PENSIONS (34 QUESTIONS) Flashcards

Question

If there are insufficient funds to pay the benefit under a defined benefits plan and the employer has to pay the difference, what does their cost include?

Answer 1

The employer’s cost include the amount necessary to provide the benefit and the administrative and actuarial expenses.

Answer 2

Contributions are not made for each individual participant. No funds are segregated for any particular employee, since defined benefit plans do NOT include separate accounts for each employer, nor does an employee have a specific percentage of the whole.

Answer 3

Defined benefit pensions are insured against default by the Pension Benefit Guarantee Corporation PBGC and employers pay insurance premiums per employee for each employee participating in the plan

Answer 4

Employers pay insurance premiums per employee for each employee participating in the plan.

Answer 5

Defined benefit plans often include a survivor option providing for a reduction in the benefit so that payments will continue to the surviving spouse after the employee’s death.

Answer 6

The marital component of a defined benefit plan is based upon the coverture fraction of denominator being the total # of years employee earned pension benefit with employer and the numerator being the total # of those pension credited years which the parties were married

Answer 7

OF PENSION CREDITED YEARS PARTIES WERE MARRIED __________________________________________ # OF YEARS EMPLOYEE EARNED PENSION BENEFIT WITH EMPLOYER

Answer 8

Actuaries determine present value of defined benefit to be received in future based upon various methods.

Answer 9

Interest & Inflation

Answer 10

1. Term Method 2. Time Method 3. Salary or Compensation Method 4. Plan Termination Method

Answer 11

The term method presumes the employment of the wage earner terminates as of separation or other specified date, thereby fixing the benefit at that date. Produces an artificially low value if employment in fact continues because the marital property component will invariably increase between valuation date and actual retirement due to salary increases and other factors

Answer 12

The time method presumes wage earner’s employment will continue until retirement age, but at the same benefit level at separation. While it produces a higher value than term, its still artificially low because the wage earner usually receives increases in both wages and plan benefits between the valuation date and actual retirement. However, such increases have been held to be separate property of the employee spouse and not marital property

Answer 13

The salary and compensation method is similar to the time method, but assumes salary increases (comparable to those existing before separation) will continue to occur from date of valuation to actual retirement. This method produces the most accurate estimate of what wage earner will probably receive in retirement benefits

Answer 14

The plan termination method presumes pension plan itself terminated as of the date of separation or other valuation date. It's appealing because it is easy to use and perceived that expert valuation can be avoided by simply using current Pension Benefit Guarantee Corporation (PBGC) tables. However, these tables were not intended for this and produces an artificially low valuation because wage earner’s benefits are not actually being terminated and benefits will probably increase because of salary raises and upgrading of plan.

Answer 15

Term method produces an artificially low value if employment in fact continues because the marital property component will invariably increase between valuation date and actual retirement due to salary increases and other factors

Answer 16

While the time method produces a higher value than term, its still artificially low because the wage earner usually receives increases in both wages and plan benefits between the valuation date and actual retirement. However, such increases have been held to be separate property of the employee spouse and not marital property

Answer 17

It's appealing because it is easy to use and it is perceived that expert valuation can be avoided by simply using current Pension Benefit Guarantee Corporation (PBGC) tables. However, these tables were not intended for this and produces an artificially low valuation because wage earner’s benefits are not actually being terminated and benefits will probably increase because of salary raises and upgrading of plan.

Answer 18

This method produces the most accurate estimate of what wage earner will probably receive in retirement benefits.

Answer 19

The salary and compensation method.

Answer 20

Cash balance plans

Answer 21

A defined-benefit plan with many features of a defined-contribution plan. The employee has an account that consists of his contributions as a specified rate of interest.

Answer 22

It is a defined benefit plan because the employer bears the investment risk and guarantees a particular benefit at retirement. If the account earns more interest that the funds necessary to pay the benefit, the employer keeps it; if it earns less, the employer assures the benefit amount.

Answer 23

Yes - by the PBGC.

Answer 24

ERISA defines pensions as any plan maintained by an employer that provides retirement income to employees.

Answer 25

A pension is considered vested if the employee has an absolute un-forfeitable right to receive a payment at retirement, even if the employee terminates employment prior to normal retirement age.

Answer 26

A qualified plan is one which is deductible by the employer and not currently taxable to the employee.

Answer 27

Over the years, the benefit will usually increase as a result of a number of factors i.e. seniority of employee, salary, productivity, inflation.

Answer 28

Pension benefits have “matured” when the employee is eligible to receive payments, generally at retirement age.

Answer 29

A maturity date may not be determined in advance because employees may be offered the option of accelerating or deferring retirement, based upon the needs of the employer.

Answer 30

Continued employment, remains alive, vested.

Answer 31

A judgment, decree or order that relates to property settlement, child support, alimony payments to a spouse, child or other dependent of a plan participant and is made pursuant to state domestic relations law.

