"Separate Interest" vs. "Shared
Payment" QDRO: What's the Difference?
This is one of the most confusing
QDRO areas which can often lead to failed QDROs. Or even worse,
it could lead to an accepted QDRO that does not carry out
the intentions of the parties. For the alternate payee, it's
the difference between receiving a lifetime annuity or nothing
at all. For the alternate payee's attorney, it could be much
worse. It is critical to understand the major difference between
the two basic approaches to drafting QDROs for defined benefit
pension plans. The sole distinction rests on whose life expectancy
the alternate payee's share of the benefits are based.
Interest" QDRO (Where benefits are based on the Alternate
Payee's Life Expectancy)
Under a separate interest QDRO,
the alternate payee's share of the benefits is "actuarially
adjusted" to her own life expectancy. In essence, the
assigned portion of the benefits is carved out and actuarially
adjusted to provide the alternate payee with her own separate
interest in a lifetime annuity. Also, unlike the shared payment
QDRO, the alternate payee can commence her share of the benefits
before the participant actually retires. For example, assume
that a participant retires with a pension of $2,000 per month,
and it is the intention of the parties to provide the participant
with $1,000 per month and the alternate payee with $1,000
per month. However, one must remember that pension plans are
funded to provide the "participant" and not the
alternate payee with a lifetime annuity. If the alternate
payee was ten years younger than the participant, the plan
would likely have to pay the alternate payee's $1,000 share
of the benefit over a longer period of time if the actuarial
tables hold true. If the QDRO in our example included language
that simply provided the alternate payee with $1,000 per month
(1/2 of the pension) for the remainder of her lifetime, this
would violate ERISA's prohibition of providing increased benefits
under a QDRO and it would be rejected.
Under a separate interest QDRO,
the alternate payee who is ten years younger than the participant
may receive only $800 per month rather than $1,000 for the
rest of her life to reflect her longer life expectancy.
This life expectancy issue
is also important from a QDRO survivorship perspective. If
your QDRO utilizes the separate interest approach and instructs
the plan administrator to pay the alternate payee on an actuarially
adjusted basis for the rest of her lifetime, the death of
the participant after the alternate payee's benefit commencement
date should not affect the alternate payee's rights to continued
benefits. It is critical for family law attorneys to understand
the ramifications of ERISA's joint & survivor benefits
depending on whose life expectancy the alternate payee's benefits
are based. If you use the separate interest approach, you
do not have to include post-retirement joint & survivor
protection in the QDRO for the benefit of the alternate payee.
Because the alternate payee is already guaranteed a lifetime
of actuarially adjusted benefits (once they commence), the
QDRO should not require the participant to elect benefits
in the form of a reduced joint & survivor annuity. The
participant is free to elect any form of benefits available
under the plan with respect to his share of the benefits,
including perhaps a single-life annuity without any reduction.
If the participant is remarried, he can elect a joint &
survivor benefit for the new spouse. This is one of the advantages
of the "separate interest" QDRO. It provides a lifetime
of benefits for the alternate payee while at the same time
permitting the participant to elect any form of benefits for
his remaining share.
Some Plan Administrators
Vary in their Treatment of Separate Interest QDROs
Once the alternate payee commences
her benefits under a separate interest QDRO, she will continue
to receive them for the remainder of her lifetime. However,
it is still usually necessary to include "pre-retirement"
survivorship protection in the QDRO to secure the alternate
payee's benefits in the event of the participant's death "before
retirement". Then, if the participant dies before retirement,
the alternate payee will receive a pre-retirement survivor
annuity in lieu of her regular assigned share of the benefits.
The alternate payee will not generally receive both the assigned
interest and the pre-retirement survivor annuity. It is one
or the other.
However, some plan administrators
do not even require pre-retirement survivorship protection
in a separate interest QDRO. Once it is clear that the QDRO
provides the alternate payee with an actuarially adjusted
benefit, the alternate payee's benefits are "secure."
The participant's death, either before or after retirement,
will not impact the alternate payee's rights to continued
benefits. A word of caution. If you determine that a plan
administrator does not require any pre-retirement survivorship
language in their separate interest QDROs, you should include
an affirmative statement in the QDRO that "It is understood
that the plan administrator utilizes a totally severed approach
to administering their separate interest QDROs and the participant's
death, either before or after retirement, will not affect
the alternate payee's rights to her benefits as set forth
herein." This is recommended in the event the plan administrator
ever modifies their QDRO procedures.
In cases where the plan administrator
does not require pre-retirement survivorship language in order
to secure the alternate payee's benefits, they may nonetheless
accept this language in the QDRO, which could then provide
the alternate payee with a windfall. She would receive both
her assigned separate interest in the participant's pension
regardless of the participant's death, and an additional pre-retirement
survivor annuity in the event of the death of the participant
before retirement. Clearly, this is never the intent of the
parties, and in this case, you should remove the pre-retirement
survivor annuity language from the QDRO.
for the Participant of the Separate Interest QDRO: Reversionary
As stated above, in many cases,
the separate interest approach can be an advantage for the
participant. It allows the participant to elect any form of
benefit under the plan. However, under the separate interest
approach, once the plan administrator actuarially adjusts
the alternate payee's benefits to her own lifetime, the chance
for a reversion to the participant is lost once the alternate
payee's benefits go into pay status. In other words, if the
alternate payee predeceases the participant after her benefit
commencement date, the alternate payee's share of the benefits
evaporates rather than reverting back to the participant.
This is where some strategy
should enter the picture when you negotiate QDRO issues for
your client. If you represent the participant who has a former
spouse in ill-health for example, you should probably not
use a separate interest QDRO. The "shared payment"
QDRO discussed below, could be in your client's best interest.
Under the shared payment QDRO, the alternate payee's share
of the benefits would revert back to the participant in the
event of the premature death of the alternate payee. This
is true even if the alternate payee predeceases the participant
after her benefit commencement date.
The "Shared Payment"
QDRO (Where benefits are based on the Participant's Life Expectancy)
The shared payment approach
is the second type of QDRO for a defined benefit pension plan.
In essence, the alternate payee simply shares a portion of
the participant's benefits when they go into pay status. Generally,
under this approach, the alternate payee must wait until the
participant actually retires before she can commence her portion
of the benefits. Further, because the alternate payee's share
of the benefits is not actuarially adjusted to her life expectancy,
her share of the benefits will generally revert to the participant
upon the alternate payee's death.
While this reversion issue
could play an important part in the negotiation strategy,
the participant should understand that there is a trade-off.
In order to maintain full reversionary rights in the event
of the alternate payee's death, the participant would typically
be required to elect benefits in the form of a reduced joint
& survivor annuity upon retirement. Because the alternate
payee's share of the benefits is not actuarially adjusted,
the only means of securing the alternate payee's benefits
(ie: providing a lifetime of benefits to the alternate payee)
is to require the participant to elect a reduced joint &
survivor annuity at retirement for the benefit of the alternate
payee. Without a post-retirement joint & survivor election
by the participant, the alternate payee's share of the benefits
would cease at the death of the participant. In this case,
if the participant died just one month after retirement, the
alternate payee would not receive any benefits unless the
participant had elected a reduced joint & survivor annuity
and the QDRO included proper language that treated the alternate
payee as the participant's surviving spouse.