Why Are Survivor Benefits Important with a QDRO?
Traditional pension plans begin a monthly benefit at retirement, and end upon the retiree’s death. Survivor benefits – if elected – allow some or all of the benefit to be paid until the death of the spouse or former spouse.
In the context of a divorce, these benefits can only be put in place by using a special court order called a QDRO or DRO. Survivor rights are one part of this order, but they are a very important part of it. These benefits are often overlooked which is why it is important to work with an attorney who fully understands the crucial nature of these plan benefits.
What is a QDRO?
Colorado divorces divide all the assets you and your spouse acquired during your marriage, including retirement. If you or your spouse have an employer-sponsored retirement account such as a pension or 401k that was opened or which increased in value during your marriage, that is considered a marital asset and is subject to division in the divorce or legal separation. Because these types of retirement are generally non-assignable, they can only be divided in a divorce or legal separation through a particular kind of court order called a qualified domestic relations order (QDRO).
A QDRO is prepared by one of the attorneys in the case in consultation with the retirement plan to ensure that the specific language required by the plan is incorporated into the plan. The judge then signs the order as an order that is separate from the judgment of divorce.
The person who was employed and has the plan in their name is called the participant or employee. Their spouse or former spouse who receives part of the participant’s pension in the divorce is called the alternate payee or non-employee spouse.
Importance of Survivor Benefits
The pension is often one of the largest assets in a divorce. Therefore, significant attention should be paid to dividing it fairly and certainly not overlooking it.
One of the big questions when dealing with a pension is whether it is going to be paid over the lifetime of the employee or whether it will also be paid out over the lifetime of the non-employee spouse. This is crucial because if you are the non-employee spouse, your payments end upon the death of the employee.
If your ex dies two years after the divorce, you will receive no more funds from that pension. If this was a significant asset in your divorce, you’ve lost most of it. Ensuring you can receive payment for your lifetime increases your financial stability. And what’s more, if your ex re-married and designated a new spouse for the survivor benefits, not only will you not receive your marital share, but you will see the new spouse receive your monies.
How Survivor Benefits Work
Pension plans must include the option of survivor benefits for the non-employee spouse. To avoid any future problems, the survivor benefits should be addressed in the QDRO. There are two types of survivor benefits with pension plans:
- QJSA: A QJSA (qualified joint and survivor annuity) is a benefit that protects the non-employee spouse in the event that the employee spouse dies once retirement commences.
- QPSA: A QPSA (qualified preretirement survivor annuity) is a benefit that protects the non-employee spouse in the event that the employee spouse dies before retirement commences.
Once a couple divorces, the non-employee spouse has no rights to the survivor benefits unless it is stated in the QDRO. That’s where the QDRO comes into play and ensures they can receive their share of the marital property division
Approaches to Dividing a Pension
There are two ways a pension can be divided using a QDRO.
Shared Interest Approach
In this approach, the pension remains as is. When the participant commences the retirement benefit, the alternate payee is then paid a portion of that payment. The alternate payee gets nothing until the participant retires. If the alternate payee dies, the participant’s share is restored (this is called reversion). If the participant dies, nothing further is payable to the alternate payee unless a survivor benefit option was elected.
With this approach, it is advisable that the QDRO award a QSPA so that the alternate payee will receive payments even if the participant dies before retiring. A QJSA ensures that the alternate payee can continue to receive payments even if the participant dies after retirement commences. If the alternate payee dies first, the participant receives both their share and that of the alternate payee.
Separate Interest Approach
This approach is not available with all plans, and never once the retirement benefit has already commenced. The separate interest approach allows the alternate payee to begin receiving their annuity as soon as the participant could elect to receive their pension benefit, but no later than the participant does start. If available, the separate interest approach may be the best choice as the alternate payee does not have to wait for the participant to decide to retire. A new account is essentially created and payments (actuarily adjusted) are made throughout the rest of the alternate payee’s lifetime. The benefit of this is that the alternate payee can start to collect as soon as the participant can, and payments will continue for the lifetime of the alternate payee once started. This means that a QPJA is never needed with a separate interest approach. However a QPSA is still advisable.
There are two considerations: 1) what happens if the non-employee spouse remarries; and 2) what happens if the employee spouse remarries:
- In the context of federal pensions (including military retired pay), the non-employee spouse’s remarriage before age 55 will invalidate the survivor benefit. With all plans, the non-employee spouse can never designate a subsequent spouse for a survivor benefit for their awarded portion of the plan.
- The employee spouse is limited, or will be prohibited from naming a new spouse as a survivor benefit.
If you are going through a divorce and you or your spouse has a pension plan, it is essential that you work with a Colorado attorney who is experienced in handling QDROs so that the pension plan can be handled correctly in your divorce. Burnham Law attorneys have years of experience with pension plans and QDROs and are ready to represent you. Make an appointment now by calling our offices at 303-990-5308.