Answer 32

A Domestic Relations Order creates or recognizes the rights of an alternate payee to receive all or a portion of the benefits payable to a participant under the plan.

Answer 33

The order must contain a certain required information and may not alter the amount or form of plan benefits (i.e. survivor’s benefits cannot be awarded if the plan does not provide for such benefits)

Answer 34

The spouse, former spouse, child or other dependent of a participant who is recognized by the order as having the right to receive all or a portion of the participant’s benefit.

Answer 35

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.

Answer 36

Does not cover military or government retirement plans, plans maintained for worker’s compensation or unemployment, church plans or IRAs.

Answer 37

Yes - because it allows them to take tax deductions on contributions that they make on behalf of participating employees. Participating employee’s contributions towards their plans and the earnings on the contributions are also tax-deferred

Answer 38

(1) Employer can take deductions on contributions they make on behalf of participating employees; and (2) Participating employee’s contributions towards their plans and the earnings on the contributions are also tax-deferred

Answer 39

They must expressly prohibit the assignment or alienation of benefits, which is to protect employees from their own financial imprudence and to protect them from others who might use their retirement plans as a means to retaliation, as employers frequently did before ERISA.

Answer 40

Supreme Court has held this spendthrift provision protects pensions from the employees own wrongdoing even if a judgment is entered against him or even if he files for bankruptcy.

Answer 41

YES - ERISA preempts state community property law

Answer 42

ERISA pre-empts a state law allowing a nonparticipant spouse to transfer by testamentary instrument an interest in undistributed pension plan benefits. Brief Facts: Respondents are the sons of Isaac and Dorothy Boggs. After Dorothy's death in 1979, Isaac married petitioner Sandra Boggs. When Isaac retired in 1985, he received various benefits from his employer's retirement plans, including a lump sum savings plan distribution, which he rolled over into an individual retirement account (IRA); shares of stock from the company's employee stock ownership plan (ESOP); and a monthly annuity payment. Following his death in 1989, this dispute over ownership of the benefits arose between Sandra and the sons. The sons' claim is based on Dorothy's purported testamentary transfer to them, under Louisiana law, of a portion of her community property interest in Isaac's undistributed pension plan benefits. Sandra contested the validity of that transfer, arguing that the sons' claim is pre-empted by the Employee Retirement Income Security Act of 1974 (ERISA).

Answer 43

ERISA pre-empts a state law allowing a nonparticipant spouse to transfer by testamentary instrument an interest in undistributed pension plan benefits; and Dorothy’s testamentary transfer violated ERISA’s prohibition on the assignment or alienation of plan benefits intended for plan participants and their beneficiaries.

Answer 44

Surviving spouse; A living former spouse; A child; or Another dependent—as long as one or more of these persons are designated as a beneficiary in the QDRO

Answer 45

No - not under Boggs v. Boggs which is why her sons could not be considered beneficiaries

Answer 46

When she died

Answer 47

Her interest in those same benefits existed by virtue of ERISA’s qualified-joint-survivor-annuity provision

Answer 48

It amended ERISA of 1974 and IRC to provide greater protection to employees, widowers/widows and divorced spouses.

Answer 49

1. Requirement that employee provide a survivor annuity for the spouse unless spouse consent in writing to waive that right; 2. Provide for allocation and distribution of pension benefits incident to a divorce; 3. Reduces age from 25 to 21 when an employee becomes eligible to participate in plan; 4. Permits employee to take a break in service of the greater of 5 years or the years of prior service before returning to work without losing credits for vesting purposes; 5. Maternity and paternity leave without losing pension participant credits;

Answer 50

The participant's spouse will receive a survivor’s annuity if the participant predeceases the spouse.

Answer 51

The plan administrator must pay the surviving spouse between 50% and 100% of the participant’s benefits

Answer 52

A qualified joint-and-survivor annuity.

Answer 53

If a writing is executed by the plan participant and his spouse and the writing is either notarized or the signing is witnessed by a plan representative.

Answer 54

The annuity terminates.

Answer 55

NO - the surviving spouse cannot bequeath the annuity benefits.

Answer 56

Pensions are regulated by federal law that preempts state statutes

Answer 57

Those provisions are superseded by federal law as to all benefits and plans covered by ERISA.

Answer 58

It is ineffective until the change in beneficiary designation is actually effected.

Answer 59

ERISA requires the inclusion of a spendthrift provision that prevents the assignment or alienation of the pension benefits

Answer 60

ERISA requires the inclusion of a spendthrift provision that prevents the assignment or alienation of the pension benefits since this sometimes presented conflicts to the plan administrator between the administrator’s duties to plan participant and the beneficiaries, REA eliminated this conflict by expressly providing for the allocation of pension benefits in matrimonial litigation by means of a QDRO.

Answer 61

QDROS - bc the Retirement Equity Act of 1984 (REA) specifically exempts QDROs from the preemption clause and anti-alienation provision.

