|
Prior to negotiating or drafting a QDRO against a Defined
Benefit Plan the practitioner should be familiar with
29 USCS 1056(d)(3)(D)(ii), which provides:
does not require the plan to provide increased benefits
(determined on the basis of actuarial value),
This Practice Aid discusses “actuarial equivalence.” A
workable definition of this term is: of equal value.
Thus, two or more items are actuarially equivalent
if they are of equal value. For example if the current
worth of a Single Life Annuity payable monthly in the
amount of $1,000.00 for a male age 65 is worth $130,000.00
and a Ten Year Certain Monthly Annuity in the amount
of $900.00 for a male age 65 is worth $130,000.00 these
two annuities are actuarially equivalent. The reader
will note that actuarial equivalence does mean that
the equivalent items are identical. The worth of the
items will be identical, however, other features of
each item will differ.
For QDRO negotiating and drafting purposes it is necessary
for the practitioner to understand the application
of the above cited prohibition.
Scenario One
Assume the husband retires with a monthly pension of
$1,500.00. It is agreed that the wife is to receive
one-third of this benefit. Clearly, one-third of $1,500.00
is $500.00. Does this mean that the wife will receive
a monthly pension of $500.00? Absolutely not. Rather,
the wife will receive the actuarial equivalent of a
monthly pension of $500.00. In the vast majority of
cases actuarial equivalence results in the Wife receiving
less than $500.00. This reduction in benefit to the
wife will be attributable to the fact that she has
greater longevity than her former husband. Assume at
the husband’s age 65 the wife’s age is
60. Using a standard actuarial table the life expectancy
of a male age 65 is 15.7 years. For a female age 60
life expectancy is 23 years. Thus, the wife will be
receiving monthly payments for 87.6 months after the
death of the husband. She would receive $43,800.00
subsequent to the death of her former husband. An alternative
method of expressing this greater stream of payments
to the wife is to state that the cost to purchase her
longer duration annuity is relatively greater than
that of the husband. At a rate of 6% the cost to purchase
the husbands annuity (of $500.00, which is the amount
due to the wife) is $60,923.65. The cost to purchase
a monthly annuity of $500.00 for the wife for her lifetime
of 23 years is $74,755.49.
Clearly, these $500.00 monthly
annuities are not of equal value: they are not actuarially
equivalent. To make these two monthly annuities of
$500.00 actuarially equivalent the cost of the wife’s
annuity must be equal to that of the husband. Thus,
the question becomes what amount of monthly benefit
can be bought for the wife that has a cost of $60,923.65?
Answer; a monthly annuity of $407.49. Thus, a monthly
annuity of $1,000.00 to the husband and a monthly annuity
of $407.49 to the wife, will under this fact pattern
be actuarially equivalent to a monthly annuity of $1,500.00
paid to the husband.
To emphasize the need for clarity regarding Domestic
Relations Orders and actuarial equivalence, consider
a case in which a benefit is to be equally divided
between spouses. The titled-spouse
is the wife age
65 and the husband is also age 65. Assume the total
monthly benefit payable to the wife $2,000.00. Thus,
each expects $1,000.00. Using an interest rate of 6%
and a standard mortality table, the wife will as expected
receive a monthly benefit of $1,000.00. However, the
husband will receive a monthly benefit of $1,118.10
(recall his shorter life expectancy). Thus, a monthly
annuity of $1,000.00 to the wife and a monthly annuity
of $1,118.10 to the husband is the actuarial equivalent
of a monthly annuity of $2,000.00 paid to the wife.
Each of the above scenarios may result in a non-felicitous
experience for an attorney. To avoid unexpected payout
amounts and client outrage, be clear prior to crafting
your settlement how 29 USCS 1056(d)(3)(D)(ii) will
impact on your client. Request that your expert prepare
an illustrated explanation of how actuarial equivalence
will impact on the actual benefit paid to your client.
Absent this exercise, consider how you would explain
to the wife in scenario two, how one half of $2,000.00
is $1,118.10.
<= Back to Practice Aids
|
