In a Qualified Domestic Relations Order there are two common approaches used to split the benefit payments under a defined contribution plan and under a defined benefit plan. They are:
- Shared payment approach
A shared payment approach enables an alternate payee to receive a portion of the benefit payment that would normally be paid to the participant of the retirement plan. In other words, the alternate payee will not receive any benefits until the participant receives a benefit. Many times this approach is used when the participant is already receiving payments when the QDRO is in the process of being prepared.Under a shared payment approach the QDRO needs to specifically state the amount or percentage of each payment the alternate payee will receive from the retirement plan. Furthermore the QDRO should indicate how long the payments from the retirement plan will be made to the alternate payee. It is important to arrive at a logical payment term or you may risk having the plan administrator not approve of the distribution. It is worthy to note, all payments will come from the retirement plan directly not from the participant of the retirement plan.The QDRO must specify the term of the payments (i.e. begin and end dates). When the child support starts is often the date the domestic relations order (DRO) becomes a QDRO. If the alternate payee is for a child it is common for the payment term to end when the child finishes college. If the alternate payee is for a former spouse it is common for the ending date to be when the former spouses remarries or passes away. - Separate interest approach
The separate interest approach is different from the shared payment approach. Instead of arriving at an equitable allocation of future distributions (i.e. assignment of payments) the separate interest approach provides the participant an interest in the retirement benefit that is no longer tethered to the participant. This approach provides the alternate payee more control over when, and in what form, the alternate payee wants to receive any benefit payments. Similar to a shared payment approach, the separate interest QDRO would need to indicate the dollar amount, percentage of the total benefits, payment term along with a method that leads to a logical calculation of the total amount of future payments to be made to the alternate payee. It is important to note, future payments have to align to the constraints of the retirement plan to distribute monies to the participants.If the separate interest approach is applied to a situation, the financial divorce expert should address whether the alternate payee should receive survivor benefits or any other benefits that are payable under the plan. As a result a careful read of the retirement plan may bring forth alternative benefits not visible on the surface.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
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This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.