It is important to remember that under this type of plan, the Alternate Payee is typically not awarded a lump sum cash payment from the Plan. It is usually a requirement of the Plan that the amount awarded to the Alternate Payee be expressed in terms of a monthly benefit payable for either the lifetime of the Participant or the Alternate Payee.
When writing a QDRO for a Traditional Defined Benefit Plan there are two approaches that may be followed:
Shared Interest Approach: Under this type of QDRO, the Participant and the Alternate Payee “share” the benefit paid from the Plan. The Alternate Payee may not begin to receive benefits until the Participant actually retires and begins receiving benefits. The Plan will only pay the amount awarded to the Alternate Payee for the lifetime of the Participant. If it is the intention of the parties that the Alternate Payee receive benefits after the Participant�s death, the Participant must elect a joint & survivor annuity upon his/her retirement and designate the Alternate Payee as the survivor annuitant for this benefit.
There are three disadvantages for following this approach to dividing the benefits. * The Alternate Payee cannot begin to receive benefits under the Plan until the Participant actually retires and begins receiving benefits. Therefore, if the Participant chooses not to retire, the Alternate Payee never receives the amounts awarded.
* By forcing the Participant to elect a joint & survivor annuity with his/her ex-spouse as the designated survivor annuitant, any subsequent spouse of the Participant could be left without any share of the Participant�s benefits after his/her death.
* The joint & survivor annuity will reduce both parties� share of the benefits. Separate Interest Approach: Under this approach, the Alternate Payee and the Participant receive “separate” benefits. The Alternate Payee may begin receiving benefits, at his/her election, anytime after the Participant reaches earliest retirement age. The Plan may perform various actuarial adjustments to the Alternate Payee�s benefit in order to convert it to an amount that may be paid to him/her for life. Therefore, after benefits commence, the death of the Participant will have no affect on payment to the Alternate Payee.
There are three advantages for choosing this approach to dividing the benefits. * The Alternate Payee does not have to wait for the Participant to retire to begin receiving benefits.
* The Participant does not have to make any choices that could jeopardize a new spouse in order to protect the interest of an ex-spouse.
* This separate interest approach provides more flexibility to both parties without a financial impact for either party.
When writing a QDRO for a Cash Balance Defined Benefit Plan it is important to understand the following: * A Cash Balance Plan is a hybrid that falls between a Defined Contribution Plan and a Traditional Defined Benefit Plan. Individual accounts are maintained for each employee. Therefore, employees can receive an immediate lump sum distribution when they terminate employment.
* Employees receive defined pension credits every year based upon a set percentage of their annual salary. In Addition, the employees account balance will receive interest credits at a specific annual rate of return which is determined by the Plan. The employee does not have any input as to how the account balance is invested.
* Most Cash Balance Plans are “conversions” from a Traditional Defined Benefit Plan. It is important to know the date the conversion was made in order to establish the Alternate Payees interest if the parties were married prior to the conversion.
Money Purchase Plans contain individual participant accounts, but they are technically determined to be a defined benefit plan. This is because these plans have defined formulas for determining the participant�s benefits that guarantee a specified and predetermined level of annual contributions that generate interest and earnings. These plans look like a traditional defined contribution plan because individual accounts are created for each participant. Understanding the Money Purchase Plan