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Earliest Retirement Age - Disability Pension


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The question is whether the payment of an auxiliary disability benefit or a disability pension under a defined benefit pension plan is a "distribution" for purposes of determining the earliest retirement age under a separate interest qdro so as to permit a lifetime payment to the alternate payee to begin at the participants disability.

The ugly details follow.

Defined benefit pension plan has an auxiliary disability benefit equal to the participant's unreduced accrued benefit at the time of disability. Payment requires disability and 15 years of service. If the disability continues until normal retirement age, the participant is eligible for a normal retirement pension and is provided with the joint and survivor annuity election then. If the participant recovers before normal retirement age, the participant is eligible for whatever pension then age and service will provide, and a joint and survivor election will be provided then. Essentially, I view this as a welfare type benefit paid to a disabled participant during the period of disability before normal retirement age. (Under IRS regs, the payment of an auxiliary disability benefit is not an annuity starting date, and does not trigger a joint and survivor election.)

I think the payment of this disability benefit should not be considered a "distribution" to determine earliest retirement age (under a separate interest qdro awarding alternate payee a lifetime benefit), based on the theory that the alternate payee was awarded a portion of the participant's pension benefit, and payment of a welfare type disability benefit not related to a pension benefit should not be a distribution for purposes of determining the earliest retirement age for the awarded pension benefit. Also, payment of a lifetime benefit to the alternate payee upon participant's disability arguably provides the alternate payee with a benefit of a lifetime payment not otherwise provided under the plan.

It is a closer call if if the disability benefit under the Pension Plan is a disability pension that results in an annuity starting date and form of payment election at the participant's disability. But even then, payment of the disability benefit to the participant before normal retirement age is contingent on the participant's ongoing disability. Thus, the payment of a lifetime benefit to the alternate payee without recognizing this contingency arguably provides the alternate payee with a benefit not otherwise provided by the plan. Also, even though a form of payment of election is provided to the participant, the early payment of the disability pension arguably still is not a pension or retirement benefit until the regular pension payment date, and thus, should not accelerate the lifetime payment of a pension benefit awarded to an alternate payee.

My preliminary conclusion then is not to allow payment to an alternate payee begin under a separate interest qdro until the earliest retirement age determined without regard to the payment of a disability benefit or pension (whether or not an auxiliary disability benefit). This would avoid having to address a number of issues that would be raised if the alternate payee's payment begins when the participant is 30 some years old, like (1) actuarial adjustment for early payment; (2) alternate payee's right to elect alternative forms of payment and related adjustments; and (3) impact of participant's recovery.

However, it might be permissible for an alternate payee to be assigned a part of the disability benefit or pension under a shared payment provision.

Sorry that this is so long, but I have thought about this for a while, and I am interested in other folk's thoughts.

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  • 2 months later...
Guest Grabitquick

Sorry for responding to such an old post, but RTK hits on an issue that I'm dealing with now. I agree about the auxiliary disability benefit--not an "earliest retirement age" for QDRO purposes. I'm not as concerned about the commencement of benefits to the alternate payee under a plan that provides a disability benefit in annuity form--in fact, in our office we have a separate interest model QDRO for a DB plan that allows just that, and the terms of the plan allow it also, so it effectively works under 414(p)(4)(b). I also think that it's much tougher to argue that this type of disability is not a pension or annuity payment, since it is presumably payable for the participant's life. (On the other hand, there's some case law here in California that says, strictly speaking, the disability benefit is not community property subject to division. I haven't looked at the cases in a long time, but my guess is that they don't distinguish between the two types of disability benefits.)

A question arises under the latter scenario above (disability benefit paid as annuity) where I wonder how it works when the entire disability benefit is paid to the participant initially and the alternate payee cannot commence benefits until the regular earliest retirement age. This is particularly acute in the context of a purported separate interest QDRO. Let's say the plan allows a disability annuity at age 45 with 10 years of service, and a 45 year old participant commences a disability benefit. Regular earliest retirement age is 55. Participant, either before or after the disability starts, gets divorced but the parties don't enter a QDRO until after benefits have commenced, and under the QDRO the AP cannot start benefits until the participant reaches (or would have reached) 55. So, participant gets everything until age 55.

It should be fairly simple to draft a shared interest QDRO under these circumstances, but a separate interest QDRO would by necessity call for a bifurcation of the participant's annuity years after it has commenced. Even if you could forestall anti-selection issues (for example, by expressly providing in the QDRO that the participant cannot change his or her original annuity election as to form of payment), I wonder if any actuarial issues or costs are raised by the late bifurcation of the annuity. I also wonder about some of the drafting and actuarial issues involved if the participant dies before age 55--the plan has anticipated (for example) a life only annuity that stops when the participant dies, but now has a QDRO that provides an additional benefit to the AP.

If it weren't late, I could probably think of other issues involved, but I'm worn out. Any thoughts from anyone out there?

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