Shared Interest or Separate Interest?

[Scott]

H retired and elected a 100% J&S annuity under his pension plan. H currently receives about $5,000 per month. H is divorcing W, but wants to provide for her as much as possible, and is willing to provide that, upon his death, W will remain as the beneficiary (based on age, current health and genes, it is more likely that H will die first). Basically, the intent is for each party to receive $2,500 for the rest of H's life, and then upon his death, W will receive $5,000 for the rest of her life.

H's attorney has drafted a proposed QDRO as a separate interest QDRO, giving each party 50% of the present value of the accrued benefit as of the date of divorce, with W to receive a life annuity (or any other optional form under the plan other than a J&S with a future spouse). The QDRO says that "W will be treated as the surviving spouse of H solely to the extent necessary to provide W with a death benefit under the provisions of this Order, and to the same extent any future spouse of H shall not be treated as a spouse of H for such purposes. This provision shall have no effect after W has been paid the amount of plan benefits due to her pursuant to this Order. The death benefit payable to W under the terms of the Plan shall be calculated based on the accrued benefit of H awarded to W in this Order."

The quoted language seems a bit unclear and I'm not sure it clearly states the parties' intent. In any event, wouldn't it be better to do this as a shared interest QDRO, giving each party 50% of the current distribution and provide that W will be treated as H's surviving spouse for all purposes? Not only would it accomplish the intent described above, but it would also allow H to recoup 50% of the benefit in the event that W were to die first, rather than having W's interest go away at her death.

Any thoughts?

[mbozek]

You are correct. The QDRO needs to define two separate benefits:

1. a shared interest in H's monthly annuity benefit equal to 50% of his annuity ($2,500) paid to the spouse during H's life. I dont think the plan would allow a separate interest benefit since the spouse's portion of H's beneift can only be paid while H is alive. If the ex spouse is receiving a shared benefit the QDRO could provide that the ex's $2500 monthly benefit will revert to H if the ex dies before H.

2. the $5,000 monthly surviving spouse's benefit to be paid to the spouse after H's death. I dont know what purpose would be served by designating this benefit as a separate interest since it will paid only to the spouse for her life under the plan if she survives H.

I dont think the plan would want to spend any money creating a separate benefit for either 1 or 2.

I dont know what the attorney means by "this provision shall have no effect after W has been paid the amount of benefits due her under this order." Is he attempting to preserve the surviving spouse benefit to H's sucessor spouse if the ex spouse dies before her surviving spouse benefit commences?

[eeyore]

The current benefit can be considered the sum of (i) a life annuity of $5,000 payable to H, and (ii) a deferred contingent annuity of $5,000 payable to W after H's death. If you use the separate interest approach, two things will be different than under the approach suggested by both Scott and the OP:

a) H will receive a larger benefit , because half the value of the contingent survivor benefit will go to H, as well as half the value of the life annuity payable while H is alive. Instead of receiving $2,500, he would receive something more. (How much more? Depends on the assumptions and the ages, but it might reasonbly be 5-10% more.)

b) W would also receive more than $2,500--at least if H and W are the same age, and ignoring the possible use of different mortality tables for H and W--because she would also receive half the value of the $5,000 deferred benefit in her lifetime income. (This larger benefit replaces half the value of the extra $2,500 she would have received after H's death.)

So a separate interest approach does have some attractive features. However, I'm in agreement with Scott that most plans prohibit changing the payment form elected by the retiree, and if that's the case, then I would point that out to the attorney and suggest the same approach Scott did.

[mbozek]

eeyore:

I dont see how H's separate interest in a) can include an interest in the contingent survivor annuity paid to his spouse because H has no vested right to surviving spouse benefits which can only be paid to his surviving spouse after his death if she survivies him. Under Carmona v. Carmona, the surviving spouse benefit can only be paid to the spouse to whom the participant is married on the date the retirement benefits begin. Therefore the plan would reject a DRO that provides a separate interest to H that includes any portion of the the value of the surviving spouse annuity benefit because under IRC 414(p)(3)(A) it is not a benefit that can be provided to him by the plan.

Given that H has no vested interest in the $5,000 contingent survivior annuity, W's separate interest in b), if allowed under the plan, will be 100% of the actuarial value of the $5,000 death benefit plus $2,500 of H's annuity.

Finally I dont understand how the separate benefits of both H and W under a) and b) can both be larger because IRC 414(p)(3)(B) prohibits a QDRO from requiring the plan to provide increased benefits. If, under your scenario, H's benefits increase by 5-10% then W's benefits would have to decline by the same amount to comply with (p)(3)(B). Its all an accademic exercise anyway since H cannot have an interest in W's survivor annunity and his interest is limited to the value of the annuity paid to him during his life.