The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Washington State is representative of a common inquiry involving pension payments, a divorce settlement and the Pension Benefit Guaranty Corporation (PBGC). The advisor asked:
“One of my clients is receiving pension payments from the PBGC. (His employer went bankrupt and the PBGC took over the pension plan as trustee.) My client is now divorcing and his attorney has inquired about how they should address the splitting of the pension assets when the PBGC is involved.”
Highlights of Recommendations
This is an unfortunate set of circumstances, but the PBGC has provided clear guidance on how to handle such matters. Before we address the specific question, let’s review the process of how qualified retirement plan assets are handled in divorce situations in general.
- Qualified retirement plan assets, including pension plan payments, can be part of a legal divorce settlement referred to as a domestic relations order (DRO). DROs can require all or portion of the plan assets or pension payments to be made to a third party such as the former spouse. These third parties are referred to as “alternate payees.”
- The language in the DRO must meet certain IRS requirements before pension benefits may be divided or disbursed to an alternate payee. Upon evaluation, if the language of the DRO satisfies the IRS requirements it is considered “qualified,” and is now known as a QDRO.
- A QDRO creates a right for an alternate payee to receive some or all of a participant’s benefits in a qualified plan. (Code §414(p)(1)(A))
- Generally, the plan sponsor determines whether a DRO satisfies the rules to be a QDRO. However, in this case, the corporate plan sponsor no longer exists.
- Since the PBGC has assumed the trustee responsibility for the plan, it assumes the responsibility for making QDRO determinations.
- Detailed instructions explaining the PBGC QDRO determination process can be found on the PBGC website here. The site also contains information and samples for attorneys on the proper preparation of QDROs for consideration by the PBGC.
Conclusion
When a DRO relates to a defined benefit pension plan trusteed by PBGC, the PBGC must qualify the DRO to ensure it is in line with applicable federal pension law, as well as PBGC policies, before benefits can be paid to alternate payees.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
