Financial Analysis & Plan Evaluation Flashcards

A defined benefit QDRO assigns the alternate payee a 'fixed dollar amount' of $800/month rather than a percentage. What is the primary risk of this drafting approach?

Answer: The alternate payee bears no investment risk but the real value erodes with inflation over time

A fixed dollar amount protects the alternate payee from benefit reductions but does not adjust for inflation, reducing purchasing power over a long retirement.

Under IRC §72(t), early distributions from a retirement plan generally carry a 10% penalty. Which QDRO-related distribution is exempt from this penalty?

Answer: Distributions made to an alternate payee pursuant to a QDRO

IRC §72(t)(2)(C) exempts QDRO distributions paid directly to an alternate payee from the 10% early withdrawal penalty.

A plan provides a 'subsidized early retirement benefit' — a pension at age 55 worth more than the actuarial equivalent of the age-65 benefit. Should the QDRO capture this subsidy for the alternate payee?

Answer: Yes, the QDRO should specify participation in the early retirement subsidy so the alternate payee benefits from the enhanced value

Explicit QDRO language ensuring the alternate payee receives the subsidized early retirement benefit preserves this valuable plan feature in the divided benefit.

What does 'investment gain and loss passthrough' mean in the context of a defined contribution QDRO?

Answer: The alternate payee's segregated account grows or shrinks with actual plan investment performance after the valuation date

Gain and loss passthrough means the alternate payee's share tracks actual investment performance from the valuation date through the transfer, aligning risk and reward with market outcomes.

A QDRO covers a multiemployer pension plan. Which unique challenge arises compared to single-employer plans?

Answer: The alternate payee's benefit is calculated under a complex reciprocal agreement that may differ by contributing employer

Multiemployer plans involve contributions from multiple employers under collective bargaining agreements, and the benefit formula may depend on hours worked under each contributing employer, complicating the valuation.

Which of the following is an example of 'actuarial equivalence' as applied in a defined benefit QDRO?

Answer: Converting a monthly annuity benefit to a lump-sum present value using plan-prescribed interest and mortality assumptions

Actuarial equivalence uses interest rates and mortality tables to convert between different benefit payment forms (e.g., annuity to lump sum) so that the expected value is the same.

The participant in a 401(k) plan has outstanding plan loans at the time the QDRO is processed. How should the QDRO practitioner address these loans?

Answer: The QDRO should clarify whether the alternate payee's share is calculated before or after netting the outstanding loan balance

Whether outstanding loan balances reduce the account balance before the alternate payee's percentage is applied is a drafting decision that must be explicitly addressed in the QDRO.