The McKeogh Company - Actuaries Club of Philadelphia

James J. McKeogh, FSA
February 12, 2013
The McKeogh Company
What are QDROs and what do they have to do with
Two varieties: Shared Payment and Separate Interest
Beware of Early Retirement Subsidies
Post Retirement QDROs
Disability and Settlement Dates
QDRO Procedures
Pension Plan Valuations --First really new data category
since vesting
The McKeogh Company
Created by the Retirement Equity act of 1984
Defined in Section 414(p) of Internal Revenue
A domestic relations order which meets
certain specific requirements (i.e. is
Removed conflict between ERISA’s antialienation provisions and court orders
The McKeogh Company
Code Section 414(p)(3)- Order must “not
require the plan to provide increased benefits
(determined on the basis of actuarial value)”.
Code Section 414(p)(4) –Order may require
payment to alternate payee “before a
participant has separated from service” but
“on or after the date the participant attains
the earliest retirement age” and “not taking
into account the present value of any
employer subsidy for early retirement”.
The McKeogh Company
“Actuaries should not be involved with
administration of QDROs. They are legal
documents and any questions should be
addressed by legal counsel”
The McKeogh Company
Under a Shared Payment QDRO, the plan pays
exactly what it would have paid absent the
QDRO but directs part of the participant’s
payments to alternate payee(s).
Example: QDRO orders plan to pay participant
his pension in form of reduced 50% J&S with
half payment going to AP while both alive. If
AP dies first, AP share reverts to participant.
If participant dies first, AP gets 50% survivor
The McKeogh Company
Under Separate Interest QDRO, value of benefit
assigned to AP converted to annuity based on AP
Example: QDRO orders 50% of Participant’s
pension assigned to AP and converted to life
annuity on AP life. Participant’s pension of
$2,000 is reduced to $1,000 single life annuity.
Because AP is younger than participant, AP gets
$800 for life. Neither death of participant nor
death of AP affects the other’s benefits
(I still have not found adequate words to explain to
an AP the “missing” $200 in this example)
The McKeogh Company
A Plan has a “30 & Out” provision with no
reduction for early retirement. Participant is
Separate interest QDRO orders 50% of her $1000
pension assigned to AP who is same age. If
participant retires at 55 both she and AP get
$500 for life. If participant does not retire but AP
wants to begin payment, he gets $250 (actuarial
equivalent of NR benefit).
QDRO specifies AP entitled to share of ER
subsidies if participant subsequently retires early
and AP’s benefit should be recalculated.
The McKeogh Company
What happens to AP’s benefit if Participant
decides to retire one year later at age 56?
Nothing. Stays at $250.
Increases to $500.
The McKeogh Company
What happens to AP’s benefit if Participant
does not retire until NR at age 65?
Nothing. Stays at $250.
Increases to $500.
The McKeogh Company
AP should receive value of ER Subsidy as if AP
retired at same time as participant but with an
offset for payments already received.
The McKeogh Company
PBGC Publication 100 (revised October 2012)
states that, for PBGC trusteed plans, its “Model
Separate Interest QDRO may be used only if the
participant’s benefit payments have not started
when the domestic relations order is submitted
to PBGC for qualification”.
The McKeogh Company
Can a QDRO order benefits be paid to an AP
in the event a disability pension benefit is
Can a plan restrict the types of QDROs to
Shared Payment QDROS?
What happens if the disabled participant
recovers from the disability?
If a Separate Interest QDRO, what mortality
table is appropriate for the disabled life?
The McKeogh Company
What is the appropriate “as of” date to
determine the split of a participant’s benefits
under a Separate Interest QDRO?
A. The date the QDRO is qualified.
B. The date the benefits are vested.
C. The date benefits are first payable.
D. Other.
The McKeogh Company
Code Section 414(p)(6)“Each plan shall establish reasonable procedures to
determine the qualified status of domestic
relations orders and to administer distributions
under such qualified orders”.
“ the plan shall promptly notify the participant and
each alternate payee of the receipt of such order
and the plan’s procedures for determining the
qualified status of domestic relations orders”.
The McKeogh Company
Data furnished to actuaries should contain
sufficient information so that:
◦ Actuary can estimate liability
◦ Actuary can spot check calculation of benefit (i.e.
there should be sufficient audit trail)
◦ Actuary can compare one year’s data to the next
For years, QDROs were rare enough and
simple enough (we might look at a shared
payment QDRO as a non-event) to be ignored
or valued as exception.
The McKeogh Company
Today, we see increasing numbers of pensions
being split in accordance with terms of QDROs .
Some pensions might be held in escrow if QDRO
terms are in dispute .
There may be a significant portion of a
participant’s pension NOT subject to a QDRO and
a different form of payment elected with new
spouse as contingent annuitant for the nonmarital component.
There may be multiple QDROs.
For a growing number of sponsors,
recordkeeping and reporting is anything but
The McKeogh Company