Please comment on this QDRO award

[Fuzzy]

Originally Posted by DiscreteAndDiscreet

Answering the question more narrowly, if the participant, the AP, the judge, and the plan’s fiduciaries are mutually satisfied with an interpretation of a QDRO, it’s effectively valid even if an actuary thinks it’s nuts. Plan counsel is supposed to be responsible for pointing out when it’s likely that the PA’s actions will put the plan in an untenable position or create a fiduciary breach.

You’re effectively practicing law when you advise someone on how a question of law will be decided in court or when you analyze a situation to identify any potential claims the different parties involved could make against each other. Your situation seems to have some obvious implications, but a lawyer qualified in this area should be able to settle this in a more decisive fashion.

The problem appears to be that the AP and the AP's lawyer didn't know enough to ask an actuary to look at the situation before putting together the settlement and QDRO, let alone to ask the Plan to provide sufficient information to understand how they came up with the interpretation, or to ask an actuary to review the determination after the fact. The Plan has never provided the details of their calculation (the AP had to put together the calculation based on her own records and research, but likely too long after the fact to satisfy the time for review restrictions in the procedures) nor have they indicated whether the Plan advisors (legal or actuarial) had any comments about the interpretation.

This seems to be another case of advisors thinking they know something about a very specialized and complicated area. As for "a lawyer qualified in this area", the AP obviously didn't know she needed one, and her lawyer was apparently too sure of herself to ask for help, but even then, most pension actuaries who know anything about QDROs also know that there are very few "lawyers qualified in this area" and even the few who exist know that a pension actuary can still be very helpful with details.

But I'm still wondering if there is anyone who might be able to come up with a reasonable explanation for a switch in life basis without a benefit adjustment?

(BTW, when the P finally did retire, the Plan did reduce his age 65 benefit by exactly $1,363.15. It seems that they still used his life basis for the QDRO reduction, but it appears that, as the AP asked me, "did they take more away from him than they gave to me?" On the surface of things, it appears that they at least didn't give her 6 and one-half years of benefit payments by delaying her commencement to her age 65 (actuarial adjustments not included).)

And not to be sassy Helen, but it makes no difference at all what other property awards were, the QDRO specifically awarded 50% of the P's benefit. 50% of the P's benefit was an amount payable at his age 65 for 10C and his life thereafter. The question was, and remains, how can that be interpreted to be that same dollar amount but payable at her age 65 for 10C and her life thereafter? When asked by the AP, the lawyers, and the court (if it ever comes to that), it is impossible, as an experienced pension actuary and based on what I currently understand about the Plan and actuarial science, that my answer would be anything other than that it doesn't make actuarial sense that it could be.

The face of the QDRO does not give the impression that the benefit payable to the AP should be any less valuable than the benefit not paid to the P.

[Helen Sass]

Originally Posted by Fuzzy

And not to be sassy Helen, but it makes no difference at all what other property awards were, the QDRO specifically awarded 50% of the P's benefit. 50% of the P's benefit was an amount payable at his age 65 for 10C and his life thereafter. The question was, and remains, how can that be interpreted to be that same dollar amount but payable at her age 65 for 10C and her life thereafter? When asked by the AP, the lawyers, and the court (if it ever comes to that), it is impossible, as an experienced pension actuary and based on what I currently understand about the Plan and actuarial science, that my answer would be anything other than that it doesn't make actuarial sense that it could be.

The face of the QDRO does not give the impression that the benefit payable to the AP should be any less valuable than the benefit not paid to the P.

You are confusing the benefit (monthly amount under the plan formula paid in whatever form to the participant) with the value of the benefit. A valid QDRO may assign any portion of the value of the benefit to the AP as long as the total value payable to both parties equals 100% of what would otherwise have gone to the participant.

The order may specify a dollar amount of monthly benefit payable to the AP in any form that the plan allows. Describing the amount as 50% of the participant’s monthly benefit is not the same as describing it as a benefit actuarially equivalent to 50% of his accrued benefit, which is how you seem to interpret it.

I’m sorry if I confused you with my example of a situation where it might be appropriate to award the AP less than 50% of the value of the pension. The QDRO of course only applies to the pension benefit but it is part of the overall settlement in the divorce decree.

