Do terms like “pre-retirement survivor annuity” and “joint and survivor option” make your head spin? Is the retirement plan administrator not giving you the answers you need?
Before you can understand survivor benefits, as well as the need for such benefits, it is important to have a quick understanding of the two types of Qualified Domestic Relations Orders (QDROs) that we can use to divide a pension: the separate and shared interest forms of benefits.
A separate interest QDRO breaks out the ex-spouse’s portion of the pension benefit into a separate pension. Depending on the plan rules, this usually means that the monthly payment pension is guaranteed no matter what happens to the employee-participant spouse. Even if the employee-participant dies before retiring, the ex-spouse will still get paid for life. This is known as a severed separate interest.
Many other plans will guarantee payment of the separate interest pension for life to the ex-spouse, except when the employee-participant dies before retirement or before the ex-spouse files to commence payment on her benefits. Retirement of the employee-participant or an ex-spouse’s application for benefits triggers the pension. Failure to do either before the death of the employee-participant will leave the ex-spouse with nothing but pre-retirement survivor benefits.
Shared interest QDROs, on the other hand, leave the ex-spouse at the mercy of the lifespan of the employee-participant spouse. To simplify it a bit, the ex-spouse is simply given a percentage of the employee-participant spouse’s monthly benefit check every month, with little say in when the retirement checks begin and no protection when the employee-spouse dies. Hence, the need for both pre-retirement and post-retirement survivor “death benefits.”
In some cases, your divorce decree will explicitly state whether survivor benefits should be added to the QDRO. However, most divorce decrees lack this level of detail – and the issue becomes a point of contention between the parties. Before it does, let’s clarify whether survivor benefits should even be an issue for your pension QDRO.
Qualified Pre-Retirement Survivor Annuity (Pre-Retirement Survivor Benefits)
The Qualified Pre-Retirement Survivor Annuity (QPSA) is a vital benefit for all ex-spouses, except for those who will be the recipients of a severed separate interest pension. What these benefits do is provide monthly retirement benefits to the ex-spouse in the event that the employee-participant spouse dies before retirement. Typically, a QPSA provides a “surviving spouse” with a monthly check that is about half of what the employee-participant would have gotten had she retired on the day of her death. To be clear, formulas for QPSA amounts vary by plan – “half” is just a common figure.
Where this gets complicated is at the intersection between an ex-spouse and a surviving current spouse. Obviously, the employee-participant wants to protect her current spouse, if she has one, while the ex-spouse wants to protect her share of the pension, which she was probably counting on for retirement.
We often include language that gives the ex-spouse a portion of the survivor benefit that is capped at the amount she would have gotten if the employee-participant had not died. In other words, the ex-spouse is given the lesser of the amount she would have gotten or the full QPSA amount, leaving any leftovers for the current spouse. While this may seem unfair, it does protect an ex-spouse who had a long-term marriage with the employee-participant while still providing some income for a recent spouse with a shorter-term marriage.
Another possible arrangement is to do a proportional interest: the ex-spouse is given a percentage of the QPSA equivalent to her percentage of the overall pension. So, if at the time of retirement she would have gotten 40% of the employee-spouse’s retirement check, she is limited to 40% of the QPSA. This is obviously less beneficial for her because it basically cuts her expected pension check in half. But it also leaves more of the QPSA for a current surviving spouse – both the earlier ex-spouse and the current surviving spouse get benefits, in other words, but both get a little less than they would have expected.
One more possible trick we can pull out of our bag is to write this language all in conditionally: “If the employee-participant is married at the time of death, the QPSA shall be divided proportionally between the ex-spouse and the present day surviving spouse. If the employee-participant is not married at the time of death, the QPSA shall be assigned in full to the ex-spouse.” This conditional version arguably contains the best of both worlds: if there are two surviving spouses (one ex-spouse, one current spouse), they are both covered, but if there is not a current surviving spouse, the ex-spouse gets the whole benefit and none of the benefit is wasted and returned to the plan.
As you can imagine, depending on how you word these survivor benefits, there can be massive repercussions for the ex-spouse and current family of the employee-participant. This is why it is important to consult with an attorney on all of your possible options and concerns, rather than rely on the forms provided by the retirement plan or an online template website.
Post-Retirement Survivor Benefits
First things first: if the QDRO is a separate interest order, postretirement survivor benefits are frequently unnecessary. This is because, as a separate interest, the ex-spouse is given a pension that is actuarially adjusted to her lifespan, and her benefits will not stop upon the death of the employee-participant spouse.
But, if you are locked into a shared interest QDRO, which many state plans require and many private plans will require if the employee-participant has already retired at the time of divorce, postretirement survivor benefits are absolutely necessary to address in the QDRO. These benefits ensure that the ex-spouse will continue to receive pension payments after the death of the employee-participant spouse. So, if the employee-participant receives pension payments for 10 years after the date of divorce before passing away, with the ex-spouse receiving 20% of that check and the ex-spouse survives the employee-participant, a postretirement survivor benefit will continue her payments (though often in a reduced form, such as ½ payment) until her own death.
