An order dividing a retirement benefit under a defined contribution plan may adopt either a “separate interest” approach or a “shared payment” approach (or some combination of these approaches). Orders that provide the alternate payee with a separate interest, either by assigning to the alternate payee a percentage or a dollar amount of the account balance as of a certain date, often also provide that the separate interest will be held in a separate account under the plan with respect to which the alternate payee is entitled to exercise the rights of a participant. Provided that the order does not assign a right or option to an alternate payee that is not otherwise available under the plan, an order that creates a separate account for the alternate payee may qualify as a QDRO.

Orders that provide for shared payments from a defined contribution plan should clearly establish the amount or percentage of the participant’s payments that will be allocated to the alternate payee and the number of payments or period of time during which the allocation to the alternate payee is to be made. A QDRO can specify that any or all payments made to the participant are to be shared between the participant and the alternate payee.

In drafting orders dividing benefits under defined contribution plans, parties should also consider addressing the possibility of contingencies occurring that may affect the account balance (and therefore the alternate payee’s share) during the determination period. For example, parties might be well advised to specify the source of the alternate payee’s share of a participant’s account that is invested in multiple investments because there may be different methods of determining how to derive the alternate payee’s share that would affect the value of that share. The parties should also consider how to allocate any income or losses attributable to the participant’s account that may accrue during the determination period. If an order allocates a specific dollar amount rather than a percentage to an alternate payee as a shared payment, the order should address the possibility that the participant’s account balance or individual payments might be less than the specified dollar amount when actually paid out.

Reference:[ERISA §§ 206(d)(3)(C); IRC § 414(p)(2)]