[DiscreteAndDiscreet]

Originally Posted by Fuzzy

The problem appears to be that the AP and the AP's lawyer didn't know enough to ask an actuary to look at the situation before putting together the settlement and QDRO, let alone to ask the Plan to provide sufficient information to understand how they came up with the interpretation, or to ask an actuary to review the determination after the fact. The Plan has never provided the details of their calculation (the AP had to put together the calculation based on her own records and research, but likely too long after the fact to satisfy the time for review restrictions in the procedures) nor have they indicated whether the Plan advisors (legal or actuarial) had any comments about the interpretation.

This seems to be another case of advisors thinking they know something about a very specialized and complicated area. As for "a lawyer qualified in this area", the AP obviously didn't know she needed one, and her lawyer was apparently too sure of herself to ask for help, but even then, most pension actuaries who know anything about QDROs also know that there are very few "lawyers qualified in this area" and even the few who exist know that a pension actuary can still be very helpful with details.

But I'm still wondering if there is anyone who might be able to come up with a reasonable explanation for a switch in life basis without a benefit adjustment?

(BTW, when the P finally did retire, the Plan did reduce his age 65 benefit by exactly $1,363.15. It seems that they still used his life basis for the QDRO reduction, but it appears that, as the AP asked me, "did they take more away from him than they gave to me?" On the surface of things, it appears that they at least didn't give her 6 and one-half years of benefit payments by delaying her commencement to her age 65 (actuarial adjustments not included).)

And not to be sassy Helen, but it makes no difference at all what other property awards were, the QDRO specifically awarded 50% of the P's benefit. 50% of the P's benefit was an amount payable at his age 65 for 10C and his life thereafter. The question was, and remains, how can that be interpreted to be that same dollar amount but payable at her age 65 for 10C and her life thereafter? When asked by the AP, the lawyers, and the court (if it ever comes to that), it is impossible, as an experienced pension actuary and based on what I currently understand about the Plan and actuarial science, that my answer would be anything other than that it doesn't make actuarial sense that it could be.

The face of the QDRO does not give the impression that the benefit payable to the AP should be any less valuable than the benefit not paid to the P.

If you are a friend of the AP, I’d suggest looking for a QDRO consultant to fix the situation. I have trouble believing that the PA’s interpretation will stand up to scrutiny, regardless of how the QDRO was drafted. I’ve seen plenty of bad QDROs and they don’t produce your situation. You just need someone familiar with the process of challenging a plan’s interpretation of a QDRO to resolve this.

I have heard of QDROs being administered in an informal way without adjustments. This usually happens when a PA administers a QDRO without discussing it with plan counsel and the plan actuary.

[DiscreteAndDiscreet]

Originally Posted by Helen Sass

You are confusing the benefit (monthly amount under the plan formula paid in whatever form to the participant) with the value of the benefit. A valid QDRO may assign any portion of the value of the benefit to the AP as long as the total value payable to both parties equals 100% of what would otherwise have gone to the participant.

The order may specify a dollar amount of monthly benefit payable to the AP in any form that the plan allows. Describing the amount as 50% of the participant’s monthly benefit is not the same as describing it as a benefit actuarially equivalent to 50% of his accrued benefit, which is how you seem to interpret it.

I’m sorry if I confused you with my example of a situation where it might be appropriate to award the AP less than 50% of the value of the pension. The QDRO of course only applies to the pension benefit but it is part of the overall settlement in the divorce decree.

I don’t buy this argument at all. Unless the QDRO is very specific about assigning a portion of the participant’s normal form benefit equivalent to a target amount payable to the AP, I would read any assignment of an amount calculated by reference to the accrued benefit as being an amount payable on the participant’s lifetime needing to be adjusted for the AP’s lifetime if executed as a separate interest and adjusted for option factor if executed as a shared payment.

I wouldn’t jump to a different interpretation without being directed to do so by plan counsel. This is my pat answer, as a practitioner, to the question of how to interpret ambiguous instructions in QDROs. Someone has to give me specific directives to lead me to something else.

[Fuzzy]

Discrete, I'd agree, since this QDRO specifically awards a portion of the participant's Accrued Benefit, that defines it as an amount payable in a certain way beginning at a certain time, just as the Plan definition of AB does. Very frequently I have conversations with clients (lawyers and individuals) who only think of the dollar amount as their "benefit", without any thought about when it is payable or what the contingencies are for the continuation of those payments. If a QDRO, for whatever reason, defines an award as a specific dollar amount (or the result of some formula), it still must define a starting date and a payment form in order to be complete.

