QDRO Administrative Assumptions

[Guest qdroatty]

I am drafting a QDRO to conform to provisions of a settlement agreement which I did not draft. The Settlement agreement provides cryptically as follows "The wife shall be entitled to surviving spouse rights under this Plan."

The plan is a DB plan and the SPD has only cursory mention of QDROs. However, the QDRO Administrative Procedures and model forms provided by Hewitt state that in the event the AP is granted a separate interest under the QDRO and the Participant predeceases the AP that the AP's "benefit will be unaffected." In this instance, it my understanding that the AP is not in danger of receiving nothing in the event the Particpant dies before her.

This result seems to run counter to most of the DB plans I have seen. I would be interested to know what other folks' experience had been and what thoughts they might have about the impact this provision has on the provision of surviving spouse rights.

Thank you in advance for your thougths.

[QDROphile]

It is a matter of plan design and I have no idea how it breaks down statistically. I don't recommend a true separate interest for DB plans.

The design choice has actuarial implications because the AP' life is injected into a portion of the benefits in a way that is adverse to the plan. I have been told by some actuaries that the effect is so small over all that they make no separate adjustment to benefits. I do not know if this is the universal approach, but it probably does not matter because you cannot change it. You can recognize it and adjust the division formula if the terms of property settlement allow.

Even if the plan says that the AP's interst is truly separate, it would be a good idea to make sure the terms of the order make it clear that the AP will be paid the assigned portion of the regular benefit without regard for the death of the participant before the AP.

The terms of the settlement agreement also raise an interesting question. Does the AP get the pre-retirement and post-retirement survivor annuity of the portion of the participant's benefits that is not awarded as a separate interest to the AP? Literally, that is what the words mean, whether or not that was intended. The alternate payee could start benefits under the AP's share of regular benefits. The participant would have to take benefits in the form of a 50% J&S annuity. If the participant dies first, the AP continues the AP's regular benedfit and the picks up the survivoar annuity payments from the participant's portion whether or not the particpant has remarried and accrued benefits during the second marriage. This gives the AP further incentive to kill the participant, even if other aspects of the divorce were not sufficient in the first place.

Because of this potential confusion of terms, I never let a domestic relations order go by with a simple statement that the AP is to be treated as a suviving spouse. Many of its implication are not intended.

[Guest qdroatty]

I could not agree more about the unintended consequences of the "surviving spouse" language. As I mentioned, I represent the Participant in the QDRO matter and have given a lot of thought to the vagueness of the settlement agreement provisions. Please indulge me while I quote you the rest of the language (all 2 sentences of it) that deals with the pension plan.

"The parties agree that the wife shall be entitled to receive 50% of the income payable to the husband under said Plan, as of the date of his separation or retirement, and shall have her prorata share of all subsequent increases/losses and investment experience on her share. The husband shall be entitled to the remaining funds in the pension plan.... The wife shall be entitled to surviving spouse rights under this Plan."

Obviously, some lawyer or lawyers had a close call with some 401(k) QDRO language in a previous life. Be that as it may, the more I think about this language, the more inclined I am to tell my client that what his ex-wife got was a shared interest and that in that instance surviving spouse rights are appropriate to protect a portion of that interest in the event he dies.

To some extent, this would also disincintivize her to kill him.

Please let me know your thoughts on this latest interpretation of the "QDRO" language in the settlement agreement.

Thanks in advance.

It is a matter of plan design and I have no idea how it breaks down statistically. I don't recommend a true separate interest for DB plans.

The design choice has actuarial implications because the AP' life is injected into a portion of the benefits in a way that is adverse to the plan. I have been told by some actuaries that the effect is so small over all that they make no separate adjustment to benefits. I do not know if this is the universal approach, but it probably does not matter because you cannot change it. You can recognize it and adjust the division formula if the terms of property settlement allow.

Even if the plan says that the AP's interst is truly separate, it would be a good idea to make sure the terms of the order make it clear that the AP will be paid the assigned portion of the regular benefit without regard for the death of the participant before the AP.

The terms of the settlement agreement also raise an interesting question. Does the AP get the pre-retirement and post-retirement survivor annuity of the portion of the participant's benefits that is not awarded as a separate interest to the AP? Literally, that is what the words mean, whether or not that was intended. The alternate payee could start benefits under the AP's share of regular benefits. The participant would have to take benefits in the form of a 50% J&S annuity. If the participant dies first, the AP continues the AP's regular benedfit and the picks up the survivoar annuity payments from the participant's portion whether or not the particpant has remarried and accrued benefits during the second marriage. This gives the AP further incentive to kill the participant, even if other aspects of the divorce were not sufficient in the first place.

Because of this potential confusion of terms, I never let a domestic relations order go by with a simple statement that the AP is to be treated as a suviving spouse. Many of its implication are not intended.

[Guest mjb]

In DB plans there are usually three separate traunches of benefits that can be awarded to the AP:

1. As a separate benefit or separate interest payable to the AP. In this benefit the AP is awarded a specific portion of the empoyee's benefit such as 50% of the retirement benefits accrued as of the date of divorce. The actuarial equivalent of this amount is transferred to the AP as a benefit to be paid over the AP's life as a single life annuitybesaed upon the AP's life expectancy. The AP has all of the rights of a beneficiary under the plan, may commence benefits without regard to whether the employee has retired and the payment is not affected by the death of the employee. However the AP's payment will usually be forefited if the AP dies before benefits commence and the AP cannot desigate a beneficiary to receive payments after benefits commence unless the plan allows for payment over a guaranteed period.

2. A shared interest in the retirment benefit to be paid to the employee. This benefit can be awarded in lieu of or in addition to the separate benefit. In this scenario the AP's benefits do not commence until the employee retires and the benefits cease upon the employee's death. The AP shares in any future increase in benefits, including early retirement subsidies and cola increases. In most plans the employee may recapture the AP's portion of the benefit if the AP dies prior to the date benefits commence.

3. surviving spouse benefits. The AP can also be designated as the the surviving spouse for either preretirement or post retirement benefits, e.g. 50% survivor annuity. This can result in the new spouse who marries the employee after the divorce being denied any SS benefits b/c it was granted to the AP.

The rights to one or more of these benefits are never inferred and should be spelled out in the QDRO. The language you included is to inappropriate for a DB plan. Why not discuss the above options with counsel for the AP? Otherwise you need to go back to court for clarification of the benefits due to the AP.

[Peter Gulia]

QDROATTY, I'm curious, if you represent only the participant, don't you have an opportunity to advance an interpretation of the settlement agreement that your client, after hearing your advice, believes is most likely to preserve benefits for himself and those he chooses to benefit? Or is there some court rule or customary domestic-relations practice that requires a proposed-DRO drafter to be more even-handed?

[david rigby]

Implicit somewhere in all this is that the default QPSA and/or QJSA is a 50% continuation. If the plan states otherwise, careful wording in the QDRO may be required.

For example, our office has a few plans that define the QPSA using the 50% benefit, but if the EE dies after reaching ER eligbiilty (but before commencement) then the QPSA will be a 100% benefit.

[IRA]

I agree with Fiduciary Counsel. If you represent the participant, you have duty to represent that participant zealously (unless your state rules provide a lower standard for attorneys or you happen to be in a collaborative law situation that somehow lowers the standard of representation you owe the client or something like that).