Many people facing the prospect of divorce are surprised to learn that pension benefits accrued during the course of a marriage are considered marital property (or, in some states such as California, community property) that is divided between the spouses upon divorce. A pension plan falls under the category of retirement plans known as defined benefit plans. These types of retirement plans generally provide that upon retirement, the participant (employee) is entitled to a monthly annuity that is payable over his or her lifetime.
Because of certain provisions contained a Federal law known as the Employment Retirement Security Act, a divorce judgment or matrimonial settlement agreement, standing alone, is not a legally sufficient mechanism for dividing a pension plan. It is essential that a further order, known as a qualified domestic relations order (QDRO) be entered by the court and approved by the pension plan administrator.
In situations where the participant spouse is not yet retired, the QDRO form can utilize two different methods for dividing pension benefits. These include the “shared interest approach” and “separate interest approach.”
If a QDRO form uses the Shared Interest Approach, payments to the Alternate Payee cannot begin until the Participant chooses to retire and begins to receive a retirement allowance. Furthermore, payments to the Alternate Payee must end upon the Participant’s death unless the Alternate Payee was designated in the QDRO as the surviving spouse of the Participant for the purpose of electing a Qualified Joint and Survivor Annuity and such election was elected by the Participant at the time of the Participant’s retirement.
If a QDRO form applies the Separate Interest Approach, a “separate interest” is carved out for the Alternate Payee and adjusted to his or her actuarial life expectancy. In addition, the Alternate Payee controls the timing and manner of his or her receipt of the benefit payments. The Alternate Payee can commence receiving benefits at the Participant’s earliest retirement date, rather than wait for the Participant to begin to receive a retirement allowance.
In most instances, it is highly beneficial for the non-participant spouse that the QDRO form utilize a separate interest approach. Sample QDRO forms are available for download. Upon completion of a proposed QDRO form, the document must be submitted to the pension plan administrator for approval, and, thereafter, to the divorce court adjudicating the matter.