Effect of separate interest QDRO on QPSA

[Bittermelon]

Let's say a QDRO creates a 50% separate interest - Participant is not yet retired and has not commenced a benefit, and is presently alive - and the QDRO creates a 50% separate interest in his accrued benefit during the period of marriage, for AP.  The QDRO also says that if Participant dies prior to the date the AP commencing her benefit, then the AP must be treated as Qualified Surviving Spouse under the plan, which provides by default for a QPSA equal to what they 100 percent QJSA would have been had the Participant retired the day before he died. So far, pretty standard? But the QDRO goes to state that if QPSA becomes payable to the AP, the extent of her entitlement is "50% of the benefit as set forth in Paragraph 5" which is the paragraph creating the separate interest. 

The actuary finds this confusing. Is she entitled to a QPSA calculated on 100% of participant's accrued benefit, 50%, or 50% of 50% (25%?) 

But, looking at 417, I think this QDRO is trying to do something contrary to the plan (and law). A qualified plan must offer a QPSA and a QPSA's payment must not be less than the amount that she would have received had he retired with a QJSA while alive, correct? 

If the QDRO orders that she's treated as the surviving spouse, and then Participant dies before commencing a benefit, isn't AP's separate interest irrelevant at that point? She's entitled to the QPSA actuarially equivalent to 100% of his accrued benefit, or am I wrong? Because if he had retired before death with a QJSA, that's how much would have been payable as a survivor annuity. 

But wait, the actuary's saying.. He "lost" 50% of his interest in the QDRO, so even if he'd been alive and retired with the 100 percent QJSA, it would be based only only 50% of what he had accrued prior to the QDRO. 

So, then is the AP's QPSA based on the 50% interest that Participant had retained after the QDRO but prior to death? 

Does this make sense? Thank you.

 

[QDROphile]

Read IRC 414(p)(5): "To the extent provided in any [QDRO] ...  ."

I read the statute to mean that the order (if otherwise a QDRO) may award a portion of the surviving spouse benefit to the AP.  The portion is not prescribed or limited.  The terms of the order have awarded of a portion of the QPSA and instructions about how to calculate it:  50% of the regular benefit awarded to the AP.  The question for the actuary is whether or not this could be more than the entire surviving spouse benefit at the time of death of the participant.  The order would be fine if it had awarded the lesser of the 50% or the entire spouse death benefit.

[Bittermelon]

Thank you. So then, does she retain her 50% separate interest, as well as get 50% of the QPSA? is that right?

[QDROphile]

My approach is to consider the plan to provide two mutually exclusive benefits, the "regular" retirement benefit and the death benefit.  The AP gets no part of the death benefit unless the QDRO says so expressly and says what the AP's benefit is. Of course the AP gets the portion of the regular benefit that the order describes. But the plan pays no regular benefit if the participant dies before starting benefits.

It might help to understand that there is really no such thing as a true separate interest under a DB plan.  "Separate interest" is not a term under section 414(p).  It is an imprecise label that carries with it incorrect implications.

[My 2 cents]

I am not a lawyer, but this is my understanding:

If the QDRO assigns a separate interest to the AP, then even if the QDRO does not preserve the AP's status as spouse, if the participant dies before payments start, the AP continues to be able to collect the amount assigned.  The benefit assigned to the AP ceases to belong to the participant and belongs to the AP.  Unless otherwise specified in the QDRO, if the AP dies before payments have started, the assigned portion does NOT have to be reverted to the participant.

Obviously, the more clearly all contingencies are addressed in the QDRO, the better.

[Bittermelon]

Thanks for the replies. Yes, I realize that "separate interest" is a bit of a legal fiction or a metaphor used for characterizing an assignment that behaves in a certain way, but it is not a creation of the law itself. Honestly I wish that the statutes relating to QDROs had a bit more specificity about what is allowed, or that there were regulations with better examples. 

I am having some confusion or whether a "separate interest" benefit survives if the participant dies before either party commences benefits.  I thought that one of the favorable features of a separate interest vs. a shared payment is that it would persist afterward irrespective of the participant. Is that not the case? 

