Shared Interest vs. Separate Interest in a Texas QDRO
One issue dividing retirement accounts in a Texas divorce is whether the division is on shared interest or separate interest. This issue is technical and can be a confusing aspect of dividing retirement plans in a divorce. Often this issue arises when the parties are determining the final language of the divorce decree and the qualified domestic relations order (QDRO) that will go to the retirement plan administrator to execute the retirement plan division based on the property division in the divorce decree. This issue can create problems in a Fort Worth divorce. If you have retirement plans among the assets in your divorce then you should hire a Fort Worth divorce lawyer familiar with these issues.
The issue of whether that division should occur on a shared interest or separate interest methodology is usually more important to defined benefit pensions where the benefit is a promise of future periodic payments, rather than defined contribution plans like a 401k in which there is a defined set of assets that can be divided today. (But we will touch on those defined benefit plans as well.) Today’s post will conquer some of the distinctions between the two approaches in a Texas divorce.
Separate Interest Division of a Retirement Account in Texas divorce
The separate interest approach to dividing a retirement account in a Texas divorce and subsequent QDRO establishes a benefit for the alternate payee (the spouse who is not the participant of the retirement plan) that is separate from the plan benefit of the participant. The simplified version of how this works is that the plan administrator will carve out the alternate payee’s benefit from the participant’s benefit upon approving (or qualifying) the QDRO. This creates two separate benefits. The alternate payee’s separate benefit adjusts for life expectancy. He or she can receive his or her benefit whenever the plan would allow, subject to the QDRO.
Separate approach and payments
The alternate payee is not required to wait until the participant retires (unless the QDRO says otherwise) and the alternate payee continues to receive his or her benefit until the alternate payee’s death even if the participant dies first. Under the separate interest approach, the participant retains the freedom to elect whatever payment method he or she prefers under the plan rules with no restrictions caused by the QDRO (keep this is mind about the shared interest approach). The alternate payee typically only receives a single life annuity for the remainder of his or her life.
The separate interest approach is most similar to the divorce process itself. The two individuals have separate control over their respective benefits without the ability to affect the other’s. Depending upon the QDRO language, the alternate payee may receive increases to the extent the participant receives them. These increases are divided and applied to the separate interests according to the QDRO.
Shared Interest Division of a Retirement Account in Dallas and Fort Worth
The shared interest approach to dividing a retirement account in a Texas divorce and QDRO does not establish a separate benefit for the alternate payee, rather the alternate payee shares in any payment made to the participant in accordance with the terms of the QDRO. Under the shared interest approach there is no benefit carved out and set aside for the alternate payee. Instead, when the participant retires and begins receiving his or her pension benefit, the plan administrator will pay the alternate payee a portion of each periodic payment for as long as the participant is alive and receiving payments.
Under the shared interest approach the alternate payee is subject to not only the plan rules regarding the timing of electing the pension benefit to begin paying out but also the participant’s decision to retire and begin taking payment from the pension plan. In a shared interest approach there is no free-standing benefit set aside for the alternate payee. That means if the alternate payee dies before the participant elects to receive payments the alternate payee no longer has a right to benefits under the plan. The participant will see no reduction in his or her periodic payments. He or she becomes free from the restrictions of the QDRO regarding pre-retirement survivor benefits and payment options.
QDROs in Fort Worth and Dallas divorces
Typically under this approach the participant is restricted in his or her pension benefit elections. In a well-drafted QDRO (for the alternate payee) the QDRO will require the alternate payee to receive any pre-retirement survivor annuity so that the alternate payee will receive a share of the benefit for the rest of the alternate payee’s life should the participant pass away before electing to receive his or her pension benefit. If the participant dies before receiving his or her benefit then it is usually not payable to anybody else, aside from a pre-retirement death benefit. So the participant’s premature death could otherwise deprive the alternate payee of any benefit.
The QDRO typically requires the participant to elect payment in a joint and survivor annuity. Under this option the alternate payee receives the survivor annuity. This ensures the alternate payee will receive his or her share once the participant elects to receive payment. Should the participant pass first, alternate payee receives his or her share for the remainder of the alternate payee’s life. These are key issues to consider in dividing retirement benefits in a Fort Worth divorce. It’s a key consideration for Fort Worth divorce attorneys familiar with retirement plan issues.
QDRO and survivor benefits
There is no room for a new spouse to come in and become the participant’s beneficiary or receive survivor payments. The QDRO orders the plan administrator to treat the alternate payee as the spouse for plan purposes. Any subsequent spouse is out of luck. (A QDRO does not have to include these provisions; but if drafted by the alternate payee’s attorney then it likely will.)
Unlike the separate interest approach, the shared interest approach gives the participant some continued control over the property division in the divorce. The participant retains control over when the alternate payee can ever see money from the pension plan. It is analogous to a property division in a Texas divorce in which a business cannot be easily divided. The ex-spouses must retain a shared interest in the asset until it can be liquidated or transferred. This type of property division is not entirely unusual in Texas; but it can be more difficult to deal with especially where the ex-spouses want to move on from each other.
