A look at the three common pitfalls in the formulation of QDROs for clients. One of them is the misunderstanding of the concept of coverture.
By Mark Altschuler, Actuary
1. Survivor Benefit Language
When formulating QDROs for clients, the biggest pitfall is in the survivor benefit language, which is critical to maintain benefit levels in various plans. In most state and federal plans, more than one survivor is allowed, which means that even if the language is not explicitly formulated in the agreement, it still applies and can be claimed. There are certain exceptions, such as the New York City Employee Retirement System, which only allows one survivor, and the Florida Retirement System, which allows none – regardless of the language used in the agreement. For military service members, the survivor benefit language is imperative because there can’t be two survivors. The Military Court Order (i.e. a QDRO in the military) usually provides that the first spouse is the survivor, so the second spouse cannot be added to the agreement. The only workaround possible is if the first spouse agrees to indemnify the second spouse as the sole survivor beneficiary. Language must be previously implemented in the marital settlement agreement to be enforced, especially in military orders, and must be clear even in plans that automatically delegate the alternate payee’s portion, or risk the benefit halve when the plan holder dies.
2. Understanding The Concept of Coverture
Another big pitfall is the misunderstanding of the concept of coverture. Many attorneys will put language in their agreements that the alternate payees portion would be 50% of the benefit accrued from marriage until the cut-off date. Where the marital piece of the pension ends at the cut-off date is a concept called bright line, and only applies in Virginia, Texas and Florida. Most states follow the coverture method, where the marital piece doesn’t end at the cut-off date but is a continued benefit during retirement called the coverture fraction, which is service during the marriage divided by total service. If you put in language “one half the marital portion” then in a coverture state it automatically means that—yet many agreements say that one half the benefit accrued between marriage and the cut-off date, which means you could be short-changing your client.
3. Dollar Amounts and Lump Sums in Defined Benefit Plans
The third of the QDRO pitfalls is including a dollar amount or lump sum value in a defined benefit pension plan marital settlement agreement. In one case, the marital pension valuation was $96,000. Typically, you take a valuation, the pension’s dollar lump sum value, and do an offset with any other involved assets, such as the house, to come to a percentage award. Another good solution is a complete cash buyout. According to the language in the faulty Marital Settlement Agreement, the alternate payee gets 50%, “half of $96,000”. A valuation is unnecessary if the alternate payee gets 50%, but the extra language referencing $96,000 could limit the award to the alternate payee. The participant said that the spouse was only entitled to half of $96,000, because of the superfluous language referencing $96,000. Limiting the Alternate Payee’s award to $48,000 disallows a coverture QDRO. In addition, $48,000 cannot be paid as a lump sum from a defined benefit pension.
Mark K. Altschuler is President of Pension Analysis Consultants, Inc., serving all 50 states from offices in Pennsylvania & Florida. He has performed over 25,000 pension valuations and QDROs, and is an affiliated member of the American Society of Pension Actuaries and Professionals.
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