I know it's a slightly different context but I'm reading the PBGC's manual on how it administers QDROs, and under Section 10, "Surviving Spouse Rights of Alternate Payee," it states:

"When PBGC administers a separate interest order, it uses a totally severed approach. The participant's benefit is divided into two separate parts - one for the participant and one fo rthe alternate payee. Once the order is qualified, the participant's death before or after the alternate payee's benefits commence will not affect the alternate payee's rights to a lifetime benefits. Thus, assignment of either pre- or post- survivor annuities are not needed to ensure that the alternate payee will receive lifetime benefits."

"However some alternate payees and participants may choose to include survivor annuity provisions in their orders."  It goes on to basically address my original question and say that "Survivor benefits are in addition to a separate interest or shared payment the alternate payee also has a right to receive."  

As to calculating the amount of the QPSA, this agrees with what you're saying, QDROphile, that the order can assign any amount of a QPSA. Their model order leaves a blank percentage in the surviving spouse provision, to allow any percentage of the QPSA to be assigned- then, to in a separate interest, the QPSA is (assigned percentage) x (participant's retained separate interest) x (survivor annuity percentage provided for in the Plan).  So, with the facts I gave above, the QPSA would be 50% of 50% of 100%, or 25%; but, she will also have her 50% separate interest as well. 

I think that's the best answer I'm going to get on this.

[StaceyHelton]

18 hours ago, Bittermelon said:

Thanks for the replies. Yes, I realize that "separate interest" is a bit of a legal fiction or a metaphor used for characterizing an assignment that behaves in a certain way, but it is not a creation of the law itself. Honestly I wish that the statutes relating to QDROs had a bit more specificity about what is allowed, or that there were regulations with better examples. 

I am having some confusion or whether a "separate interest" benefit survives if the participant dies before either party commences benefits.  I thought that one of the favorable features of a separate interest vs. a shared payment is that it would persist afterward irrespective of the participant. Is that not the case? 

I know it's a slightly different context but I'm reading the PBGC's manual on how it administers QDROs, and under Section 10, "Surviving Spouse Rights of Alternate Payee," it states:

"When PBGC administers a separate interest order, it uses a totally severed approach. The participant's benefit is divided into two separate parts - one for the participant and one fo rthe alternate payee. Once the order is qualified, the participant's death before or after the alternate payee's benefits commence will not affect the alternate payee's rights to a lifetime benefits. Thus, assignment of either pre- or post- survivor annuities are not needed to ensure that the alternate payee will receive lifetime benefits."

"However some alternate payees and participants may choose to include survivor annuity provisions in their orders."  It goes on to basically address my original question and say that "Survivor benefits are in addition to a separate interest or shared payment the alternate payee also has a right to receive."  

As to calculating the amount of the QPSA, this agrees with what you're saying, QDROphile, that the order can assign any amount of a QPSA. Their model order leaves a blank percentage in the surviving spouse provision, to allow any percentage of the QPSA to be assigned- then, to in a separate interest, the QPSA is (assigned percentage) x (participant's retained separate interest) x (survivor annuity percentage provided for in the Plan).  So, with the facts I gave above, the QPSA would be 50% of 50% of 100%, or 25%; but, she will also have her 50% separate interest as well. 

I think that's the best answer I'm going to get on this.

I used to work for PBGC and was a QDRO Coordinator for 4 years, so I am intimately familiar with how they would administrate such an order.

You are correct, the AP would get half of the participant's remaining benefit; any subsequent spouse would be entitled to the remaining survivor benefit.  The key would be if the order stated something like "in lieu of the benefits provided in paragraph x" or not.  If it did, then the AP would only be entitled to the QPSA benefit, if it did not, then the AP would get both her "separate" share and the QPSA share.

Also, although PBGC does not require language dealing with what happens if the participant dies first, most of the QDROs I dealt with still had it; some (not common) even specified that the AP would get nothing if the participant died first.  They may no longer allow that (it's been 4 years since I worked there), but it wouldn't surprise me if they did.