Answer 62

The Railroad Retirement Solvency Act eliminated annuity reductions made under prior law when military service was counted as railroad service and was also the basis for benefits under another Federal law. It conformed railroad retirement student benefit provisions to social security student benefit provisions The Railroad Retirement Act is a Federal law that provides retirement and disability annuities for qualified railroad employees, spouse annuities for their wives or husbands, and survivor benefits for the families of deceased employees who were insured under the Act.

Answer 63

Benefits are marital property subject to ED only to the extent these payments are comparable to private pension benefits that are tied to earnings and career service, and not in the nature of a social welfare plan such as social security.

Answer 64

No - it would not be property subject to distribution.

Answer 65

The Uniformed Services Former Spouse Protection Act is a federal law that provides certain benefits to former spouses of military members. Under this law, former spouses may be entitled to portions of the military member's retirement pay, medical care, and exchange and commissary benefits.

Answer 66

It authorizes state courts to award up to 50% of the disposable retired pay to a military spouse so long as parties married 10 years or more.

Answer 67

If a military spouse pay has been waived in order to receive veterans’ disability payments then that payment is exempt from distribution as marital property on the theory that disability payments are compensation for lost earnings and not subject to ED.

Answer 68

The participant spouse could simply exclude a portion of their retirement benefits by converting retired pay to disability payments.

Answer 69

Payments that are based upon disability and to replace earning capacity are not subject to equitable distribution

Answer 70

It is not necessarily a “disability pension” unless it replaces lost earnings as opposed to merely accelerating the pension payout.

Answer 71

No - social security is a form of “social insurance” and is not property subject to equitable distribution

Answer 72

A divorced spouse is entitled to the spouse’s social security benefit, equal to 50% of the worker’s retirement benefit, provided the divorce spouse is age 62 or older and the marriage lasted at least 10 years, and the parties have been divorced for at least 2 years

Answer 73

They are plans that do not meet the qualification requirements under the Internal Revenue Code and thus, do not afford the tax advantages available under qualified tax plans.

Answer 74

Plans are typically limited to executives and are designed as a means of allowing executives to forego current income and current taxation until retirement or some other date when presumably they will enjoy a lower income tax bracket

Answer 75

The most important factor is flexibility since they have the freedom to choose participants on a discretionary basis and freedom from ERISA guidelines. Thus, it is an unfunded promise by the employer to pay the deferred amounts in the future

Answer 76

They are paid out of the employer’s general assets, subject to the rights of creditors of the employer

Answer 77

Distributions are taxed to the employee and the employer receives a corresponding deduction in the same tax year

Answer 78

Compensation earned over a period of 12 months.

Answer 79

Stock options have been a prevalent form of long term compensation, and allow executives to purchase the corporation’s stock as a set price for a fixed period of time

Answer 80

(1) Incentive Stock Options (ISOs); and (2) Non-Qualified Stock Options (NQSOs).

Answer 81

ISOs must confirm to rules set forth in the Internal Revenue Code. The option price is normally equal to the FMV on the date the option is granted. Once the option is exercised, the executive is free to sell the purchased shares or hold them for future appreciation. ISOs are NOT taxed as ordinary income and are tax at capital gain rates when the stock is sold

Answer 82

An executive will recognize some income upon the exercise of a NQSO in an amount equal to the spread between the exercise price and the stocks FMV on the date of exercise. Following exercise, income tax on the stock’s appreciation is deferred until the stock is sold and at that time the appreciation from the date of exercise is taxed at capital gain. The employer is entitled to a tax deduction equal to the spread at exercise.

Answer 83

Incentive stock options must confirm to rules set forth in the Internal Revenue Code whereas NQSOs are options that do not meet those requirements. ISOs receive favorable tax treatment and additional restrictions to offset their benefits while NQSO receive double taxation.

Answer 84

The option price is normally equal to the FMV on the date the option is granted.

Answer 85

Once the option is exercised, the executive is free to sell the purchased shares or hold them for future appreciation

Answer 86

Incentive Stock Options are not taxed as ordinary income and are tax at capital gain rates when the stock is sold

Answer 87

One a nonqualified stock option is exercised, income tax on the stock’s appreciation is deferred until the stock is sold and at that time the appreciation from the date of exercise is taxed at capital gain.

Answer 88

The employer is entitled to a tax deduction equal to the spread at exercise

Answer 89

SARs are similar to stock options but the executive does not actually purchase the stock and the corporation simply pays the spread at the date of exercise in cash or shares or both.

Answer 90

Similar to stock options, a SAR gives the executive the ability over an extended period of time to realize the appreciation value in his employer’s stock from the grant date to the exercise date..

Answer 91

There are no tax consequences to the company or employee upon grant of SAR, but upon exercise of the SAR, it is taxed as ordinary income in the amount of the appreciation; the employer then receives a corresponding deduction in the same amount.

Answer 92

Restricted stock gives the executives actual shares of the employer’s stock subject to vesting requirements, typically rendering of service over a defined period and achievement of certain performance goals during that period.

