QDRO Corner: Cost of Survivor Benefits
Most pension plan survivor benefits come at a cost. The reason for this is because most pension plans determine the benefit amount assuming that the payment will be made only during the life of the retiree. In order to extend payments for an additional life, the plan will decrease the monthly benefit to apply those funds toward the survivor benefit. To be clear, this cost is taken by the plan as a deduction each month from the monthly pension benefits.
Things to consider regarding the cost of the survivor benefit.
The larger the survivor benefit, typically, the larger the cost. Some plans determine the cost actuarily while other plans have a set fee schedule.
How does the cost for the survivor benefit get paid? There are two ways that plans can take the cost from the parties, the first option is as a reduction to both or either party’s monthly benefit and the other is ‘off the top’ of the monthly benefit.
Reduction to both or either party’s benefit. Under this scheme, the parties can determine whether one party pays the entire cost, or if they will share the cost equally. This scheme results in the plan taking the cost AFTER the monthly benefit is divided between the parties.
Off the top. Under this scheme, the parties cannot allocate the cost of the survivor benefit to either party. The plan takes the cost of the survivor benefit BEFORE dividing the monthly payment between the parties. In essence, this results in the parties paying their proportional share of the survivor benefit. If the parties want to shift the cost, they’ll have to determine an equalizing payment to be made on a monthly basis between themselves, separate from the QDRO.
Some plans provide a certain amount of survivor benefits without any cost, but will charge a very high cost for any survivor benefit amount above the free survivor benefit amount.
If you don’t know if there’s a cost, it’s best to reach out to the plan in advance of signing an agreement. You’ll be able to find out if there is a cost, what the cost is, and how the plan requires the cost be paid. Such information can help the parties determine whether the benefit is worth the cost, and can save the parties from negotiating for this after everything else is resolved.
If you have any QDRO questions, please reach out to Beatriz Giglioli at bgiglioli@markhamlegal.com
