QDROs: Shared vs. Separate?

One question you may hear when preparing to divide a retirement plan is “shared or separate interest?” What does that mean?

It’s an important decision and one worth understanding.

To begin with, here’s an example:

Suppose Ms. Smith is a long-time employee of the Jones Company and is a fully vested participant in the Jones Company Pension Plan (which we’ll assume is a typical pension plan for the purposes of this illustration; specific plans may vary). This means that when Ms. Smith retires, she will receive a monthly payment (almost like a paycheck) for the rest of her life. When Mr. Smith and Ms. Smith divorce, however, they must decide whether Mr. Smith will get a shared interest or separate interest in the Jones Company Pension Plan.

               What is a separate interest? 

               The effect of a separate interest in the Jones Company Pension Plan is that Mr. Smith will receive a separate account within the Jones Company Pension Plan, almost as if he were an employee like Ms. Smith. Mr. Smith’ rights under the Jones Company Pension Plan will be separate from Ms. Smith. Thus, Ms. Smith has an account and Mr. Smith has an account. Because they have separate rights, under most plans like Jones Company Pension Plan, they can each choose when to retire and when to start receiving benefits without consulting or affecting the other.  Or one might choose to take out a loan against their benefits, which would likely not impact the other’s account.

What is a shared interest?

               The effect of a shared interest in the Jones Company Pension Plan is that Mr. Smith will receive a share of Ms. Smith’s benefits, but not a separate account. He will begin to receive payments from the Jones Company Pension Plan whenever Ms. Smtih retires and in the same manner as she receives them. This is sometimes referred to as “if, as, and when.” Mr. Smith will receive benefits if, as, and when Ms. Smtih receives benefits. To put it another way, Mr. Smith’s benefits are largely dependent on Ms. Smith’s actions and decisions.

So, which is better?

               It depends.

Usually, most people prefer a separate interest because it gives them more of a sense of autonomy and the feeling that they are no longer entangled with their former spouse. However, there can be situations in which a shared interest is better.

Returning to our example, suppose Mr. Smith is twenty years younger than Ms. Smith. Under a separate interest, Ms. Smith may retire at 70 and Mr. Smith may have to wait twenty years before he receives any benefits from the Jones Company Pension Plan. If Mr. Smith is in ill-health, it may be better for him to elect a shared interest and not a separate interest.

There are other factors which we have not discussed to consider, such as cost of living increases and pre- and post-retirement survivor benefits. This point is: when it comes to shared or separate interests, there is no one right answer for everyone. Because it’s such an important decision, if you are considering a shared or separate interest, you may want to consult with an attorney.  If you or your attorney need this kind of assistance, please call Weinberg & Schwartz.