Answer 93

Restricted stock is taxed when it is no longer subject to a substantial risk of forfeiture, meaning, the performance of substantial service is no longer required for the restrictions to lapse and it is taxed as ordinary income equal to the FMV of the stock less any amount paid by the employee for the stock (employer receives reciprocal deduction).

Answer 94

Any dividends paid to employee are taxed as ordinary income when paid (employer receives reciprocal deduction).

Answer 95

When the stock is sold, it is taxed capital gains for any subsequent appreciation.

Answer 96

RSUs are phantom stock units that track the actual stock price but are not represented by actual shares of stock.

Answer 97

The units represent a promise by the employer to pay shares at some future date, and are usually subject to the same vesting requirement as restricted stock

Answer 98

RSU is taxed as ordinary income when employee receives payment of RSU (and employer receives corresponding deduction).

Answer 99

NO - there is no tax at grant or upon vesting

Answer 100

Performance Unit/Performance Share Plans are designed to pay awards if the corporation meets predetermined, long term performance objectives. Generally, an executive receives a grant of such units or stock at no cost, and no stock is granted or transferred until the end of the performance period.

Answer 101

Performance units are usually paid in cash but may be paid in combination of cash and stock.

Answer 102

The executive recognizes ordinary income in the year award is received, and company will receive corresponding deduction

Answer 103

It is a group term life insurance that allows an employee to exclude from income the first $50,000 from life insurance.

Answer 104

Individual life insurance is often used to fund a nonqualified executive compensation plan with a split-dollar plan. This is where employer pays part of the annual premium equal to the increase in cash value of the policy during the policy year. The balance is paid by executive. The employer is named the beneficiary of the cash value of the policy. The executives named beneficiary is entitled to the remaining proceeds

Answer 105

The purchase of group disability coverage does not have taxable income to the executive, however, the disability insurance payments are made under the plan, taxable income will result

Answer 106

No - if the employer pays the premiums and owns the policy, the premiums are not taxable to the executive

Answer 107

If executive owns the policy, the employer usually pays premiums as compensation to executive and executive compensation to pay premiums is taxable at the time it is paid but the disability benefits paid are not taxable

Answer 108

Then disability income benefits paid from the insurance will be fully taxable to executive

Answer 109

Equitable distribution may include only the benefits based upon employee’s salary as of date of separation, and any increase in value attributable to the efforts or contribution of employee post separation are generally not marital property and may not be included in the marital value

Answer 110

Employer-funded early retirement inducements, and post separation increases in value based upon employee’s years of service

Answer 111

It is based upon a fiction the employee will earn the same salary until retirement as existed at the date of separation

Answer 112

Two tests have emerged in allocation the marital and non-marital property interest in retirement benefits

Answer 113

In general, the accrual of benefits should be applied to defined contribution plans while marital fraction approach should be applied to defined benefit plans.

Answer 114

The marital fraction approach

Answer 115

Accrual of benefits approach

Answer 116

Courts generally calculate this in two different ways. The time and contribution versions of the marital fraction approach can lead to different results. The contribution fraction takes into consideration the increasing contribution to the plan over time where as the time rule does not. Also the time rule does not account for the time value of money. Special issues arise when the pensions is not mature, some of it is not vested and when the employed spouse has not yet retired

Answer 117

The contribution fraction takes into consideration the increasing contribution to the plan over time where as the time rule does not

Answer 118

In the time rule, the numerator is the number of years married coincided with the credited employment service under the plan and the denominator is the total number of years credited service the employee has at the time of distribution of the pension interest. The value of the pension at the time of the divorce is multiplied by the resulting fraction to determine the marital component: #of years of marriage during pension plan X present value of plan = marital property interest in plan total # of years employed during plan.

Answer 119

Some courts have calculated the marital fraction based not on length of employee’s services but on the source of employee’s contributions. The marital fraction is calculated by dividing the value of the employee’s marital contributions by the total value of the employee’s contributions. $ contributions during the marriage X present value of plan = marital property interest in plan total $ contributions to plan

Answer 120

The accrued benefit at the date of marriage is subtracted from the accrued benefit at the date of divorce to arrive at the benefit to be divided. The evaluator must know the value at the date of marriage and date of divorce. The value at the date of marriage is subtracted from the value at the date of divorce to arrive at the marital property component of the pensions plan. The accrual of benefits approach is designed to give effect to the amount of contributions and the time of money, and neither of these facts directly bears on the benefit of the defined benefit plan since the benefit is pre-defined by contract and the earnings history of the plan’s investments doesn’t affect it. Therefore, you wouldn’t use this method to value a defined benefit plan and instead, would use it to valued a defined contribution plan.

Answer 121

Allocation issues should be driven by the type of plan involved and not by the method of distribution.

Answer 122

Consideration of whether to take a date-of-divorce distribution or to defer distribution should focus on the equities between the parties and the reliability of the pension valuation if present distribution is considered.

