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DOMESTIC RELATIONS ORDERS - SURVIVOR BENEFITS

PART ONE

SEPARATE INTEREST QDRO

This article provides the family practitioner with a basic discussion of the most litigated issue involving Qualified Domestic Relations Orders.

SURVIVOR BENEFITS

The Survivor Annuity benefits discussed in this article are limited to:

  • ERISA Qualified Defined Benefit Plans [1]
  • "Separate Interest" Award to an Alternate Payee

This article does not apply to Survivor Annuity Benefits provided by:

  • ERISA "Shared Payment" QDRO
  • Federal, State or Military Retirement System's Survivor Benefits

Forms of the Alternate Payee Survivor Annuity

  • Separate Interest QDRO
  • Shared Payment QDRO

Clarification.

Due to the complexity of this topic, and an intent not to overwhelm the practitioner with excessive analysis, this article is limited to the SEPARATE INTEREST QDRO.

Separate Interest QDRO.

This form of Qualified Domestic Relations Order removes all or a portion of the participant's benefit and assigns this benefit to the Alternate Payee. Upon this assignment becoming effective, the benefit assigned to the Alternate Payee becomes "the sole and separate property" of this Alternate Payee. This Separate Interest benefit is not subject to loss as a result of the death of the participant or retiree since this form of Order divides the benefit NOT the payments.

Clarification.

At the Alternate Payee's Annuity Starting Date (benefit commencement date), she or he has discretion as to the form of annuity she or he wishes to elect: e.g. single life annuity, period certain annuity. What is not available to an Alternate Payee is a Joint and Survivor Annuity with a subsequent spouse. See 26 U.S.C. 414(p)(4)(A)(iii). If the Alternate Payee elects a Single Life Annuity form of benefit, the annuity payments cease upon the death of the Alternate Payee. There is no reversionary interest in this circumstance. The benefit is gone! [2]

Effective Date of the Separate Interest Benefit.

The practitioner should be aware that the effective date of this "Separate Interest" need not be simultaneous with Qualification of the Domestic Relations Order. This circumstance requires the attorney representing the Alternate Payee to ascertain when the "Separate Interest" becomes effective. Plans have two options regarding the effective date for the creation of the Separate Interest of the Alternate Payee.

Option # 1.

The Separate Interest award is effective upon qualification of the Domestic Relations Order

Option # 2.

The Separate Interest award is effective upon the retirement of the Alternate Payee [3]

This effective date is significant. When a Plan applies Option # 2, there is a window of exposure during which the Alternate Payee's award is subject to loss, i.e. the time from Qualification of the Domestic Relations Order up to the Alternate Payee's Annuity Starting Date.[4] During this window period, the death of the participant extinguishes the benefit of the Alternate Payee. Because of this exposure, the prudent attorney representing the Alternate Payee, understands that it is necessary to also assign to the Alternate Payee a Qualified Preretirement Survivor Annuity (QPSA). This assignment of this form of Survivor Annuity Benefit operates as a bar preventing the Alternate Payee's loss of benefits as a result of the death of the participant prior to the effective date of the Separate Interest.

Qualified Preretirement Survivor Annuity (QPSA). [5]

This form of Survivor Annuity can be awarded to a Former Spouse to protect against loss of benefit as a result of the death of the participant prior to the Alternate Payee's retirement. Significantly the cost of this benefit is either zero or de minimis. The practitioner will further note that the QPSA is generally a divisible form of survivor annuity. Hence, if a "Fractional QPSA" is awarded to an Alternate Payee, practitioners should be mindful to incorporate language that does not bar a subsequent spouse from the remaining QPSA benefit.

Drafting Alert.

This QPSA protection for the Alternate Payee is available provided the attorney representing an Alternate Payee has inserted appropriate language into the Marital Settlement Agreement and Domestic Relations Order. Avoid presumptions and unclear language. If attorney intent is to award a QPSA to an Alternate Payee then she or he must clearly insert such language into the foundation agreements and into the Domestic Relations Order.

Caution to Attorney Representing the Participant Spouse.

There cannot be uncertainty on this issue. If a QPSA is inserted into the Property Settlement Agreement and Domestic Relations Order and it is subsequently determined that this Plan does not require the QPSA since the Separate Interest is effective at the time of Qualification of the Domestic Relations Order, then the Alternate Payee will "double dip".

  • Collect the QPSA benefit, and in addition…
  • Collect her or his Separate Interest benefit

Summary.

If the Alternate Payee is awarded a Separate Interest, then, from the effective date of this Separate Interest, no further protection is required to prevent loss of entitlement to an annuity award to this Alternate Payee. It is now clear that as of its effective date a Separate Interest creates a separate property interest for the benefit of the Alternate Payee. The assigned benefit is now the "property" of the Alternate Payee. Upon the Separate Interest's effective date the separate property interest of the Alternate Payee vests in the Alternate Payee. Once again, it is emphasized that this insulation from loss of benefit only ripens as of the "effective date" of the Separate Interest. Prior to this date and absent the QPSA (when required), the award to the Alternate Payee remains evanescent. In effect, from the effective date of the Separate Interest Award, only the death of the Alternate Payee terminates this property interest. [6]

Cost of a Separate Interest QDRO.

