to elect from any other available options under the plan. Here, it may make sense for the participant to forfeit any reversionary interests he/she would otherwise have in favor of receiving a higher benefit during his/her life.