defined benefit plan QDRO can be extremely confusing when it comes to estimating how much the participant and alternate payee can expect to receive upon retirement. This article is intended to help clarify how this calculation is done and what a QDRO can (and cannot) require the plan to do when calculating an alternate payee’s benefit.
Often times a Judgment of Dissolution of Marriage will state (incorrectly) a specific dollar amount the alternate payee will receive as a result of a QDRO on participant’s defined benefit plan. This can result in a partial or complete waiver of spousal support due to a misrepresentation of alternate payee’s expected monthly income.
Assume participant’s current monthly benefit is $3,000/mo., payable at normal retirement age (typically 65) and is entirely community property in nature. Participant and alternate payee will each receive a lifetime benefit of $1,500 per month payable at the participant’s age 65. While this is true for the participant as the benefit is based on their age, the alternate payee will receive a benefit equal in actuarial value to $1,500/mo payable over participant’s lifetime. However, the monthly dollar amount alternate payee receives will be actuarially adjusted for gender and the alternate payee’s age on the date they elect their benefit (i.e. the Benefit Commencement Date (BCD)). Furthermore, if participant was eligible for an early retirement subsidy but did not actually retire at the same time as alternate payee, the plan will not pay any portion of the early retirement subsidy to alternate payee (unless participant subsequently retires with subsidized early retirement benefits).
Simply put, a QDRO cannot require the plan to pay an alternate payee a monthly benefit that includes any early retirement subsidy if the plan does not actually pay that to a participant at the same time as well, nor can the plan be required to pay an alternate payee a lump sum if the plan does not already provide that payment option to its participants (not including required cash-outs for small value awards).
Example of Income Streams: Assume Participant’s current total benefit payable at age 65 is $3,000 per month and is entirely community property in nature. Both Participant and Alternate Payee will receive 50% of the accrued benefit at normal retirement age, and both parties are now age 55.
Alternate Payee’s monthly income stream assuming (a) commencement at age 65, (b) age 55 with early subsidy and (c) at age 55 without early subsidy (before conversion from participant to alternate payee’s lifetime):
If the Judgment stated Alternate Payee would receive $1,500/mo as a result of the QDRO but failed to acknowledge Alternate Payee is only age 55 and Participant would not be retiring immediately, then Alternate Payee would receive $900 per month LESS than what was anticipated.
*This is not an error in the QDRO but rather an error in the representation of alternate payee’s expected income stream.*
Whether you are a Collaborative attorney, mediator or Certified Divorce Financial Analyst (CDFA), obtaining an accurate estimate of client monthly income streams can be integral part of any negotiation and will ensure such unwelcome surprises at the time of benefit commencement do not occur.