Financial Analysis & Plan Evaluation Flashcards

When evaluating an employee stock ownership plan (ESOP) for QDRO purposes, which unique valuation challenge must the QDRO practitioner address?

Answer: Employer stock in an ESOP may be privately held and require an independent appraisal

Closely held company stock in an ESOP lacks a public market price, so an independent business appraisal is required to determine fair market value for division purposes.

A participant's 403(b) account includes both pre-tax elective deferrals and after-tax voluntary contributions. How should the QDRO address the tax character of the assigned funds?

Answer: The QDRO should specify whether the assignment includes after-tax basis to preserve the alternate payee's cost basis

Specifying whether after-tax contributions are included preserves the alternate payee's cost basis and determines the taxable portion of future distributions.

A plan's normal retirement age is 65. The QDRO requests that the alternate payee receive benefits beginning at age 50 under the earliest retirement age provision. What limitation applies?

Answer: Benefits cannot begin before the participant's earliest retirement age under the plan

ERISA allows QDROs to pay the alternate payee as early as the participant's earliest retirement age under the plan, even if the participant has not yet retired.

How does a cost-of-living adjustment (COLA) clause in a defined benefit plan affect the QDRO drafting strategy for the alternate payee?

Answer: The QDRO should specify whether the alternate payee participates in future COLAs to avoid ambiguity

Without explicit QDRO language, whether the alternate payee's share grows with COLAs may be disputed, so the order should clearly address COLA participation.

Which of the following best describes the 'time rule' (or 'coverture fraction') used in community property states to divide pension benefits?

Answer: The fraction equals community service divided by total projected service at retirement

The time rule fraction is community (marital) service in the numerator over total projected service at retirement in the denominator, applied to the retirement benefit.

A participant rolls over a 401(k) balance to an IRA before the QDRO is submitted to the plan. What is the most significant consequence for the alternate payee?

Answer: The alternate payee must obtain a separate transfer order directed to the IRA since QDROs only apply to qualified plans, not IRAs

QDROs apply only to qualified retirement plans; once funds are in an IRA, a different court order (not a QDRO) is needed to divide the IRA.

When reviewing a cash balance plan for QDRO purposes, what distinguishes the valuation from a traditional defined benefit plan?

Answer: The hypothetical account balance serves as the primary valuation metric, simplifying division compared to traditional DB plans

Cash balance plans express benefits as a hypothetical account balance with a stated interest crediting rate, making the account balance the natural starting point for QDRO division.