If the Plan allows it, the award can be paid out as a separate interest which ought to be actuarially equivalent to the award of the portion of the P's benefit. In order to pay a separate interest benefit, there has to be a new benefit scheme for the new life (the AP's), with appropriate changes as needed to the start date and the form of payment. There is no way that I can figure out how the Plan changed the life basis and delayed payment by 6.5 years and did not change the benefit amount, especially using unisex mortality and no reference to different mortality rates for a beneficiary.

It ought to be obvious that a strict interpretation of an award of a portion of the P's benefit means that the calculated amount is still payable to (e.g., shared with) the AP when it would have started for the P and it would stop when it stopped for the P (subject to the 10C in this case). I'd even go so far as to say that should the AP die first, unless there is a contingent AP named, that the shared amount reverts to the P (obviously not true if the "separate interest" process is followed).

[Mike Preston]

Originally Posted by Fuzzy

Let me lay out some facts so we see if anyone wants to comment directly about whether this interpretation is outrageous of justifiable rather than with generalities:
1. If the participant had terminated on the day of the divorce division, he would have been entitled to an Accrued Benefit of $2,726.29, payable monthly at his NRD (FOMF 65) as a 10C&C annuity.
2. The PA determined that a QDRO was qualified and notified the AP that she was entitled to 50% of his benefit, $1,363.15, but payable at her age 65 (6.5 years after his age 65) as a 10C&C annuity over her lifetime. At the time of qualification, she was offered a lump sum, using then current published tables, of $66,602.15.
3. Using the same Plan tables (the Plan apparently uses the same tables for participants and beneficiaries), the participant would have been eligible to elect a lump sum payment of $195,126.74 for his Accrued Benefit at the same time. 50% of this is $97,563.37.
Question: can anyone think of anything which would make the PA’s determination of her award a valid interpretation of a divorce decree and QDRO which stated that she was entitled to 50% of his Accrued Benefit?
(I'm leaving out all of the other typical divorce questions, such as whether the award was equitable, whether there were any subsidized benefits subject to division, whether any survivor benefits which should have been considered, etc. Let's just assume that all of the typical restrictions were included (no increased benefits, nothing that the Plan wouldn't normally pay, etc.) and concentrate on whether this interpretation makes any sense to anyone.)

No. What you describe is unconscionable. I would give serious consideration to an ABCD referral if it came from an actuary.

[Helen Sass]

I'll take another shot at this.

Originally Posted by Fuzzy

Discrete, I'd agree, since this QDRO specifically awards a portion of the participant's Accrued Benefit, that defines it as an amount payable in a certain way beginning at a certain time, just as the Plan definition of AB does.

Unless I missed it, the only wording from the actual QDRO you gave is that it awarded the AP 50% of the participant's accrued benefit. If you are saying that the QDRO also specified that amount was "payable in a certain way beginning at a certain time", then that would determine not only the monthly benefit amount but also the value of the AP's award. Again, the value is not necessarily 50% of the value of the benefit that the participant gets, but it is constrained such that the value of the AP's benefit plus the value of the participant's benefit must equal 100% of the value of the participant's benefit absent the QDRO.

If you are saying that specifying a portion of the participant's Accrued Benefit is the same as defining the form of the benefit (how it is paid and when it is paid), that is not true. We can plug in what we think is reasonable, or logical, or what we think the QDRO meant to say, but if it's not the language in the actual document then the value of the AP's benefit is not defined.

Very frequently I have conversations with clients (lawyers and individuals) who only think of the dollar amount as their "benefit", without any thought about when it is payable or what the contingencies are for the continuation of those payments. If a QDRO, for whatever reason, defines an award as a specific dollar amount (or the result of some formula), it still must define a starting date and a payment form in order to be complete.

Yes, this is also what I'm saying. Part of the problem is that we are living more and more in a 401(k)/DC world than one dealing frequently with DB plans. I have seen more than one attorney who is considered a QDRO specialist, and may have dealt with hundreds of clients, but my client's DB plan is the first one they have ever encountered. They absolutely believe that "accrued benefit" and "value of accrued benefit" are the same thing, i.e. the participant's balance in their 401(k) plan.

If the Plan allows it, the award can be paid out as a separate interest which ought to be actuarially equivalent to the award of the portion of the P's benefit. In order to pay a separate interest benefit, there has to be a new benefit scheme for the new life (the AP's), with appropriate changes as needed to the start date and the form of payment. There is no way that I can figure out how the Plan changed the life basis and delayed payment by 6.5 years and did not change the benefit amount, especially using unisex mortality and no reference to different mortality rates for a beneficiary.

