Totally Severed Approach - Early Retirement Subsidy

[BTG]

I have a client who takes a "completely severed" approach to administering separate interest QDROs, so they do not require a QPSA to be awarded to the AP.  Instead, the AP just gets his/her share of the benefit regardless of whether the participant predeceases the AP.  The plan also provides a rather generous early retirement subsidy.

A situation has arisen (apparently for the first time) where the participant died before shortly before attaining early retirement age.  (The participant would now be past ERA if still alive.)  The question becomes whether the AP is entitled to an early retirement subsidy on her portion of the benefit.  If this sponsor used a "standard" (rather than completely severed) approach, the QPSA would clearly include the subsidy, so it would seem fair that the benefit payable to this AP should as well.  On the flip side, that result is driven by the QPSA rules, and this isn't a QPSA.  Since, the participant can never trigger the subsidy, arguably none would be applicable to the AP's portion.

Anyone who regularly works with this completely severed approach care to weigh in on how this is typically handled?  Thanks!

[QDROphile]

The Plan's written QDRO Procedures should deal with early retirement subsidy, such as whether it is required to be expressly awarded in the order to be included, or if it it awarded (and how) as a default unless the order provides otherwise.  It doesn't?  I am shocked that someone in the business of providing QDRO services and documents would overlook the issue.  The fiduciary will have to interpret the QDRO procedures and plan to decide what is implied.  Keep in mind that the fiduciary is required to act in the best interests of the plan participants and beneficiaries.  An alternate payee is treated generally as a beneficiary.

[BTG]

QDROphile, thanks for the response.  The QDRO does provide that the Alternate Payee shares proportionately in any early retirement subsidy (and the QDRO procedures contain default language on this as well).  The issue is whether that early retirement subsidy has been triggered where the participant died before attaining early retirement age.

You make a good point regarding the fiduciary obligation to act in the best interests of plan participants and beneficiaries.  However, as a counterpoint, the fiduciaries also have an obligation to follow the terms of the document.  I would argue that the document does not lead to an early retirement subsidy being payable because the participant died before early retirement age.  There is a clear work-around for that in the case of a QPSA because the participant is treated as having survived until early retirement age for purposes of the calculation.  However, in this totally severed approach, it is my understanding that we're not really dealing with a QPSA, but rather almost treating the AP as a completely separate participant.

Any additional thoughts appreciated.

[QDROphile]

I respect your counterpoint about fiduciary responsibility and I think my agreement was implicit in reference to interpreting the "QDRO procedures and plan", and I was not suggesting that a fiduciary was to give anything away.  I am not going to be much help to you because 1) I do not know what "completely severed" means, 2) I do not believe that there is such a thing as a truly separate interest (check out the section 401(a)(9) regulations), and therefore, 3) I do not care to imagine what a compliant "completely severed" interest could look like.

This is not a well thought out response, but I go to first principles and stand on the idea that a QDRO should not cause the plan to pay more that it was designed to pay (a concept also found in section 414(p), although the plan sponsor can provide otherwise by its choice of plan terms).  That may be what the plan sponsor did with the "completely severed" approach.  It is compliant to have a separate interest that allows an alternate payee to escape the risk of death of the participant relative to a QPSA (with appropriate actuarial consequences), but to require the plan to pay a subsidy when the condition for the subsidy (participant retires in accordance with the terms of the subsidy) fails is a step beyond, and I would not infer it.  I would want to see it expressly provided.  To analyze further, I could go into questions about what was the purpose and intent of the early retirement subsidy and a whole lot of thinking that I would do if asked at my hourly billable rate, but ... .  So my lazy predeliction is that the subsidy is not "translated" to fit a separate interest of an alternate payee (unless otherwise expressly provided in the plan -- or maybe QDRO Procedures, somehow).  Either the subsidy conditions are met, and the alternate payee can share in the subsidy, if provided, or they are not met and there is no subsidy for nobody (I deliberately use the colloquial double negative, so don't ding me for grammar).  

