How Shared Payment Vs. Separate Interest Qualified Domestic Relations Orders (QDROs) Address Unique Pension Splitting Challenges For Divorcees
Over the last few decades, divorces among couples over age 50 have been increasing dramatically, even though the overall US divorce rate has decreased, giving rise to the phenomenon known as “grey divorce.” Which means that, given the fact that older couples have had decades to accumulate shared assets, splitting those assets between divorcees can be a thorny situation, and one that has become a common issue that financial planners have to address. As while splitting IRA accounts is relatively straightforward, ERISA-qualified plans, which include defined contribution 401(k) and defined benefit pension plans, can be much more complicated to divide.
For instance, when ERISA-qualified plans are split, they require a formal document, known as a Qualified Domestic Relations Order (QDRO), in order to be divided. A QDRO identifies the Plan Participant and Alternate Payee (the former spouse receiving a benefit via the QDRO), how the benefit will be divided, and the amount of time or number of payments for which the QDRO will be in effect. For defined benefit plans, in particular, the QDRO also determines whether the plan will be divided using either the “Shared Payment” or “Separate Interest” method. For defined benefit pension plans, both forms of QDRO methods address the question, “How much will I get/give?”, but the “Separate Interest” method gives the Alternate Payee additional flexibility in terms of “How?” the benefits they receive under the plan will be paid.
Specifically, the Shared Payment QDRO is based on the Participant’s retirement date and life expectancy, and the ex-spouse Alternate Payee’s benefits will generally begin and end at the same time they do for the Participant. Furthermore, in the event the Participant dies before beginning to receive benefits under the plan, the Alternate Payee won’t receive any benefits unless a Qualified Pre-Retirement Survivor Annuity (QPSA), guaranteeing survivorship benefits, is created by the QDRO. Thus, the Shared Payment QDRO can lead to some serious planning challenges for the Alternate Payee, should the Participant die first. However, if the Alternate Payee dies first after pension benefits begin, their share of the benefit will often shift back to the Participant.
On the other hand, a Separate Interest QDRO splits the plan balance between the Participant and Alternate Payee, before payments have begun. This gives both the Participant and the Alternate Payee control over how their share of plan benefits will be paid and eliminates the Alternate Payee’s risk of payments ending upon the Participant’s death.
Ultimately, the key point is that a QDRO offers some flexibility in planning strategies for both the Participant and the Alternate Payee. While the Shared Payment method must be used if the Participant has already begun payments when the QDRO is implemented, either the Shared Payment or Separate Interest strategy can be chosen if the QDRO is implemented before pension benefits begin. These choices allow for more flexible planning for both parties, possibly lowering at least one hurdle for older couples who choose to divorce.