Benefit offset due to QDRO

[David MacLennan]

1 person DB plan (takeover) had the unfortunate overused 10% x YOS formula, and PVAB outstripped assets by 2:1. Divorce occurs, and QDRO dictated split of plan assets 50/50. Benefits were not split 50/50 as this would mean the alternate payee spouse gets all plan assets, so assets were split 50/50. As of a certain date, spouse was paid 50% of FMV assets. If benefit offset for plan sponsor due to QDRO is determined by the actuarial equivalent of the distribution amount, the underfunding becomes worse, because assets are cut in half, and benefits have only been reduced by 1/4. Can one reason somehow that the benefit offset should be half the accrued benefit, as this would help reduce the 412 funding? Doesn't seem possible, but thought I would solicit some advice. Should the QDRO have been worded that she (alternate payee) is receiving half the AB, but the "allocation" is only half to reflect the extent funded (as discussed in other threads on this message board relating to plan termination)? I suppose this still would not be valid for 412 purposes.

If plan termination is the only answer for this plan's problems, then would future DB plan's 415 offset be determined by actual distributions to participant and alternate payee, or accrued benefits under the plan?

[QDROphile]

I am a rather simple sort. I look at section 414(p) and see that a QDRO gives an alternate payee the right to all or a portion of BENEFITS payable to a participant. The plan may have a problem with sufficiency of assets to pay accrued benefits, but you can't avoid consequences as manifested in terms of benefits.

I can see sizing the alternate payee's interest, as specified in the QDRO or computed in a manner provided in the QDRO, to allow the AP to be paid from an agreed portion of available existing assets. If the plan paid 50% of its assets to the AP, the value of the the assets corresponds to the value of some portion of the participant's accrued benefit (determined in accordance with the plan's actuarial specifications and assumptions), so the particpant would lose that portion of the accrued benefit. You suggest that 50% of the value of the assets would be something like 25% of the value of the particpant's accrued benefit. Hooray! The participant avoided having to give up 50% of the participant's benefit (and all the assets). The remainder of the benefit after subtracting the alternate payee's benefit is the participant's new accrued benefit. In our example, the participant' benefit is now 75% of the original accrued benefit. The plan has 50% of the original assets. The funding got worse.

[AndyH]

Who determined that the DRO was a QDRO and when? I may be stating the obvious, but how can a QDRO assign something (assets) that doesn't belong to the participant? How can that be a QDRO?

Again, this is perhaps too obvious, but is there still time to declare the DRO to be invalid? And what happens if the administrator receives a bogus DRO and does nothing? I'd have to brush up on that stuff but I'm sure that QDROphile knows these answers off hand.

[QDROphile]

As long as the order translates to benefits and provides for a proper divison, it can qualify. It is possible to use assets to define a portion of the particpant's benefits. No particular words are necessary. But Andy H is correct. If the plan administrator can't follow the translation from assets to a measure of benefits, the order won't qualify. Perhaps the original post arose out of doubt about what the AP's benefit really was.

It seemed to me from the description that the order was carefully constructed. Even though it is unconventioonal to start by looking at assets, it eventually got to a benefit equivalent. In a one person DB plan, it is not so surprising to focus on assets, because the plan is just a device to set aside assets for the participant. That approach won't work in a DB plan with more participants. But you can still use any number of measuring devices to arrive at a description of the portion of a participant's benefits to award to an alternate payee, subject to the other qualification requirements. For example, you could award an alternate payee the portion of the participant's accrued benefit that has an actuarial equivalent value of $X as long as that value is not more than the value of the accrued benefit. That is how I read the post.

[AndyH]

Understood. But then for the QDRO to be valid it must somehow translate assets to benefits, it would seem. And how else but through the plan's actuarial equivalency definition if the QDRO is silent on the matter? Perhaps the QDRO should have said this. But it would seem that some connection is needed in order to prevent, for example, a 415 violation.

So, in response to the original question, my two cents says that the actuarially equivalent benefit to the assets distributed must be the amount considered to have been paid.

[QDROphile]

Agreed.

[David MacLennan]

Thank you all for your help on this. Indeed, the QDRO was worded to say the alternate payee's benefit was the actuarial equivalent of 1/2 the value of the assets as of a agreed upon date.

My thinking was along the lines of what happens during a plan termination, where benefits are paid only to the extent funded. QDRO's in my 1-person DB plans seem to be relatively common. I wonder if a plan provision worded to the effect that the alternate payee's benefit would be paid only "to the extent funded" would have worked in this case to help avoid exacerbating the underfunding problem. Then, the QDRO would award the AP half of the accrued benefit, but she would only be paid half the assets (?). However, as in a plan termination, for 412 it seems this would still have to be ignored, and for 415 the participant would be considered to have received the full 1/2 AB (?). Very confusing, and probably not worth much more thought.

If there's a lesson in this, it is yet another reason to not let liabilities get too far out of sync with assets, even in a 1-person DB plan.

[Mike Preston]

Agreed. It is time to have a serious discussion with the client and determine whether the client wants to terminate the plan and therefore avoid ongoing deficiences, or whether the actuary can reevaluate the retirement assumption to reduce 412.