Actuarial Aspects of QDROs The Philadelphia Actuaries’ Club

1. Actuarial Aspects of QDROsThe Philadelphia Actuaries’ Club James J. McKeogh, FSA February 12, 2013

2. Agenda • What are QDROs and what do they have to do with actuaries? • Two varieties: Shared Payment and Separate Interest • Beware of Early Retirement Subsidies • Post Retirement QDROs • Disability and Settlement Dates • QDRO Procedures • Pension Plan Valuations --First really new data category since vesting

3. What is a QDRO? • Created by the Retirement Equity act of 1984 • Defined in Section 414(p) of Internal Revenue Code • A domestic relations order which meets certain specific requirements (i.e. is “qualified”) • Removed conflict between ERISA’s anti-alienation provisions and court orders

4. And Why Actuaries? • Code Section 414(p)(3)- Order must “not require the plan to provide increased benefits (determined on the basis of actuarial value)”. • Code Section 414(p)(4) –Order may require payment to alternate payee “before a participant has separated from service” but “on or after the date the participant attains the earliest retirement age” and “not taking into account the present value of any employer subsidy for early retirement”.

5. Overheard at recent EA Meeting “Actuaries should not be involved with administration of QDROs. They are legal documents and any questions should be addressed by legal counsel”

6. Shared Payment QDRO • Under a Shared Payment QDRO, the plan pays exactly what it would have paid absent the QDRO but directs part of the participant’s payments to alternate payee(s). • Example: QDRO orders plan to pay participant his pension in form of reduced 50% J&S with half payment going to AP while both alive. If AP dies first, AP share reverts to participant. If participant dies first, AP gets 50% survivor benefit.

7. Separate Interest QDRO • Under Separate Interest QDRO, value of benefit assigned to AP converted to annuity based on AP life. • Example: QDRO orders 50% of Participant’s pension assigned to AP and converted to life annuity on AP life. Participant’s pension of $2,000 is reduced to $1,000 single life annuity. • Because AP is younger than participant, AP gets $800 for life. Neither death of participant nor death of AP affects the other’s benefits (I still have not found adequate words to explain to an AP the “missing” $200 in this example)

8. Beware of ER Subsidies – Example • A Plan has a “30 & Out” provision with no reduction for early retirement. Participant is 55/30. • Separate interest QDRO orders 50% of her $1000 pension assigned to AP who is same age. If participant retires at 55 both she and AP get $500 for life. If participant does not retire but AP wants to begin payment, he gets $250 (actuarial equivalent of NR benefit). • QDRO specifies AP entitled to share of ER subsidies if participant subsequently retires early and AP’s benefit should be recalculated.

9. Beware of ER Subsidies (continued) What happens to AP’s benefit if Participant decides to retire one year later at age 56? • Nothing. Stays at $250. • Increases to $500. • Other.

10. Beware of ER Subsidies (continued) What happens to AP’s benefit if Participant does not retire until NR at age 65? • Nothing. Stays at $250. • Increases to $500. • Other.

11. Beware of ER Subsidies (continued) AP should receive value of ER Subsidy as if AP retired at same time as participant but with an offset for payments already received.

12. Post Retirement QDROs PBGC Publication 100 (revised October 2012) states that, for PBGC trusteed plans, its “Model Separate Interest QDRO may be used only if the participant’s benefit payments have not started when the domestic relations order is submitted to PBGC for qualification”. Why?

13. Disability Benefits • Can a QDRO order benefits be paid to an AP in the event a disability pension benefit is payable? • Can a plan restrict the types of QDROs to Shared Payment QDROS? • What happens if the disabled participant recovers from the disability? • If a Separate Interest QDRO, what mortality table is appropriate for the disabled life?

14. Settlement Dates What is the appropriate “as of” date to determine the split of a participant’s benefits under a Separate Interest QDRO? • The date the QDRO is qualified. • The date the benefits are vested. • The date benefits are first payable. • Other.

15. QDRO Procedures Code Section 414(p)(6)- “Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders”. and “ the plan shall promptly notify the participant and each alternate payee of the receipt of such order and the plan’s procedures for determining the qualified status of domestic relations orders”.

16. Valuation Issues • Data furnished to actuaries should contain sufficient information so that: • Actuary can estimate liability • Actuary can spot check calculation of benefit (i.e. there should be sufficient audit trail) • Actuary can compare one year’s data to the next • For years, QDROs were rare enough and simple enough (we might look at a shared payment QDRO as a non-event) to be ignored or valued as exception.

17. Valuation Issues (continued) • Today, we see increasing numbers of pensions being split in accordance with terms of QDROs . • Some pensions might be held in escrow if QDRO terms are in dispute . • There may be a significant portion of a participant’s pension NOT subject to a QDRO and a different form of payment elected with new spouse as contingent annuitant for the non-marital component. • There may be multiple QDROs. • For a growing number of sponsors, recordkeeping and reporting is anything but trivial.