Answer 123

The court must determine the present value of the future pension payment and make a division of assets at divorce based upon the estimated present value.

Answer 124

Vested, health and age of employee, life expectancy. The further away the plan is from vesting, the more speculative the determination of present value. Also, the interest rate at which the future pension benefit is discounted can make a difference in the present value of the pension. The risks of inaccurate valuation are placed on the employed spouse, and the risks can result in complete loss of an employed spouse’s marital property interest if the plan does not vest or become mature.

Answer 125

A present value determination is not usually made and some sort of deferred determination takes place with courts either determining the formula by which the pension will be distributed in the future when it becomes mature at either the date of divorce or reserving jurisdiction to address in the future.

Answer 126

(1) The amount of the unemployed spouse’s benefit is fixed at the time of divorce, but payment is postponed until the plan matures or until the employee retires. (2) The formula by which the nonemployed spouse’s benefit will be calculated is determined at the time of the divorce but formula is not applied to the actual pension and benefit, and the benefit is not paid until the pension is mature or the employed spouse retires. (3) The court reserves jurisdiction to determine division of pension when it is mature and when employee spouse retires.

Answer 127

Court’s calculate the non-employee spouse’s share of the pension at the time of the divorce but defer payment of the share until the pension is actually received by the employee spouse. Usually courts determine the non-employee’s spouse’s share of the pension using the marital fraction approach. Under this approach, the non-employee spouse loses a reasonable rate of return on the investment in the pension.

Answer 128

Court’s have deferred not only the distribution of the spouse’s share of the pension but also the determination of the formula for determining that share. This enables court to consider return on investment of the non-employee spouse’s share.

Answer 129

A court should use a QDRO as the preferred method of distributing the pension interest to the non-employed spouse.

Answer 130

In making a deferred distribution of the interest in the pension plan, a court should avoid fixing the amount of the specific fractional interest in the plan at the time of divorce, and instead, establish a formula that permits the non-employee spouse’s interest in the plan to appreciate until the eventual distribution of the interest.

Answer 131

(1) Immediate Offset (2) Set Off (3) QDRO

Answer 132

This approach involves distribution of the retirement benefits by way of a set off for the present value of the benefits

Answer 133

This approach eliminates the need to establish present value and is the preferred method of distribution for unvested retirement benefits since the risks of the nonreceipt of the benefits is shared by the parties. The present value is an estimate of the current worth of the future payments.

Answer 134

The set off approach

Answer 135

In order to determine the marital property component, the present value is multiplied by a coverture fraction consisting of the denominator which is number of years during which the employee earned the benefit and the numerator is the number of years the parties were married.

Answer 136

This coverture fraction should not be utilized in determining the marital portion of the defined contribution plan, since the portion of the account acquired during the marriage is readily ascertainable by simply referring to the balance in the account.

Answer 137

of years parties were married ___________________________ # of years the employee earned the benefit

Answer 138

It is a domestic relations order that creates, recognizes, or assigns an alternate payee the right to receive all or a portion of the benefits payable to a participant under a pension plan subject to EIRSA

Answer 139

It is an exception to ERISA’s spendthrift clause AND It is also an exception to ERISA’s preemption of state domestic-relations law

Answer 140

It cannot just be a domestic relations order it must meet the Retirement Equity Act (REA)’s QDRO requirements

Answer 141

The primary responsibility for determining whether a domestic-relations order is a QDRO rests with the ERISA plan to which it is directed

Answer 142

Whether an alternate payee has an interest in a participant’s pension is a matter decided in state court proceeding under the state’s domestic relations law.

Answer 143

Whether the state court order meets the statutory requirement to be a QDRO and is enforceable against the pension plan is a matter to be determined in the first instance by the plan administrator

Answer 144

While the plan administrator is making that decision, he must segregate the benefits that would be due to the alternate payee under the terms of the order during the first 18 months that those benefits would be payable if the order is ultimately deemed a QDRO

Answer 145

Because the plan cannot make payments retroactively

Answer 146

No - the administrator must accept any domestic-relations order that satisfies the REA’s QDRO requirements

Answer 147

1. The name and last known mailing address of the participant and the alternate payee; 2. The amount or percentage of the participant’s benefits to be paid by the plan to each alternate payee OR the manner in which the amount or percentage is to be determined; 3. The number of payments or periods to which the order applies; 4. The identity of each plan to which the order applies

Answer 148

1. Payments of the benefit be made to the alternate payee on or after the date on which the participant attains or would have attained the earliest retirement age, even though the participant has not retired; 2. It could also provide distribution may be made to the alternate payee before the participant reaches earliest retirement age where the plan is within the control of the parties and it could be amended to permit such an early distribution per QDRO; 3. Payment of benefits in any form in which the benefits may be payable under the plan, BUT NOT require the calculation in the form of a joint and survivor annuity with respect to the alternate payee and his/her subsequent spouse; 4. The alternate payee may elect options no selected by the participant, such as a lump sum payment whereas participant may elect payments for life. The only right the participant has that is NOT available to the alternate payee is the right to select survivor annuitant option with a subsequent spouse.

