Pension Benefit Considerations for a QDRO Review
You made it through the negotiations and are ready to move on in your life. As part of the settlement, you are to receive a portion of your spouse’s pension (defined benefit plan). You are presented with a qualified domestic relations order (QDRO) to review. How do you know it is done correctly? Does it protect your share of the future pension?
Some errors could result in your getting a smaller pension benefit or none at all. Remember that a QDRO can be drafted to protect the employee or you. There are costly errors that may not be discovered for years to come — until the ex-spouse dies or retires. Let’s look at a few.
- What if the qualified domestic relations order requires payments that the pension benefit plan does not allow? There have been cases where the divorce is completed, the QDRO has been sent to the pension plan, but the ex-spouse got nothing. Why? Because the QDRO required a method of payment not allowable by the plan. The company’s legal documents set the rules.
- What if the QDRO does not specify what happens if the employee dies? What if no survivor benefits have been put into the plan? You are counting on getting a share of his pension, but no survivor benefit provisions were made, and you lose out on the pension.
Your payments are not affected by the death of the Participant if the qualified domestic relations order provides for a Joint and Survivor Annuity. If a Single Life Annuity is chosen by the Participant (this requires a waiver to be signed by the non-employee), you receive no payments after the death of the Participant.
It is paramount that you include provisions for a Qualified Pre-Retirement Survivor Annuity to protect your pension benefit from the possible premature death of the ex-spouse. The QPRSA comes into play if the employee-spouse is under his earliest retirement age.
- Another frequent error in a QDRO is failing to check for early retirement benefits. Sometimes plans offer large incentives for employees to retire early. If the QDRO doesn’t address the issue of early retirement incentives, the alternate payee will not share in the early retirement subsidy. This could be the difference between $2000 per month and $3000 per month. The QDRO can be written to include this or exclude it. Some companies allow your benefit to be “recalculated” (increased for the subsidy) after his retirement even if you have already commenced the pension.
- What if the separate property interest isn’t clearly defined? Separate property occurs if the employee worked at the company prior to marriage. One recent case concerns a divorce completed six years ago. The qualified domestic relations order was signed and submitted. Now, when it’s time to commence the benefit, the company administrator is asking the parties to bring in attorneys on both sides, because it is unclear how to calculate the separate property. Is the fraction to be determined by the total years of employment versus years of marriage, or just the years up until the date of divorce? The language in the QDRO was unclear.
- The Social Security pension is another bonus added to a person’s defined benefit plan if he is under the age of Social Security benefits. Depending on how the QDRO is written, the alternate payee may or may not share in this.
Every corporation with more than 20 employees is required to have written QDRO procedures for the pension and 401k (technically called defined benefit plan and defined contribution plan). These are extremely important and should be carefully reviewed, along with a copy of the Plan’s model QDRO if available.
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