QDRO Corner: Cash Balance Plans
A cash balance plan is a hybrid plan between a defined benefit and a defined contribution plan, offered by some private employers.
A statement for a cash balance plan will look very similar to a statement for a 401(k) account, in that the statement will show a specific dollar amount in what appears to be an account for the participant as of a date certain. However, this is not a separate account for the participant with that specific amount of funds in it. Instead, this is the actuarial value of the plan based on the participant’s life.
Most cash balance plans can only be divided in the same manner as a defined benefit plan, wherein the alternate payee receives a share of the monthly payment to the participant, or receives their own share in which the monthly payment amount is actuarily determined based on the alternate payee’s life.
Some cash balance plans may be divided like a defined contribution plan, wherein the alternate payee receives a lump sum. This is the small minority of cash balance plans.
Before finalizing a separation agreement that includes the division of a cash balance plan, it is best to have the QDRO prepared and communicate with the plan to ensure that the division upon which the parties are agreeing will be accommodated by the plan.