[Calavera]

Just my opinion: If the QDRO language along with the plan document language are not clear whether the AP is entitled to the ER subsidy, I would go with the intent. If in the calculation of death benefits for a participant's beneficiary, the ER subsidy is or would be included, I would give it to the AP as well.

[QDROphile]

Insightful.

[fmsinc]

I don't know if this will help, but see  Einhorn v. McCafferty, No. 5:14-cv-06924, United States District Court, E.D. Pennsylvania (March 31, 2016) that you can find at https://scholar.google.com/scholar_case?case=8170636359019689152&q=Einhorn+v.+McCafferty,&hl=en&lr=lang_en&as_sdt=20000006&as_vis=1

In this case the District Court discusses the difference between shared and separate interest allocation of a defined benefit plan, the age 50 rule and the  “severed rule.”  The Court explained: 

“Here, as in Files, the language of the settlement agreement reveals that Kevin intended to afford Deborah a separate interest in fifty percent of his pension, rather than a mere interest in sharing a portion of any benefit payments that he later received. This is a critical difference, because under the shared payment approach, the former spouse receives nothing if the participant does not receive any payments (there would be no payments to split). Kevin died before he began receiving retirement benefits, which means that if Deborah had been given only a shared payment interest, she would not have been entitled to any benefits. But under the separate interest approach, "because the spouses' benefits are independent, neither spouse's benefits stop upon the death of the other." See 2 Brett R. Turner, Equitable Distribution of Property § 6.34 (3d ed.), Westlaw (database updated Nov. 2015) (emphasis omitted).

“However, there may be a problem for Deborah. At the time of Kevin's death, he had not yet reached the minimum age to be eligible to start receiving benefits from the Plan. While a person who is afforded a separate interest in someone else's pension plan is treated like a plan participant in his or her own right, that person nonetheless "cannot . . . receive a benefit earlier than the date on which the participant reaches his or her `earliest retirement age,' unless the plan permits payments at an earlier date." QDROs, supra, at 40. Under the terms of some pension plans, this means that if the participant dies before reaching the minimum retirement age, any person who holds a separate interest in the participant's plan loses that interest. See Raymond S. Dietrich, Qualified Domestic Relations Orders § 10.04[1], Lexis (2015).

 “Other pension plans are different. They apply the so-called totally severed approach, which means that when a participant gives another person a separate interest in his or her pension plan, the plan completely separates the two interests, leaving the participant and the beneficiary as two autonomous plan participants. Under these plans, 

            ‘an alternate payee [can] begin receiving her entitlement when the plan participant reaches retirement age, whether the participant actually retires or continues working. If the plan participant dies before retirement, the alternate payee may begin receiving benefits when the participant would have reached retirement age; the participant's death, whether it occurs before or after the participant reaches retirement age, therefore does not affect the alternate payee's entitlement.’

        “Krushensky v. Farinas, 189 P.3d 1056, 1062 (Alaska 2008) (citing David Clayton Carrad, The Complete QDRO Handbook 70 (2d ed. 2004)); see Dietrich, supra, § 10.04[1]. This approach fully protects a former spouse who holds a separate interest in a pension against the risk of the participant dying before reaching the minimum retirement age.”   You can find Krushensky at https://scholar.google.com/scholar_case?case=12011889634268315346&q="severed"+"separate+interest"+"defined+benefit"&hl=en&lr=lang_en&as_sdt=20000006&as_vis=1. 

These are the only two cases I have found in the US discussing the concept of "totally severed" as it applies to QDROs or divorce or "separate interest" or "defined benefit" or subsidy or subsidized.  So I suspect the answer to your questions will be found in the language of the QDRO itself, or in State law, or in the Plan documents.   I think your Plan Administrator needs something to hang his/her hat on other then his own preference.   I don't think the age 50 rule prevented the early retirement subsidy from kicking in. I don't think IRC  417(c) changes that outcome. The benefit never came into existence.