QDRO Financial Analysis & Plan Evaluation 4 — Questions and Answers
Question 1: 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?
- Fixed dollar amounts are prohibited under ERISA
- The alternate payee bears no investment risk but the real value erodes with inflation over time (Correct answer)
- The participant loses all survivor rights
- The plan must actuarially increase the fixed amount annually
Correct 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.
Question 2: Under IRC §72(t), early distributions from a retirement plan generally carry a 10% penalty. Which QDRO-related distribution is exempt from this penalty?
- Any distribution from a 401(k) before age 59½
- Distributions made to an alternate payee pursuant to a QDRO (Correct answer)
- Distributions made to a participant who transfers funds to an alternate payee
- All distributions from governmental plans
Correct 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.
Question 3: 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?
- No, subsidies are employer contributions and cannot be assigned
- Yes, the QDRO should specify participation in the early retirement subsidy so the alternate payee benefits from the enhanced value (Correct answer)
- Subsidies automatically flow to the alternate payee without QDRO language
- Subsidies only apply if the participant actually retires early
Correct 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.
Question 4: What does 'investment gain and loss passthrough' mean in the context of a defined contribution QDRO?
- The alternate payee receives a fixed return regardless of market performance
- The alternate payee's segregated account grows or shrinks with actual plan investment performance after the valuation date (Correct answer)
- Gains pass to the alternate payee but losses remain with the participant
- The plan sponsor absorbs all investment risk until transfer
Correct 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.
Question 5: A QDRO covers a multiemployer pension plan. Which unique challenge arises compared to single-employer plans?
- Multiemployer plans are exempt from QDRO requirements
- The alternate payee's benefit is calculated under a complex reciprocal agreement that may differ by contributing employer (Correct answer)
- Multiemployer plans always pay lump sums, eliminating the need for actuarial valuation
- The participant's home state law governs the entire division
Correct 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.
Question 6: Which of the following is an example of 'actuarial equivalence' as applied in a defined benefit QDRO?
- Converting a monthly annuity benefit to a lump-sum present value using plan-prescribed interest and mortality assumptions (Correct answer)
- Matching the alternate payee's benefit dollar-for-dollar with the participant's benefit
- Applying a flat 5% annual growth rate to estimate future benefits
- Splitting contributions equally between participant and alternate payee
Correct 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.
Question 7: 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?
- Loans must be repaid by the participant before any QDRO division occurs
- The QDRO should clarify whether the alternate payee's share is calculated before or after netting the outstanding loan balance (Correct answer)
- Outstanding loans are automatically transferred to the alternate payee
- Loans have no effect on the alternate payee's share under ERISA
Correct 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.
QDRO Financial Analysis & Plan Evaluation 4
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?