QDRO Benefits for AP

[Dougsbpc]

Suppose a DB client has a two participant DB covering just husband and wife. They filed for divorce Dec. 1, 2006. The wife (the major bread winner here) wants to continue the DB plan but not if the AP (her former husband) would continue to benefit from her participation.

I wouldnt think the alternate payee continues to benefit in a DB. For example, suppose the participant has an accrued benefit of $5,000 as of the date they file for divorce. I would think the AP would be entitled to xx% of the $5,000 accrued benefit payable at the participants NRD. If the AP requested a lump sum distribution now, I would think he would be entitled to xx% of the PRESENT VALUE of $5,000 which would be payable at the participants NRD. Agree?

Also, are the benefits usually determined as of the date they file for divorce or the date the divorce is finalized?

Thanks much.

[david rigby]

The AP benefit is determined by the QDRO, not by whether or not the plan continues.

BTW, is there a QDRO, or is your question hypothetical?

[Dougsbpc]

Yes. This is a hypothetical question but there will be a QDRO soon.

We know they will have to follow the terms of the QDRO, but are not certain as to how it could be written.

Specifically, the client would want to terminate the plan now if the alternate payee would benefit from an on-going plan. In other words, could it be written in such a way that the alternate payee is entitled to a portion of the participants FUTURE benefit accruals AFTER they file for divorce?

[Mike Preston]

Yes.

[Dougsbpc]

Without the consideration of other assets?

I could see how the participant could elect to give up more than 50% of pension benefits. Although we havent seen one, I would think this is somewhat common when non-liquid assets are involved in the division of joint assets. For example, the participant takes the house (which represents more than 50% of joint assets) in exchange for more than 50% of the participants current and maybe future pension benefits.

For the sake of discussion, suppose the participant's pension benefit represents all joint assets, they were married on the effective date of the plan and divorced as of 12/31/2006 (the close of the plan year). If the participant's accrued benefit was $5,000 on 12/31/2006 why would the alternate payee be entitled to more than 50% of $5,000 payable at the participant's NRD if the participant continued to accrue benefits after 12/31/2006?

[Mike Preston]

Without the consideration of other assets?

You asked whether it "could". Now you are asking whether it "would". That is dependent on the attorneys and the clients.

For the sake of discussion, suppose the participant's pension benefit represents all joint assets, they were married on the effective date of the plan and divorced as of 12/31/2006 (the close of the plan year). If the participant's accrued benefit was $5,000 on 12/31/2006 why would the alternate payee be entitled to more than 50% of $5,000 payable at the participant's NRD if the participant continued to accrue benefits after 12/31/2006?

Because that is the law in California. See my other recent post for a list of cases. But your question is answered by the granddaddy of them all: see the Brown case.

[Dougsbpc]

Mike,

Thanks for the reply.

I did see your reponses to a prior QDRO post (quite enlightening) and was able to find the Brown case.

In our client's case, the rate of future benefit accruals will not increase substantially so the non-frozen seperate interest method will not have a dramatic impact. She is happy to provide one-half of the marital interest. She just didnt want to continue the plan if her future benefit accruals would be subject to an unfair award to the AP.

I could see how a young executive may have much larger benefit accruals in future years and the AP is provided with some of that increase. What about a small plan? What would prevent a company owner from terminating a DB at the time of divorce and establishing a new plan in a few years? This would not make sense unless there was an increased rate of future benefit accruals.

[Mike Preston]

I suppose the only impediment would be the potential for the AP to have the court aggregate the two. Never seen it happen, but that doesn't mean it is impossible.