Answer 149

1. Require a plan to provide any type or form of benefit not authorized by the plan; 2. Require the plan to provide increased benefits determined on the basis of actuarial value; 3. Require the payment of a benefit to an alternate payee that are to be paid to another alternate payee under another QDRO

Answer 150

A survivor annuity is not available to the alternate payee to elect for the alternate payee’s subsequent spouse. The alternate payee may be designated by the participant to receive the survivor annuitant option even if the parties are not married, provided they were married for 1 year.

Answer 151

If a QDRO requires that former spouse who is the alternate payee to be treated as the surviving spouse for purposes of either the qualified and joint survivor annuity or the qualified pre-retirement annuity, a subsequent actual spouse may NOT be treated as the surviving spouse for that purpose.

Answer 152

Payments received by the alternate payee are treated as ordinary income for tax purposes. There is a 20% withholding tax and there is no 10% premature distribution penalty (the penalty that customarily applies to early withdraw before 59 ½) provided the QDRO is utilized as the vehicle

Answer 153

When a participant chooses a single-life annuity, payments cease when the participant dies.

Answer 154

A properly drafted QDRO can require the participant to choose a qualified joint-and-survivor annuity, which would guarantee the alternate payee a lifetime stream of payments

Answer 155

It is essential to have the QDRO entered before the participant retires; otherwise, the alternate payee has to hope that the participant outlives her so that she can receive a lifetime stream of payments.

Answer 156

Some plan administrators take the position that an order cannot be qualified as a QDRO if the participant dies before the QDRO qualification process is complete.

Answer 157

(1) court may construe the divorce decree, property-settlement agreement, or separation agreement as a QDRO if enough information is included; (2) the plan might accept a nunc pro tunc QDRO so the alternate payee’s benefits might not be jeopardized

Answer 158

The QDRO generally may not violate any of a plan’s provisions limiting the form of the benefit, the amount of benefits, and the persons to whom benefits are paid. For e.g., if a plan provides for benefits in the form of a lump sum payment upon retirement, the QDRO cannot provide for payment in the form of a joint and survivorship annuity.

Answer 159

(1) as a Single Life Annuity for the Participant’s life only; (2) as a Qualified Joint and Survivor Annuity for the lives of the Participant and the Alternate Payee; or (3) as a Qualified and Joint Survivor Annuity involving the Participant and his new spouse.”

Answer 160

Regardless of how the annuity is ultimately paid, the present actuarial value for the different payment methods must be the same so that the total amount that the plan pays will be the same.

Answer 161

The longer the payments last, the smaller they have to be; conversely, the shorter the payments last, the larger the payments must be

Answer 162

1. Participant is Retired & Receiving Payments. If the participant is retired and receiving payments from her plan, then an alternate payee has no options regarding the form or amount of benefits that she will receive because the plan started making payments to the participant based on certain actuarial assumptions, and the plan is entitled to rely on those assumptions. Payments will not last for alternate payee’s lifetime and will cease on participant’s death. 2. Single-Life Annuity on the Life of the Participant. If participant is still working and chooses a single life annuity, then when he retires, he will start receiving payments and payments will end at his death. The alternate payee hopes participant outlives her if she wants to receive benefits for her lifetime 3. Qualified Joint and Survivor Annuity on Lives of Participant & Alternate Payee. This approach guarantees the alternate payee a lifetime stream of payments. But to guaranty this, the attorney must insert language in QDRO that designates the alternate payee as the spouse of the participant for purposes of having the participant elect a qualified joint and survivor annuity with alternate payee. 4. Qualified Joint and Survivor Annuity on the Lives of the Participant and the New Spouse. If the participant is remarried, then he may chose to elect a qualified joint and survivor annuity with his current spouse, and this does not preclude the former spouse from receiving a steam of payments that can continue past the participant’s death. Payments will continue until the later of the death of the participant or his current wife, but only if appropriate language is included in QDRO. 5. Single Life Annuity on the Life of Alternate Payee. This is the preference of majority of alternate payees because it gives them complete control over when payments tart and there is no risk of outliving payments.

Answer 163

No - form QDROs don’t typically include clauses that provide survivorship benefits to alternate payees such as Qualified Preretirement Survivor Annuities (QPSA) or Qualified Joint-and-Survivor Annuity (QJSA).

Answer 164

Qualified Joint-and-Survivor Annuity. A QJSA is an annuity that provides income to the surviving spouse (or a former spouse that must be treated as a surviving spouse via a QDRO) of a plan participant who dies BEFORE retirement. If the participant dies before he stars receiving benefits from his pension, then a properly drafted QPSA clause will provide the alternate payee with a lifetime stream of actuarially adjusted pension payments.