Much like the QPSA, there is much flexibility in how the survivor benefits can be distributed. We can set this up so that the ex-spouse gets the same percentage of the survivor benefit as she would have of the overall pension. We can set it up so that she gets the entirety of the survivor benefit if the employee-participant is unmarried at the time of death. Or we can set it up so that there are no survivor benefits at all — the catch with post-retirement survivor benefits is that the cost is usually borne by the parties in the form of a reduction inyour monthly payment.
Should We Address Survivor Benefits in a QDRO?
Yes. Please, for the love of God, please do.
I had a client consultation once — a very sticky case. Survivor benefits were in place at the time of divorce. The person who prepared the QDRO, using form language provided by the plan, did not address survivor benefits because both the lawyer and the client assumed that because survivor benefits were already in place, that they could not be changed after the QDRO was ordered.
Wrong. Depending on the retirement plan, some plans will allow you to change your survivor benefit beneficiary days, weeks, or years after the QDRO is entered. For this lady, because survivor benefits were not guaranteed in the divorce agreement, nor in the QDRO, nor in that state’s laws, she was pretty much up a creek without a paddle, as my mother would say – the assumption that the benefits were locked in without stating as much in the QDRO meant her ex-husband could change them without repercussion.
Does the Law Guarantee Pension Survivor Benefits?
Darn good question. And it is a question that is pretty much unanswered in most states. The tricky thing about QDRO law is that nobody understands it — divorce lawyers, parties, retirement plans, and least of all the people who make laws. Only a few weirdo niche lawyers, like myself, even contemplate these questions until it is too late.
Personally, I am licensed to practice in seven states. In most of these states, there are only a handful of actual legal cases that have ever dealt with any QDRO issues, not the least of which is survivor benefits. Basically, when it comes to QDRO law, we are still very much in the Wild West. Everything is negotiable. The law does not “require” anything with regard to survivor benefits in most states.
Do I Want Pension Survivor Benefits?
If you are the ex-spouse of the employee, obviously, you want to push for survivor benefits – especially preretirement survivor benefits. Typically you want to lock it in the QDRO so that it cannot be changed later.
If you are an employee spouse, you typically want to fight against survivor benefits because you want to preserve them for a future spouse. Also, post-retirement survivor benefits, and in a few rare plans, pre-retirement survivor benefits, are charged to the parties to the QDRO. In other words, it will cost you a little bit out of your check each month to lock in those benefits. A bit like life insurance — somebody has to pay the premiums each month. However, many people who have children with their ex-spouse decide to voluntarily assign survivor benefits to their ex-spouse to enable them to care for their children.
Who Pays for Pension Survivor Benefits?
This is one of those questions that is impossible to answer without knowing the exact facts of your divorce, your agreement, and your retirement plan. With some planning, we might be able to write the QDRO so that the ex-spouse pays for the whole cost of the survivor benefits. This way, if the ex-spouse wants the benefit, she will have to pay for it. With other plans, such as military retirement, the only option is for the plan participant to pay for all of the benefits – offsetting the cost by trading off other assets is an option to make things more equitable.
Do I Need Survivor Benefits on a Deferred Compensation 401(k), 403(b), etc.?
Typically, you do not need survivor benefits on a deferred compensation plan. This is because those plans strictly deal in cash amounts that are already defined. If the account says $40,000, then there is $40,000 in cash or investments. There are no guaranteed lifetime payments, like in a pension plan. The best thing to do with a deferred compensation plan, such as a 401(k), is to simply do the QDRO as soon as possible during the divorce or immediately thereafter, so that each party to the divorce has her funds separated into her own account. Waiting can have disastrous consequences, such as the employee-participant cashing out the account, records disappearing (so that an accountant has to be hired to estimate the parties’ shares) or the employee-participant dying and having a new spouse drain the account before the ex-spouse finds out.
What About Military Retirement Survivor Benefits?
Great question. Military survivor benefits require 10 years of marriage, overlapping with 10 years of military service, otherwise known as the “10/10” rule. Assuming that hurdle is cleared, survivor benefits are an option, but the service member has to pay for all of the costs of these benefits. In the interest of fairness, one may decide to trade off a small amount of service time for those survivor benefits (the ex-spouse gets a little bit less than her fair marital share to offset the cost of survivor benefits).
There are also important time limits to securing military retirement survivor benefits. It is important to think about survivor benefits and possibly write the retirement division order while the divorce is still going on. If you wait until years after the divorce to try to find an ex-spouse, you may find that you have given up some of your rights, like survivor benefits, by waiting.
What Do I Do If I Still Have Questions?
We offer a free 15-minute consultation, which you can book here. We’d be happy to talk through your scenario and see if we can get you some clarity.