You answered this question in your comment above. Either the QDRO explicitly specified the timing and form of the benefit to be paid to the AP, which should then be followed, or it didn't and is incomplete. If it is incomplete and the actuary unilaterally decided it was going to be paid out this way, then I agree with Mike that he or she probably should be reported to the ABCD.

It's kind of like OK, we have this binding agreement that I am obligated to pay you $1,000. However, the agreement does not specify the form of payment nor does it specify that the value of the payments equals $1,000, so I can choose to pay you $1 per year for the next 1,000 years and technically fulfill my obligation.

It ought to be obvious that a strict interpretation of an award of a portion of the P's benefit means that the calculated amount is still payable to (e.g., shared with) the AP when it would have started for the P and it would stop when it stopped for the P (subject to the 10C in this case). I'd even go so far as to say that should the AP die first, unless there is a contingent AP named, that the shared amount reverts to the P (obviously not true if the "separate interest" process is followed).

The reason this is not obviously true is that the ending dates for the P and AP are not the same. Whether either one is receiving under a life only or 10 year C&L, the benefit stops upon their death and has no effect on the other's payment. Also, the "pop-up" benefit you describe may or may not be allowable under the plan, but it is unlikely that it would be an option with an AP.

Finally, the lump sum question is a little more complicated. I believe someone noted above that the actuarial equivalent factors used to convert the benefit to another form other than a lump sum will most likely be different from the IRS interest and mortality rates required to be used (at a minimum) for lump sum conversion. Therefore an AP's benefit determined to be actuarially equivalent with the plan factors may have a different LS value (if indeed a LS is offered as an option to the AP) than the P's LS.

A simple example is a 68 year old participant (still working) who had accrued a benefit of $2,000/mo. payable immediately as a single life annuity. The AP is 65 and has been awarded 50% of the former spouse's benefit. The AP is expected to live longer than the P, so you cannot just pay them both $1,000 as the expected value of the combined payments is more than the expected value of the P's benefit absent the QDRO. You reduce the AP's monthly benefit to the amount that is actuarially equivalent to the P's $1,000 using the plan factors, let's say it's $900. If the plan factors are not identical to the IRS factors, the lump sum benefit for the 68 year-old's $1,000 per month will not be equal to the lump sum benefit for the 65 year-old's $900 per month.

[DiscreteAndDiscreet]

I do not believe I have seen a DRO rejected for anything other than requesting benefits plan counsel has determined not to be assignable to the AP or for requesting shared payment or separate interest treatment before or after retirement elections are made (respectively).

Helen, if a legal advisor, compliance expert, or body of practice has given you additional rationales for rejecting DROs, I’m not going to say you are wrong for relying on this advice. I just haven’t been given that advice and that doesn’t line up with my practical experience.

[Mike Preston]

Originally Posted by DiscreteAndDiscreet

I do not believe I have seen a DRO rejected for anything other than requesting benefits plan counsel has determined not to be assignable to the AP or for requesting shared payment or separate interest treatment before or after retirement elections are made (respectively).

Helen, if a legal advisor, compliance expert, or body of practice has given you additional rationales for rejecting DROs, I’m not going to say you are wrong for relying on this advice. I just haven’t been given that advice and that doesn’t line up with my practical experience.

That can't possibly be the complete list, can it? If so, you have been ever so fortunate as to never having been presented with a DRO that is incomprehensible, or one that fails one or more of the myriad, sometimes ministerial, other requirements of 414(p).

[Mike Preston]

Originally Posted by Helen Sass

A simple example is a 68 year old participant (still working) who had accrued a benefit of $2,000/mo. payable immediately as a single life annuity. The AP is 65 and has been awarded 50% of the former spouse's benefit. The AP is expected to live longer than the P, so you cannot just pay them both $1,000 as the expected value of the combined payments is more than the expected value of the P's benefit absent the QDRO. You reduce the AP's monthly benefit to the amount that is actuarially equivalent to the P's $1,000 using the plan factors, let's say it's $900. If the plan factors are not identical to the IRS factors, the lump sum benefit for the 68 year-old's $1,000 per month will not be equal to the lump sum benefit for the 65 year-old's $900 per month.

I have always taken the position that the fact that the theoretical lump sum of the two distinct payment streams is different has no bearing on the lump sum payable to the alternate payee. The lump sum payable is always calculated with respect to the participant's factors and then subject to division.