How to divide a defined benefit pension plan with a QDRO

A qualified domestic relations order (QDRO) is a crucial legal document that acknowledges the entitlement of an alternate payee to receive a portion of the pension benefits. Learn about different approaches like the shared interest, separate interest, and lump-sum methods, as well as various ways to calculate monthly shares.

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When facing a divorce where either you or your spouse has a defined benefit pension plan, it may be necessary to utilize a qualified domestic relations order (QDRO) to fairly distribute the pension benefits. A QDRO is a legally binding document that acknowledges the entitlement of an alternate payee, such as a spouse, former spouse, child, or other dependent, to receive a portion of the pension benefits from the plan participant.

A defined benefit pension plan is a retirement plan that guarantees a specific income stream for the participant throughout their life, determined by various factors like salary, age, and years of service. Unlike a defined contribution plan, such as a 401(k), the participant does not possess an individual account balance that can be readily divided during a divorce settlement. Instead, the QDRO must outline the specific portion of the pension benefits allocated to the alternate payee and the timing of these payments.

Several methods can be employed to divide a defined benefit pension plan through a QDRO, contingent upon the nature of the plan, the stipulations within the divorce agreement, and the preferences of the involved parties. Here are some commonly used approaches:

  1. The shared interest approach: This method splits the pension benefits equally between the participant and the alternate payee at the time of retirement. The alternate payee receives a percentage of each monthly payment for as long as both parties are alive. This method requires the use of survivor benefits for the alternate payee and it makes the alternate payee’s share dependent on the participant’s retirement date and lifespan.
  2. The separate interest approach: This method assigns a portion of the pension benefits to the alternate payee as if they were a separate participant in the plan. The alternate payee can choose when to start receiving payments, independently of the participant’s retirement date. The amount of the payments depends on the actuarial value of the alternate payee’s share and their life expectancy. This method gives more flexibility and control to the alternate payee, and in many cases, it means survivor benefits are not required for the alternate payee to receive a pension for his entire lifetime. 
  1. The lump-sum approach: Most plans will not allow this, but for the ones that do, this method transfers a lump-sum amount from the participant’s pension plan to an individual retirement account (IRA) or another qualified plan for the alternate payee. The lump-sum amount is calculated based on the present value of the alternate payee’s share of the pension benefits. This method allows the alternate payee to invest and manage their own retirement funds, but it also forfeits any future increases in the pension benefits and any survivor benefits. Keep in mind also that if a pension plan offers a lump sum, it is usually a bad deal – the alternate payee’s lifetime of income is being bought out at a discount up front.
  2. Various methods to calculate monthly shares: Most parties and courts have endorsed a division method called the coverture method, where the participant’s service time during marriage is converted to a percentage of their final check though a formula. Other couples may choose a simpler percentage of a final check or a fixed dollar amount.

To prepare a QDRO for dividing a defined benefit pension plan, you will need to gather information such as:

  • The name and address of the plan participant and the alternate payee
  • The name and address of the plan administrator
  • The name of the plan
  • The date of marriage and date of divorce
  • The formula or method for calculating the alternate payee’s share
  • The timing and form of payment for the alternate payee
  • The allocation of fees and expenses between the parties
  • The contingency provisions for death, disability, remarriage, or other events

A QDRO must be approved by both parties, the court, and by the plan administrator before it can take effect. It is important to prepare your order carefully and with language that has been well-tested, such as the language we use in our orders. Our platform allows you to draft your own orders, preview the document before paying, and to download editable documents in case further edits are needed – get started today.

Willie Peacock
Author: Willie Peacock

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