16.03 Deferred Distribution

The nonemployee spouse is awarded a piece of the employee's pension when that pension becomes payable, hence the word "deferred." In an ERISA plan, this is at the employee's earliest retirement age. Some ERISA defined contribution plans have been amended to allow the distribution immediately instead of waiting until the employee's earliest retirement age

Defined contribution plans allow for the transfer of a lump sum from the employee's plan interest to the other spouse's IRA (referred to as an IRA rollover) or a cash payment to the other spouse, since the pension is in the form of an individual account balance. Some defined benefit plans also allow for the transfer of a lump sum to the nonemployee spouse.

A deferred distribution or lump sum transfer is usually accomplished by a qualified domestic relations order (QDRO). The word "qualified" refers to a plan being qualified under ERISA. Therefore, strictly speaking, the term "QDRO" refers to ERISA plans only. However, non-ERISA plans, such as the federal Civil Service Retirement System, recognize court orders similar to a QDRO that attach a component of a member's pension for the benefit of a former spouse.

The Retirement Equity Act of 1984 (REA) created rights for the former spouse. REA is the federal statute that created the QDRO. REA also created rights for a current spouse that did not exist under ERISA. Under REA, a married employee must choose a joint and survivor annuity at retirement so that, in the case of the death of the participant, the surviving spouse will receive no less than 50 percent of the monthly payment or annuity paid while the participant was alive. REA also states that under a QDRO, the former spouse (known as the alternate payee) shall be treated as a surviving spouse for both pre-retirement and postretirement death benefits, regarding the portion of the pension that is divided under the QDRO. Since a current spouse must be provided a death benefit, a former spouse also has the right to a death benefit under a QDRO, so that benefits continue after the death of the participant. In fact, as discussed in 16.09, the logic of REA with respect to QDROs allows a plan to create a pension payable over the alternate payee's lifetime, independent of the life of the participant. In this way, the death of the participant after retirement has no effect on the alternate payee's benefits. This type of division of pension benefits is often referred to as a "separate interest benefit." If the alternate payee's benefit is tied to the life of the participant, it is called a "piggyback, or shared interest benefit."

Divorce counsel must decide whether the immediate offset or deferred distribution QDRO approach is the best for his or her client in each case. The initial consideration is what liquid assets or cash are available to the spouses. If the employee spouse lacks the initial resources to buyout the nonemployee spouse's interest in his pension with offsetting assets, a QDRO will usually be necessary.

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