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Options for pre-retirement death benefit


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Married couple divorce and one participates in DB plan. Divorce agreement specifies pension is split 50/50. Not much else specified.

Plan provides for REA-only QPSA 50% death benefits.

QDRO is drafted by attorney to assign 50% of accrued benefit to AP, to start whenever each wants and in any form permitted by the plan without the consent of the other (i.e. separate interest design). Assume for discussion that they are the same age and the total accrued benefit is $100/month at NRD, so each gets $50.

Draft QDRO also says that if the participant dies before either pension has started, the AP is treated as the spouse and gets the QPSA (approximately $40) in lieu of the assigned retirement benefit of $50. Spouse does not like this and wants to know what alternatives are possible.

Can the QDRO instead be drafted to say that each party gets their own 50%, plus is treated as the beneficiary (spouse) for purposes of the other's pre-retirement QPSA death benefit? So in that case the spouse would get their 50% plus 20% (50% x 40%) death benefit. And also each party would have the right to name their own post-retirement beneficiary if they survive to their start date,

Anything wrong with this assuming written QDRO procedures don't prohibit it?

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Unsure if I understand all your parameters, so I'll ask questions:

- Is 414(p)(3) violated?

- Is 414(p)(4)(A)(iii) violated?

BTW, I applaud any draft QDRO that includes affirmative clear identification of what happens if he dies first or she dies first, both before and after commencement date.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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In a DB plan there are 3 separate benefits that can be paid to the AP:

1. AP can get separate share of benefits paid to employee when employee commences benefits, eg. 50% of accrued benefits that would be paid to unmarried employee.

2. AP can get a separate annuity based on employees accrued benefits that is payable to the AP when the AP becomes eligible to commence benefits under the plan.

3. AP can get survivor annuity under the plan after employee's death.

AP can get any or all of the above benefits.

Parties can negotiate additional options e.g, when spouse dies spousal annuity will be paid to employee.

Parties can mix and match benefit streams to extent permitted by plan.

Designation of a secondary beneficiary to receive benefits is subject to plan rules. Most plans do not allow benefits to be paid after death of the employee or beneficiary.

mjb

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Is 414(p)(3) violated?

I guess this is the key question. I would argue no. If the QDRO provided that the AP was not treated as the spouse, and the participant remarried someone the same health and the same age, the plan would be in the same position as under my proposed language. The AP would get her 50% when she wants and the participant's new spouse would get 20%. Same cost to the plan.

Is 414(p)(4)(A)(iii) violated?

I don't fully understand that section, but it seems to be an exception rather than something to be violated.

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mbozek, I am with you except your final sentence:

Designation of a secondary beneficiary to receive benefits is subject to plan rules. Most plans do not allow benefits to be paid after death of the employee or beneficiary.

Please clarify. In this situation, all pre-retirement death benefits would be paid to either a spouse or a former spouse treated as a spouse.

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Secondary beneficiary refers to some other than the employee or spouse. DRO can provide that if spouse predecease employee then spouse's benefit can be paid to employee but not their child.

Plans limit use of this option. For example if QDRO provides that employee will receive 40% of the value of benefits as a separate life annuity then those payments cannot be continued to spouse after his death. If spouse receives a shared portion of benefit paid to the employee for life, e.g.50% of annuity payable to employee, then plan can transfer spouse's payment to employee if spouse dies first. In this case benefits to spouse would cease if employee dies first.

mjb

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In a DB plan there are 3 separate benefits that can be paid to the AP:

1. AP can get separate share of benefits paid to employee when employee commences benefits, eg. 50% of accrued benefits that would be paid to unmarried employee.

2. AP can get a separate annuity based on employees accrued benefits that is payable to the AP when the AP becomes eligible to commence benefits under the plan.

3. AP can get survivor annuity under the plan after employee's death.

AP can get any or all of the above benefits.

Parties can negotiate additional options e.g, when spouse dies spousal annuity will be paid to employee.

Parties can mix and match benefit streams to extent permitted by plan.

Designation of a secondary beneficiary to receive benefits is subject to plan rules. Most plans do not allow benefits to be paid after death of the employee or beneficiary.

So I think I am proposing 1+3 (3 based on the participant's 50%). The Attorney that drafted QDRO is calling that "double dipping" and says only 1 or 3 (3 based on the entire benefit) may be paid. I suspect that the fixed price for the QDRO drafting is the issue.

This is a simplification of a real situation in which there are actually 2 DB plans - one that the husband is in and another that the wife is in, both with similar death benefits. So it is in the best interest of both parties to have the QDROs (the second has yet to be drafted but will be a mirror) provide the best available survivor benefit option.

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