The cost of a Separate Interest Award to an Alternate Payee is expressed as an "actuarial reduction" to the benefit otherwise paid to the Alternate Payee. The full cost of a Separate Interest QDRO is attributed to the Former Spouse. There is no cost to the participant/retiree to award a "Separate Interest" to an Alternate Payee. Since, many plans do not use "sex neutral" actuarial tables, when the Alternate Payee is a female the cost of her benefit will be greater than the cost of an equivalent benefit to a male. If the Alternate Payee is female and younger than the participant/retiree the reduction to her benefit will be disproportionately greater than for an equivalent male retiree.

Joint & Survivor Annuity (JS).

This is the type of Survivor Annuity that can be awarded to a Former Spouse to protect against loss of benefit as a result of the death of the participant SUBSEQUENT TO RETIREMENT. Unlike the QPSA, the Joint and Survivor Annuity has significant cost.

Forms of Joint and Survivor Annuity.

  • Joint and 100% Survivor Annuity
  • Joint and 50% Survivor Annuity
  • Joint and 25% Survivor Annuity
  • Fractional Survivor Annuity

Explanation.

Joint and 100% Survivor Annuity. Upon the death of the retiree 100% of the benefit paid to the retiree will be paid to the Alternate Payee.

Joint and 50% Survivor Annuity. Upon the death of the retiree 50% of the benefit paid to the retiree will be paid to the Alternate Payee.

All ERISA Plans are required to provide a survivor annuity that is not greater than a Joint and 100% and is not less than a Joint and 50% Survivor Annuity. [7]

Fractional Alternate Payee Survivor Annuity.

This form of survivor annuity is unique to divorce actions. A Domestic Relations Order may provide for the allocation of the Joint and 50% Survivor Annuity on the basis of a Coverture Fraction (Time Rule).

Fractional Alternate Payee Survivor Annuity Explained.

Total Monthly Benefit At Retirement $4,200.00

Assumed Coverture Fraction 65%

Marital Monthly Benefit $2,730.00

Assume Alternate Payee Survivor Annuity $1,365.00

Fractional Survivor Award to Alternate Payee 65%

Computed as Follows:

Full Survivor Annuity

($4,200.00 ÷ 50% = $2,100.00)

Alternate Payee Full Mo. Benefit $1,365.00

To protect the Alternate Payee from loss of benefit she must be given an Alternate Payee Survivor Annuity equal to her living annuity or $1,365.00

This award equates to 65% of the total Survivor Annuity.

($2,100.00 * 65% = $1,365.00)



[1] ERISA: Employee Retirement Security Act. Relevant portions of ERISA are found at 26 U.S.C. 414(p) and 29 U.S.C. 1055 and 1056.

[2] In the article on "Shared Payment" QDRO, it will be noted that a reversionary interest may exist. It is emphasized that for "Separate Interest" this reversionary interest does NOT exist.

[3] Clearly, the practical effect of this option is that the death of the Alternate Payee prior to her or his Annuity Starting Date, extinguishes the Alternate Payee's benefit.

[4] 26 U.S.C. 417(f)(2).

[5] This is the full definition of a QPSA as found at 29 U.S.C. 1055(e).

"Qualified preretirement survivor annuity" defined

For purposes of this section—

(1) Except as provided in paragraph (2), the term "qualified preretirement survivor annuity" means a survivor annuity for the life of the surviving spouse of the participant if—

(A) the payments to the surviving spouse under such annuity are not less than the amounts which would be payable as a survivor annuity under the qualified joint and survivor annuity under the plan (or the actuarial equivalent thereof) if—

(i) in the case of a participant who dies after the date on which the participant attained the earliest retirement age, such participant had retired with an immediate qualified joint and survivor annuity on the day before the participant's date of death, or

(ii) in the case of a participant who dies on or before the date on which the participant would have attained the earliest retirement age, such participant had—

(I) separated from service on the date of death,

(II) survived to the earliest retirement age,

(III) retired with an immediate qualified joint and survivor annuity at the earliest retirement age, and

(IV) died on the day after the day on which such participant would have attained the earliest retirement age, and

(B) under the plan, the earliest period for which the surviving spouse may receive a payment under such annuity is not later than the month in which the participant would have attained the earliest retirement age under the plan.

In the case of an individual who separated from service before the date of such individual's death, subparagraph (A)(ii)(I) shall not apply.

(2) In the case of any individual account plan or participant described in subparagraph (B) or (C) of subsection (b)(1) of this section, the term "qualified preretirement survivor annuity" means an annuity for the life of the surviving spouse the actuarial equivalent of which is not less than 50 percent of the portion of the account balance of the participant (as of the date of death) to which the participant had a nonforfeitable right (within the meaning of section 1053 of this title).

(3) For purposes of paragraphs (1) and (2), any security interest held by the plan by reason of a loan outstanding to the participant shall be taken into account in determining the amount of the qualified preretirement survivor annuity.

[6] This statement requires clarification. Upon retirement the Alternate Payee may elect any option that is available to the participant, other than a Joint and Survivor Annuity with a subsequent spouse. If the Alternate Payee elects a period certain annuity the annuity need not end on the Alternate Payee's death. Rather, it will be paid for the greater of the period certain (e.g. 10 years, 15 years, 20 years) of the lifetime of the Alternate Payee. Naturally, if the Alternate Payee dies prior to her of his Annuity Starting Date, no benefit is payable. Annuity Starting Date means Benefit Commencement Date.

[7] This definition is found at 26 U.S.C. 417(b). It provides in relevant part:

the term "qualified joint and survivor annuity" means an annuity—

(1) for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse, and

(2) which is the actuarial equivalent of a single annuity for the life of the participant.