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Divorce, Non-Spouse Beneficiaries and the Pension Protection Act

By Diane Cadrain  9/22/2006

The Pension Protection Act (PPA) of 2006, the most significant revamping of pension rules in decades, gave HR and benefits professionals a lot to absorb. Among its many features are special provisions applying to the changing nature of families, addressing divorce situations and applying to the status of domestic partners and other non-spouse beneficiaries.

Divorce: Who Gets the Pension?

John Lowell, a senior consultant and actuary with compensation and benefits consulting firm CCA Strategies, says the divorce provisions are best explained in light of the law before the PPA was enacted. Simply stated, before the PPA, the parties to a divorce faced difficulties if they needed to amend or add a new beneficiary to a qualified domestic relations order (QDRO).

What's a QDRO?
A qualified domestic relations order (QDRO) is a court order that is used to divide pension rights between divorcing spouses or to collect alimony or child support from a pension or retirement plan.

The process of drawing up a QDRO and getting it approved is often complex. A lawyer drafts it, the judge approves it, and then the pension plan administrator qualifies it, Lowell explains. In order to qualify, the document has to give the plan administrator enough information to enable accurate calculation of the benefit. It sounds easy, but its very complex. In fact, some professionals do nothing but QDRO work full-time.

Parties might need to amend a QDRO or add a second beneficiary, for example, if one of the spouses got a better paying job, or conversely, became unemployed. Such a change in financial conditions might in turn trigger the need to change the QDRO. Or, if the plan participant married and divorced a second time, and the second spouse wanted a share of benefits, a different beneficiary may need to be added.

The table below provides a before-and-after look:

Before the PPA

Under the PPA

If the QDRO needed to be amended or a second beneficiary added, the parties had to go back to square one and produce a new QDRO from scratch.

The new act allows the amendment of an existing order or the addition of a subsequent party without the need for producing a new QDRO from scratch.

The second spouse cant take away what had already been covered by the first QDRO, but a second QDRO can get at other assets, explains attorney Antoinette Pilzner, a shareholder with Michigan law firm Butzel Long.

The timing or the sequence of the orders, or the fact that one is issued after, or modifies, another order, now wont affect whether they qualify, Pilzner says. The upshot will be that it will be less costly for the payees to get their money, says Lowell.

Congress gave the Department of Labor the job of drafting rules for how that will be done. The new rules are due by Aug. 17, 2007.

One other change in the divorce setting applies to the Railroad Retirement Act, which covers railway employees and their families. Those provisions allow divorced spouses of railway employees to tap into retirement benefits when the participant reaches age 62, even if the participant isnt getting benefits, and even if the participant is still working, as long as the divorced spouse reaches retirement age and hasnt remarried.

Until the PPA, the divorced spouse could not begin receiving benefits until the participant elected to begin receiving them. These changes, Pilzner explains, bring distributions to divorced spouses under the Railroad Retirement Act into conformity with distributions under the QDRO rules that apply to other pension plans.

Non-Spouse Beneficiaries

Two more of the PPAs many features apply to domestic partners and other non-spouses. One of those features eases the tax burden that would otherwise fall to non-spouses after a plan member dies:

Before the PPA

Under the PPA

If the plan participant died and the benefits were to be paid to non-spouse beneficiaries such as domestic partners, children, parents or siblings, then those non-spouse beneficiaries had to take the payment in a lump sum and bear the resulting tax burden.

Only spousal beneficiaries were entitled to a more tax-friendly option: rolling over the benefits directly into an individual retirement account (IRA).

Any distribution to a non-spouse beneficiary after Jan. 1, 2007, can roll over to an IRA.

Non-spouse surviving beneficiaries had to withdraw the entire balance of the account as a lump sum and pay the resulting taxes.

These beneficiaries will now be allowed to transfer the money into an IRA and withdraw the benefits over either a five-year period or over the period of the beneficiarys own life expectancy.

The second provision affecting non-spouse beneficiaries allows a retirement plan participant to draw on the money in a retirement plan in the case of certain financial emergencies involving anyone whom the participant has designated as a beneficiary under the plan, including a domestic partner:

Before the PPA

Under the PPA

A retirement plan participant could receive such a hardship distribution only if the financial emergency involved the participant, the participants spouse or the participants dependent (as defined in the federal tax code).

A retirement plan participant can draw on the money in a retirement plan in the case of certain financial emergencies involving anyone whom the participant has designated as a beneficiary under the plan, including a domestic partner.

The emergency provisions cover medical expenses, post secondary tuition expenses, and funeral expenses, explains Pilzner. Now the PPA expands the groups of individuals on whose behalf the participant may receive hardship withdrawals.

These [domestic partner] provisions will extend important financial protections to same-sex couples and other Americans who leave their retirement savings to non-spouse beneficiaries, says Joe Solmonese, president of the Washington, D.C.-based Human Rights Campaign, a lobby for gays and lesbians. For gay couples and all Americans with non-spouse beneficiaries, death and taxes werent only certain, but also times of great and unequal financial difficulty. [The PPA] marks an important day for fairness under the law in America.

Diane Cadrain is an attorney who has been covering workplace-related legal issues for a variety of publications for over 20 years. She is a member of the Human Resource Association of Central Connecticut.

Related Reading

The New Pension Protection Act: Provisions Likely to Spur 401(k) Plan Redesigns, Comp & Benefits Focus Area (August 2006)

Same-Gender Marriage: Benefit Plan Sponsors Reconcile Conflicting Messages, Comp & Benefits Focus Area (July 2006)

Employee Benefits and Same-Sex Relationships: An Update for Employers, Comp & Benefits Focus Area (July 2005)

Employers Confront Growing Confusion over Partner Benefits, Comp & Benefits Focus Area (March 2005)

Responding to Changing Ideas of Family, HR Magazine (August 2004)

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