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You are here: Home / Articles / Divorce Planning / Separate Interest Division

Separate Interest Division

May 17, 2017 By Patricia Barrett

Under the separate interest method, the plan is valued as of a certain date and split in two. The Separate Interest owned by the Alternate Payee may then be received by any method she chooses, continue until her death and is not affected by the death of the Participant. Conventional wisdom is that the most desirable method is a single life annuity based on her life expectancy. This will, however, require an expert to appraise the value of her share of the plan.

Actuarial Equivalence:

When a qualified plan or annuity is divided pursuant to divorce, the Actuarial Equivalence provides the basis for calculating payments. The longer a person is expected to live, the smaller a period payment will be. This concept is related to three items:interest rates, time (when do payments begin and how long with they continue), and mortality rates. The interest rate is often tied to the long-term treasury rate or the Pension Benefit Guaranty Corporation’s current discount rate. The mortality rates (life expectancies) are published regularly by insurance companies.

Employer Subsidy for Early Retirement:

A supplemental payment made to an employee to encourage early retirement need not be taken into account for a QDRO unless the Participant actually takes early retirement. This subsidy is not always evident when looking at a Participant’s statement of benefits. The dollar amount for retirement at age 55, for instance, may include an amount not divisible through the QDRO.

Dividing the Defined Contribution Plan:

The most desirable method for division of these plans (401k and 403b) is to roll the Alternate Payee’s share to an IRA Rollover account in her separate name. These plans typically allow this type of division. If divided pursuant to divorce, ERISA provides for an exemption from the usual 10% penalty for withdrawals before age 59.5. This can be useful when funds are required for attorney’s fees or relocation expenses.

Pension Currently in Pay Status:

For a qualified plan that is already making payments to the participant, the Alternate Payee is limited to receiving a portion of those payments, since it is impossible to change the form of payments. It may be possible, however, to use the “offset method” and award the Alternate Payee other assets equivalent to the calculated present value of the payments for her life expectancy. Courts may be reluctant to use the offset method when the plan benefits represent the major portion of the couple’s community property.

Remarried Participant:

If the Participant has already remarried when the QDRO division of a plan occurs, he may still choose a joint and survivor annuity with the Alternate Payee. It should be clearly stated in the QDRO that payments are to continue until the death of the Alternate Payee, regardless of the status of the new spouse. The payments received at a later date by the new spouse are not affected, since she had no entitlement to benefits accrued before the date of marriage.

Qualified Pre-Retirement Survivor Annuity:

Whichever choice is made concerning the Alternate Payee’s receipt of benefits under a QDRO, it is very important to always include provisions for a Qualified Pre-Retirement Survivor Annuity to protect her from the possible premature death of the participant. Should he die before his earliest possible retirement date, she could be left with nothing.

Participant’s Most Favorable QDRO:

For the Participant, the most favorable feature for a QDRO is to have unpaid plan benefits revert to them should the Alternate Payee predecease. This is usually accomplished through the Shared Interest method of division. It is also possible with the Separate Interest method if a reversionary clause is included in the QDRO.

Avoiding Malpractice Claims:

It is vitally important to send the client a letter summarizing your discussion of these alternatives. You should have the client sign and return a copy of this letter for your files.

Registered Mail:

Send the drafted DRO registered mail in order to have a record of the date received by the plan. It is often necessary to follow up regularly with the Plan to assure that they are on track and that the DRO has not been misplaced or overlooked.

Filed Under: Articles, Divorce Planning

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