If you are going through a divorce and you or your spouse has a pension plan, you may need to know about how these plans are divided via qualified domestic relations orders (QDROs). A QDRO is a court order that assigns a portion of a pension plan to an alternate payee, such as a former spouse, a child, or another dependent. A QDRO can help ensure that you receive your fair share of the pension benefits in the event of a divorce.
However, not all QDROs are the same. There are two main types of QDROs for pension plans: separate interest QDROs and shared interest QDROs. In this blog post, we will explain the difference between them and what you need to be aware of when choosing a QDRO for your pension plan.
Separate Interest QDRO
A separate interest QDRO gives the alternate payee a separate and distinct interest in the pension plan. This means that the alternate payee can choose when to start receiving their portion of the pension benefits, regardless of when the plan participant (the spouse who earned the pension) retires or starts receiving their benefits. Essentially, the alternate payee’s share is “broken off” into their own plan and the monthly benefit is adjusted to their lifespan, guaranteeing the alternate payee a pension for life.
The alternate payee may also be able to choose the form of payment, such as a lump sum or a monthly benefit, and in rare cases, may even be able to name a beneficiary on their share of the pension. This means that if the alternate payee dies before receiving all of their benefits, their beneficiary will inherit the remaining benefits.
A separate interest QDRO is usually preferable for the alternate payee, as it gives them more control and flexibility over their pension benefits. However, a separate interest QDRO may not be available for all types of pension plans. Some government and union plans will not allow a separate interest order.
Shared Interest QDRO
A shared interest QDRO gives the alternate payee a shared interest in the pension plan. This means that the alternate payee can only receive their portion of the pension benefits when the plan participant retires or starts receiving their benefits. The alternate payee cannot choose when to start receiving their benefits or the form of payment.
A shared interest QDRO also does not typically allow the alternate payee to name their own beneficiary for their portion of the pension benefits. This means that if the alternate payee dies before receiving all of their benefits, their benefits will revert back to the plan participant or their beneficiary.
In short, under a shared interest order, the alternate payee will only receive a percentage of every check that the employee-spouse receives and the pension will end upon the employee-spouse’s death.
A shared interest QDRO is usually less favorable for the alternate payee, as it gives them less control and flexibility over their pension benefits. However, a shared interest QDRO may be required for some types of pension plans. For example, some government and union plans may only allow shared interest QDROs.
Beware of How Survivor Benefits Are Treated in Separate and Shared Interest QDROs
One important factor to consider when choosing a QDRO for your pension plan is how survivor benefits are treated. Survivor benefits are additional benefits that are paid to a surviving spouse or beneficiary after the death of the plan participant. Survivor benefits can provide financial security and peace of mind for your loved ones in case something happens to you. There are pre-retirement survivor benefits and post-retirement survivor benefits to keep in mind as well.
However, survivor benefits are not automatically included in every QDRO. Depending on the type of QDRO and the type of pension plan, survivor benefits may be reduced or eliminated for either the plan participant or the alternate payee.
For example, if you have a separate interest QDRO for a defined benefit plan, you may lose your right to post-retirement survivor benefits from your spouse’s portion of the pension plan. This is because your spouse can name their own beneficiary for their portion of the pension benefits, which may not be you. However, you don’t necessarily need post-retirement survivor benefits – under a separate order, your benefits are typically guaranteed for your life. As for pre-retirement survivor benefits, this will depend on the plan’s terms – some plans consider a separate pension guaranteed even if the employee-spouse dies before retirement. Others will require language assigning part or all of pre-retirement survivor benefits to the alternate payee. Our templates include conditional language that assigns these pre-retirement rights if they are necessary to guarantee the alternate payee’s interest.
Compare this to a shared interest QDRO for a pension plan: upon the death of the alternate payee, that share typically reverts to the participant, whose pension is “made whole.” And if the participant dies, the alternate payee is left with nothing – which is why explicit survivor benefit language is needed on a shared interest pension to ensure that the alternate payee is awarded benefits if they outlive the participant-spouse.
For more on survivor benefits, check out our article on the topic. And if you need to draft a QDRO for a pension – separate or shared interest – check out our QDRO generator, which is designed to provide the fairest split of a pension, including survivor benefits where available.