Shared Interest vs. Separate Interests in 401k and Other Defined Contribution Plans
So far we have addressed these retirement plan division approaches in terms of defined benefit pensions; but these issues can arise with 401k plans, ESOPs and other defined contribution plans. In almost all situations use a separate interest approach. The assets in a defined contribution plan typically more easily divide without some complex formula or future payment date. Typically a separate interest approach to a defined contribution plan will either make a payment of a specific dollar amount to the alternate payee or carve out part of the participant’s assets and set them up in a new account under the plan for the alternate payee and let the alternate payee decide when to cash it out. However, there are times where a shared interest approach can make sense.
Some defined contribution plans have unusual investment structures that make division difficult or the alternate payee may want to ride out the participant’s investment skills and take payment down the road. Some defined contribution plans also pay the participant on a periodic payment structure so the alternate payee may have no choice but to take a shared interest approach. These uses of the shared interest approach are the exception, rather than the rule, in defined contribution plans. Normally the alternate payee will benefit from immediate payment or at least immediate division of the participant’s benefit. This way the alternate payee has equal access to make investment decisions.
Whether a Separate Interest or Shared Interest Approach is Best in a Defined Benefit Pension
The question of whether a separate interest or shared interest approach is best for an individual is highly specific to that individual’s interests. The two parties may have opposing interests in the retirement assets. What is best for one spouse may not be best for the other. It is increasingly less common to find parties drafting shared interest QDROs. Most, if not all, pension plans now permit separate interest QDROs and the simplicity of dividing the pension benefit up front and letting each party control their respective portion makes the separate interest approach attractive for both sides. Typically there should be a very specific reason why the parties implement a shared interest approach over a separate interest approach to avoid the restrictions on both parties that occur under a shared interest approach.
Among the reasons for adopting a shared interest approach is when the alternate payee is terminally ill. Under the shared interest approach the participant recovers the alternate payee’s share when the alternate payee pre-deceases. If the alternate payee deceases before any payments issue then the participant is free from the QDRO.
In the same scenario under a separate interest approach, there is no reversion to the participant. There is no survivor benefit for the alternate payee. So the separate interest approach can be a windfall for the participant’s employer and may not benefit either party. This can be an important consideration particularly where both spouses are near retirement age or one is seriously ill.
Value of alternate payee’s benefit in a shared interest
If the participant is likely to pass first then the alternate payee may receive a windfall under a shared interest. That may be a reason to adopt that approach. If the QDRO gives the alternate payee the pre-retirement survivor annuity and a post-retirement survivor annuity (by requiring a joint and survivor annuity) then the alternate payee may gain a larger share of the benefit.
The reason is that in many situations the alternate payee receives less than 50% of the retirement benefit; but the pre-retirement and post-retirement survivor annuities usually pays on 50% of the total retirement benefit. Pension plan administrators typically do not divide these survivor benefits. The alternate payee who may have only received, for example, 30% of the normal pension payments may receive an additional 20% (30+20=50%) upon the death of the participant. This is among the reasons why participants usually do not prefer the shared interest approach.
Shared interest approach and COLAs
The shared interest approach can also make the division easier when the pension plan provides the participant cost of living adjustments (COLA) or other increases unrelated to accrual of further benefits under the pension plan. A shrinking number of pensions provide these types of increases. Not all plans make it easy to draft a QDRO that captures increases for the alternate payee’s separate interest. By following the shared interest approach it can be easier to capture those increases for the alternate payee.
These reasons are usually not compelling to select the shared interest approach over a separate interest approach. In most cases the simplicity and flexibility of the separate interest approach best provides for a fair division. Generally tying the alternate payee’s benefit to the participant is not worth the challenges of the shared interest approach.
Separate interest QDRO benefits
One reason to adopt a separate interest approach is freedom for the alternate payee to receive benefits any time after the plan (and QDRO) permits. A problem with shared interest is where the alternate payee needs payments but cannot obtain payment until the participant retires. The alternate payee cannot force the participant to retire or elect to receive benefits. That can put the alternate payee in a real bind. The alternate payee may pursue an amended QDRO with a separate interest approach; but that will not be a quick resolution.
The most costly problem with a shared interest QDRO is when it is not qualified before the participant elects benefits. This issue has resulted in some extremely expensive litigation. The problem is when the participant elects to receive pension benefits and elects a payment option with a new spouse as the survivor, ERISA (the federal law governing pensions) overrides the QDRO and preserves the rights to the named beneficiary (the new spouse) over the family court’s order to name a different beneficiary (the alternate payee).
That means the alternate payee gets little or nothing (and may have to chase the participant or the participant’s estate). This is only a problem where the alternate payee is slow to present a signed order to the plan administrator. If retirement is close for the participant than the alternate payee should be careful about adopting the shared interest approach.
Fort Worth divorce attorney for QDROs, uncontested divorce and retirement plans
The terms of a retirement plan and a QDRO are important components of the property division in a Texas divorce. A divorce attorney with experience drafting QDROs and retirement plans can help maximize the retirement plan division in your divorce.