A recent ruling involving a QDRO serves as a reminder of the important difference between the "shared payment" and "separate interest" methods of dividing retirement benefits.
In Walter Rich v. Southern California IBEW-NECA Pension Plan, 1999 Daily Journal D.A.R. 6965, the Second Appellate District held that upon the death of an alternate payee under a QDRO, the Plan was required to restore the full monthly pension to the participant.
In Rich, the participant (husband) earned a monthly retirement benefit through his union of $962.00. Pursuant to a dissolution, the parties entered into a QDRO that stated "the [Plan] shall, at such time as Retirement Benefits are properly vested and payable under [the Plan], and are properly subject to division, forward such Retirement Benefits payable as follows:
(b) Second, the remaining community property portion of the monthly Retirement Benefit available for division shall be paid as follows:
(i) A check payable to [alternate payee] in an amount equal to 50% of the remaining Community Retirement Benefits to be divided; and
(ii) A check payable to [participant] in an amount equal to 50% of the remaining Community Retirement Benefit to be divided."
The QDRO also provided that such payments will continue until the earlier of the participant's death or the death of the Alternate Payee.
Following the alternate payee's death in 1997, the participant asked the Plan to pay him the amount that had been paid to the alternate payee. When the Plan refused, the participant brought a motion to modify the QDRO to reflect his entitlement to the full monthly benefit. The trial court denied the motion stating that the QDRO awarded the alternate payee a "separate interest" and therefore there was no reversion to the participant upon her death.
In reversing the trial court's decision, the appellate Court noted that the terms of the Plan and the QDRO required the Plan to pay the participant the entire monthly benefit for his life--a portion of which would be paid to the alternate payee while living. Accordingly, the Court concluded that when the assignment under the QDRO expired, the Plan was obligated to restore the full pension to the participant.
More important than its holding, the Rich case reminds practitioners to give careful consideration to the wording of a QDRO in general, and the method division in particular. With respect to a defined benefit plan, there are two methods of dividing benefits--the "shared payment" method and the "separate interest" method. The "shared payment" method requires the plan to pay the alternate payee a portion of every payment made to the participant--typically over the participant's lifetime. Under this approach, payments to the alternate payee will terminate upon the earlier of either party's death--but if the alternate payee dies first--the amounts assigned to the alternate payee will revert to the participant. Unlike the "shared payment" approach, an alternate payee with a "separate interest" may elect the time and manner in which he or she will receive benefits. Under this method, payments to the alternate payee will terminate according to the distribution option elected by the alternate payee--and benefits payable to the alternate payee will not revert to the participant (or plan) when the alternate payee dies.
Factors to consider in choosing the method of division include the alternate payee's desire to transfer his or her interest at death, the terms of the plan, the plan's QDRO procedures, as well as the parties' age and health. Also, once a participant is in pay status under a defined benefit plan, the QDRO may only use the "shared payment" approach. This is yet another reason why it is so important to obtain a QDRO as early as possible.