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I used to work for PBGC and was a QDRO Coordinator for 4 years, so I am intimately familiar with how they would administrate such an order. You are correct, the AP would get half of the participant's remaining benefit; any subsequent spouse would be entitled to the remaining survivor benefit. The key would be if the order stated something like "in lieu of the benefits provided in paragraph x" or not. If it did, then the AP would only be entitled to the QPSA benefit, if it did not, then the AP would get both her "separate" share and the QPSA share. Also, although PBGC does not require language dealing with what happens if the participant dies first, most of the QDROs I dealt with still had it; some (not common) even specified that the AP would get nothing if the participant died first. They may no longer allow that (it's been 4 years since I worked there), but it wouldn't surprise me if they did.

I am trying to wrap my mind around the idea that there are unresolved issues concerning something that arose pre-ERISA. That was over 40 years ago! Never mind the way that this thing seems to operate something like a tontine. I do not understand the way that it is supposed to work, let alone how it would be made to work in the context of an ERISA plan.

The IRS would disagree.

Forget for a moment that these are life insurance policies and think of them as self-directed investments. Participants (in theory) elected to purchase these investments with some of their other account money. They can choose to move the current value back to the other investments, or they can leave it where it is. Assuming the policies were set up properly in the first place (a fairly big assumption, given what all of us have seen screwed up by life insurance agents), then they are owned by the plan, and surrendering the policy(ies) just means moving money from one part of the plan to another. You're not moving funds "to" the plan, you are moving funds "within" the plan. Hence no taxable event. In a perfect world, or just a reasonable one, the insurance policies would be tracked as "PS" or whatever kind of money they were originally bought with. Unfortunately, some administrators choose to show premiums as "expenses" of the plan, which then leads them to ignore the values of the policies for asset reporting purposes. Possibly the reason for some of the confusion about moving "to" or "within" the plan.