QDRO’s Qualified Defined Benefit Plan
Drafting the Allocation of Benefits Provision

This Practice Aid addresses the issue of drafting the allocation of benefits provision for a Qualified Defined Benefit Plan. Relevant law is found at 29 U.S.C. §1056(d)(3)(C)(ii):

...the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined.

It is emphasized that this Practice Aid is for information and education purposes and is not an indication of Troyan, Inc.’s position regarding the options presented below. In determining the amount of the monthly benefit to be paid to an Alternate Payee there are two methods that the practitioner may apply.

Traditional Coverture Fraction Methodology
(Time Line Method)

Step I. The Plan Administrator shall determine the actual monthly benefit of the participant as of the date the Alternate Payee’s benefit begins.

Step II. The monthly benefit determined at Step I, shall be multiplied by a Coverture Fraction.

Numerator: total period of time the parties were married and the participant was accruing benefits up to the jurisdictions end of marriage date.

Denominator: total period of time the participant was accruing benefits up to the date the Alternate Payee’s benefits begin. The product of this calculation is the marital part of the participant’s monthly benefit.

Step III. The Alternate Payee shall receive “X”% of the Step II, result.

Limited Coverture Fraction Methodology
(Specific Dollar Award).

Step I. For purposes of this Domestic Relations Order, the monthly accrued benefit of the Participant as of (insert date) is:

Step II. The monthly benefit indicated at Step I, shall be multiplied by a Coverture Fraction.

Numerator: total period of time the parties were married and the participant was accruing benefits up to the jurisdiction's end of marriage date (same as above).

Denominator: total period of time the participant was accruing benefits up to the jurisdictions end of marriage date (very different from above). The product of this calculation is the marital part of the participant’s monthly benefit.

Step III. The Alternate Payee shall receive “X”% of the Step II benefit. For example, if the Step II, benefit was $800.00 and the Step III, percentage was 50%, then the specific monthly benefit to be paid to the Alternate Payee would be: $400.00.

COMMENTARY:
The Traditional Methodology provides a determinable benefit that will be calculated at the time the Alternate Payee’s benefits begin; generally when payments begin to the participant. This benefit is not ascertainable at the time the Order is drafted. Under this methodology neither the actual retirement benefit of the participant nor the actual monthly benefit to be paid to the Alternate Payee are known at the time of drafting. What is certain (in 99% of the cases) is the fact that the Traditional Coverture Fraction provides a result that is very supportive of the Alternate Payee. Alternatively the Limited Coverture Fraction Methodology produces a specific monthly benefit, computed at the time of the preparation of the Property Settlement Agreement. It is this specific benefit that will be paid to the Alternate Payee (at a future date, generally when payments commence to the Titled-Spouse). The Limited Coverture Fraction Methodology provides a result that is very supportive of the Titled-Spouse.

Occasionally, an attorney representing the Non-titled Spouse inadvertently inserts language into a Property Settlement Agreement that is unclear or titled toward the Limited Coverture Fraction Methodology. Such language is akin to the following:

1. The Alternate Payee shall receive 50% of that portion of the benefit earned to the date of the filing in this action (e.g. November 12, 2001)
2. The Alternate Payee shall receive 50% of that portion of the benefit earned from the date of the marriage (e.g. June 22, 1985) to the date of the filing in this action (e.g. November 12, 2001).

PRACTICE POINT:
Determine the Methodology you intend to apply, then insert appropriate language into the Property Settlement Agreement such that intent and outcome are conformed. Confirm that your inserted language is in full compliance with 29 U.S.C. §1056(d)(3)(C)(ii).

COMMENTARY:
In the majority of jurisdictions the Traditional Coverture Fraction is widely accepted. Nevertheless, this does not mean that the Titled-Spouse’s attorney is without recourse. What is discussed in this Practice Aid is an alternative negotiating tactic that may produce the desired result. Your use of the Limited Coverture Fraction may be challenged, but, such challenge is open to rebuttal. Consider the following:

The Limited Coverture Fraction Methodology produces an inequitable result because: The worth of the benefit to the Alternate Payee is the same at the time of divorce as at the later time when benefit payments begin.

For example if the award to the Alternate Payee is a monthly benefit of $700.00, as of the end of marriage date, it is true that the actual benefit to be paid to the Alternate Payee at the time the Titled-Spouse retires remains at $700.00. What must be argued by the Titled-Spouse’s attorney, is the fact that although the monthly benefit is fixed, the present cash value of this fixed benefit continues to increase annually up to the Alternate Payee’s benefit commencement date. In fact, this should be the preferred method since it is limited to that portion of the benefit that was in fact accumulated during the marriage. Moreover, this is a more accurate method since it recognizes only that portion of the benefit actually acquired during the marriage. The chart below may be useful in persuading your adversary or the court that the Limited Coverture Fraction Methodology does not discriminate against an Alternate Payee.

Illustration of the fact that the Worth of a Fixed Monthly Benefit Increases Over Time

Pursuant to the Limited Coverture Fraction Method, the benefit is determined as of the end of marriage date, nevertheless, this fixed benefit continues to increase in value up to the benefit commencement date, thus, the Alternate Payee enjoys a guaranteed (actuarial) gain on the marital part of the pension. Let your adversary try to convince the court that a method that results in the growth illustrated above is not equitable. Troyan, Inc. offers language on point.

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