Answer 165

If the participant dies before he stars receiving benefits from his pension, then a properly drafted QJSA clause will provide the alternate payee with a lifetime stream of actuarially adjusted pension payments.

Answer 166

A QJSA is when retirement benefits are paid as a life annuity to the participant and a survivor annuity over the life of the participant’s surviving spouse (or a former spouse who must be treated as a surviving spouse under a QDRO).

Answer 167

QJSA clause will provide the alternate payee with a lifetime stream of actuarially adjusted pension benefits.

Answer 168

To guarantee that the alternate payee will receive benefits after the participant’s death, the QDRO must state the alternate payee will be treated as the participant’s surviving spouse with respect to QJSA and/or QJSA. A lawyer must also include language in the QDRO that requires the participant to maintain coverage for the life of the benefit or bars him from opting out of such coverage

Answer 169

The plan’s model may state that the alternate payee will be paid directly from the plan, and this may be fine with the alternate payee if she is willing to pay the 10% penalty, even if she immediately turns around and deposits into an IRA. Instead the alternate payee may not want to pay the penalty and instead may want her share of the benefits rolled over into an IRA or her own retirement plan.

Answer 170

Employees benefit from after-tax contributions to a defined contribution plan because they do not pay tax on the entire distribution, and instead, they pay tax on the difference between the entire distribution and the amount of the distribution constituting after tax contributions (i.e. the total of an employee’s after-tax contribution to his retirement plan is his basis and he is not taxed a second time when he receives a withdrawal containing after-tax contributions.

Answer 171

The total of an employee’s after-tax contribution to his retirement plan is his basis and he is not taxed a second time when he receives a withdrawal containing after-tax contributions.

Answer 172

The alternate payee should insist on receiving 50% of a participant’s basis.

Answer 173

cost of living adjustments

Answer 174

To avoid this disparity, the attorney should include a provision in the QDRO that grants the alternate payee a percentage of the participant’s tax basis equal to the percentage of the plan assets assigned to her in the order. The language can simply state that the alternate payee should receive 50% (or whatever percent she received of the participant’s plan benefits) of the participant’s basis in his account as of a certain date. Thus in the example, the participant and alternate payee would divided the $40,000 tax basis in 2 so that each has a tax basis of $20,000.00, and then $100,000 - $20,000 = $80,000 taxable amount; 31% of $80,000 = $24,800; $100,000 marital share - $24,000 in taxes = $75,200.00 each

Answer 175

Some plan participants who receive monthly payments from their benefits receive periodic increases to offset inflation

Answer 176

The attorney representing the alternate payee needs to include language in the QDRO that awards the Alternate Payee a pro rata share of the participant’s COLA.

Answer 177

Some employers offer financial incentives to their employees to retire early. It’s a benefit or bonus offered by a company to employee to induce them to retire early

Answer 178

Then, the alternate payee cannot receive a share of the early retirement subsidy

Answer 179

If the alternate payee waits to receive benefit and participant retires early, then the employer will owe the participant the early retirement subsidy and the AP can receive a proportionate share but only if QDRO explicitly states she can

Answer 180

Language should be included in the QDRO that requires the participant who receives a payment intended for the AP to return the money to the plan administrator with a request that the funds be forward to the AP. The funds should not be forward to the AP directly because the party receiving the payment is responsible for pay the income tax, and then the participant will owe taxes on the payment intended for the AP

Answer 181

The plan administrator can then spare the participant any unwanted tax consequences by issuing to the participant a IRS Form 1099, which will relieve him of any taxes associated with the misdirected payment. Language regarding this 1099 should also be included in the QDRO

Answer 182

Most model QDROs divided vested benefits as opposed to accrued

Answer 183

Benefits that have accrued but not yet vested can be marital or community property.

Answer 184

It is essential to divide accrued number rather than vested number.

Answer 185

Then a pro rata share of the marital portion of the contribution should be included in the QDRO, with the QDRO identifying a specific portion of the employer’s contributions

Answer 186

ERISA allows an employer to delay the vesting of contributions made by the employer to an employee’s retirement plan for up to 7 years to incentivize employees to keep working. Once vested, it becomes non-forfeitable.

Answer 187

Then the portion that is not vested doesn’t go back to the employer (since employer got favorable tax treatment under ERISA) and instead, goes to the benefit of other participant’s in the plan.

Answer 188

Forfeitures are usually allocated once per year based upon events during the preceding 2 years (because they give employee the opportunity to return within 1 year). Forfeitures are when a participant terminates employment before fully vesting in their retirement plan and participant forfeits no vested retirement benefits usually following a plan distribution or a statutory period of consecutive 1 year breaks in service

Answer 189

The QDRO should treat the allocation of forfeitures the same way it treats year end contributions

Answer 190

The loan is an account receivable to the plan but an account payable to the participant. If the alternate payee is awarded one-half of the account balance (i.e. $100,000) excluding the loan (i.e. $20,000), she will get $50,000. However if she is awarded one-half of the account balance (i.e. $100,000) including the loan (i.e. $20,000), she will get $60,000 (50% of $120,000 because remember, the loan is treated as an asset to the plan, rather than a liability to the participant

Answer 191

Because the participant is replaying himself when he repays the loan

Answer 192

A QDRO that does not add the loan amount to the total amount to be divided could significantly shortchange the alternate payee.

