Basic QDRO Terminology:

QDRO:

A Qualified Domestic Relations Order a court order separate from the decree of dissolution or marriage or decree of legal separation that is needed to divide a qualified retirement plan

Participant:

A Participant is the employee who participates the retirement plan.

Alternate Payee:

An Alternate Payee is the former spouse (or current spouse, child, or other dependent) of the plan Participant who is assigned all or a portion of the Participant’s interest in a retirement plan.

Plan Administrator:

The entity, usually the employer, that administers the plan.

Accrued Benefit: 

Retirement benefit earned as of a certain date

Assigned Benefit: 

Portion of the retirement benefit that is awarded to the Alternate Payee pursuant to the QDRO

Valuation Date: 

The date that the participant’s interest in the retirement plan is valued to determine the Assigned Benefit.

Defined Contribution Plan:

These are savings plans, such as 401(k), 403(b), Money Purchase Plan, Employee Savings Plan, 457 plans and Profit Sharing Plans.  They are called defined contribution because the money the employer or employee contributes is defined, but the plan participant bears the risk of investment.  The amount available at retirement will depend on market performance

Defined Benefit Plan:

These are traditional pension plans that promise the employee lifetime payments at retirement.  Payment amount typically is based on years of service and salary for the highest three years prior to retirement.  They are called defined benefit because the amount the employee will receive at retirement is defined, and the plan sponsor bears the risk of investment.

Cash Balance Pension Plans

Cash balance plans are defined benefit plans, but they are often confused with defined contribution plans.  They are hypothetical accounts that earn a rate of return set by the employer.  Typically, the alternate payee must wait for the participant’s earliest retirement age before he/she can take a distribution of the assigned benefit.   It is a defined benefit plan because the amount that will be available at retirement is defined, and the plan administrator bears the risk of investment.

Cost of Living Adjustments:

COLAs apply to defined benefit pension plans only.  They are increases in the monthly pension payments to account for inflation.  There is a superior court opinion in which COLAs were determined to be part and parcel of the pension plan.  As such, the court determined that former spouses are entitled to a proportionate share unless specifically excluded in the judgment.

Earliest Retirement Age: 

The earliest retirement age refers to the first date a plan participant becomes eligible to commence benefits under the plan.  This allows the alternate payee to receive the benefit even if the participant has not yet retired and commenced benefits.   With most defined contribution plans, the earliest retirement age rule allows the alternate payee to take an immediate lump sum distribution.  With defined benefit plans and a small number of defined contribution plans, the earliest retirement age is when the plan participant turns 55.  Here is the ERISA definition of earliest retirement age:  “the earlier of (1) the earliest date on which the participant is entitled to receive a distribution under the plan or (2) the later of (a) the date on which the participant attains age 50 or (b) the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.”

Early Retirement Subsidy:

An early retirement subsidy applies to some traditional pension plans.  It is a plan provision that allows a participant to retire prior to his/ her normal retirement age without a full actuarial reduction of the monthly benefits.   Not all pensions provide early retirement subsidies, and if the participant does not retire early, there will be no early retirement subsidy to assign to the alternate payee.