How Does Misunderstanding the Phrase “Actuarial Reduction” Cause Significant Problems with QDROs?
Under a defined benefit pension plan, an alternate payee can commence her share of the benefits on or after the participant’s earliest retirement age even if he does not retire at such time. However, she may be shocked to realize that her expected $500 per month (which represents one-half of the participant’s accrued benefit) could be reduced by as much as 30 to 40 percent if she commences her share prior to his normal retirement age, and by another 20 to 30 percent on top of that if he does not retire when she elects to commence her benefits. Instead of getting $500 per month for life as she thought, she could receive only $200 per month after a full actuarial reduction is applied to her share of the benefit. The QDRO should include broad language that permits her to elect when she wants to commence her share of the benefits. If she has other sources of income, it may be in her best interests to defer her pension commencement date.