Answer 193

The lawyer for the alternate payee need to make sure that the alternate payee receives her share of that account receivable.

Answer 194

Pension Benefit Guaranty Corporation

Answer 195

The PBGC insures the pension benefits of a company’s employees if the company sponsoring an underfunded defined benefit pension plan becomes insolvent

Answer 196

If the PBGC has to pay a participant less than what he would have received from his plan and a QDRO lacks a provision that specifies how an alternate payee is to share in the PBGC payments, the alternate payee could receive nothing from the PBGC

Answer 197

The QDRO should state that in the event the PBGC takes over a defined benefit plan, the % difference in the alternate payee’s PBGC payment and her original payment will be equally to the % difference in the participant’s PBGC payment and his original payment.

Answer 198

Once QDRO is sent to the plan administrator, the attorney should follow up in writing every 14 days until the order is qualified.

Answer 199

The attorney should obtain a written confirmation from the plan administrator verifying the fact and send it to the client.

Answer 200

Under the separate-interest approach, the amount of the alternate payee’s payments will be based on her life expectancy. For example, if the participant’s monthly benefit is $2,000 and she is 10 years younger than participant, the AP will not receive $1000 per month but she will receive $700 per month because she will be paid over a longer period of time due to her longer life expectancy.

Answer 201

It would be rejected by the plan administrator for violating ERISA’s prohibition against requiring the plan to pay increased benefits based on actuarial equivalence.

Answer 202

1. Clear language that the parties intend to use a separate-interest attorney preparing the QDRO for the alternate payee should include approach, the alternate payee’s benefits should be calculated based on her life expectancy, and the benefits will not end when the participant dies; 2. Pre-retirement annuity protection language by including a provision for QPSA so that the alternate payee receives her benefit if the participant dies before he retires or starts receiving benefits under the plan. If the QDRO does not provide for pre-retirement annuity protection, then the alternate payee will stop receiving benefits when the participant dies. 3. The attorney for the participant does not want language providing for a Qualified Joint-and-Survivor Annuity (QJSA) because alternate payee is already guaranteed a lifetime stream of income under the separate interest approach and if this is also elected, it would deprive participant of his right to elect to do what he wants with his share, such as a single life annuity or a qualified joint and survivor annuity with this current spouse.

Answer 203

Under this approach the alternate payee can receive benefits before the participant retires at her discretion, provided that the commencement date is on or after the participant reaches the earliest retirement age.

Answer 204

Then she will lose her share of his early retirement subsidy. The longer she waits the larger her benefits will be.

Answer 205

This is the only option if the participant is retired at the time of the divorce and the alternate payee wants benefits for her lifetime because it is too late for the plan to actuarially adjust the alternate payee’s benefits to her own life expectancy under the shared interest approach below

Answer 206

This approach is good for participant if single when he retires because he can elective to receive benefits in the form of single life annuity or if he is remarried he can provide survivorship coverage to his new spouse by choosing a qualified joint and survivor annuity based upon his wife and her life.

Answer 207

The second way to divide pension payments under a defined-benefit plan is the shared-interest approach

Answer 208

With a shared interest approach, the participant has control over the timing and receipt of benefits for the participant and the alternate payee

Answer 209

Plans do this because it is less costly, requires fewer actuarial calculations and is easier

Answer 210

Under this approach, the alternate payee’s share of the participant’s benefits is not actuarially adjusted to her life; rather, she shares in the participant’s benefits when he starts receiving them. This means that the alternate payee cannot start receiving benefits until the participant retires, and even then, the payments cease when the participant dies.

Answer 211

For example: A participant is entitled to a $2,000 monthly benefit, and the court divides it evenly between the participant and the alternate payee, who is fifteen years younger. The alternate payee will receive $1,000 per month with no actuarial reduction because the benefits are tied to the participant’s life rather than her own. If a separate-interest QDRO is used instead, then she will receive $600 per month, but she will receive it for her lifetime. If she wants to receive the $1,000 monthly benefit for the remainder of her life, the participant has to outlive her.

Answer 212

The QDRO must include pre-retirement and post-retirement survivor-annuity protection by having QPSA and QJSA clauses. Using the preceding example, if the QDRO contains QPSA and QJSA clauses, then the pension plan would actuarially adjust the monthly pension from $2,000 per month to $1,800. The participant and the alternate payee would receive $900 per month while they are both living. If the participant predeceases the alternate payee, then the alternate payee will still receive $900 for her lifetime based on the QJSA