Cash Balance Plan QDROs
Some employers offer a type of retirement plan known as a “cash balance plan” or “cash balance pension plan.” Cash balance plans, like any other assets accrued during marriage, are community property and are subject to division pursuant to divorce in California. We have already written blogs about the division defined benefit plans (i.e. traditional pension plans) and defined contribution plans (i.e. 401(k), 457, and 403(b) plans) by Qualified Domestic Relations Order (QDRO). Cash balance plans are basically a hybrid between these two other plan types, but are classified as a type of defined benefit plan. QDROs are also utilized to divide cash balance plans in divorce.
HOW A CASH BALANCE PLAN WORKS
A cash balance plan awards pension credits each year based on a percentage of the employee’s salary for that year. The contributions made to the cash balance plan will also receive interest credits that are set at a predetermined rate by the plan (either a fixed rate or a variable rate linked to an index). In other words, the earnings on a cash balance account are based upon a predetermined interest rate and not tied to fluctuations of the stock market the way that earnings and losses on a 401(k) plan are. The plan administrator will invest the funds and any increases or decreases in the value of the plan’s investments will not directly affect the benefit amounts paid to the employee. Unlike a defined contribution plan, the amount of the employee’s earnings/interest is fixed and the investment risks and benefits are borne by the employer, not the employee. Once the employee is eligible to receive benefits, the employee can choose either a monthly annuity or a lump sum distribution of his/her cash balance plan benefits. You can learn more about Cash Balance Plans and how they differ from other types of retirement plans at the U.S. Department of Labor website.
CASH BALANCE PLAN QDRO ISSUES
It is critical for QDRO purposes to determine whether the cash balance plan was converted from a company’s previous defined benefit plan, or was initially created as a cash balance plan. Many companies have converted their traditional pension plans to cash balance plans because it costs the employer much less to fund a cash balance plan than a traditional pension plan. Regarding the method of division under a QDRO, if a plan was always a cash balance plan (i.e. there were no traditional pension benefit contributions), and the parties were married when the employee began participating in the plan, then the former spouse of the employee would be awarded a 50% of the account balance as of the parties’ date of separation, plus a proportionate share of annual interest credits. However, if traditional pension benefits were earned during the marriage and then the plan converted to a cash balance plan, the QDRO must address how to divide both types of benefits earned. Usually it is most accurate to apply the Time Rule Formula to the benefits accrued prior to the conversion (i.e. the benefits accrued under a traditional pension), and then to award the former spouse 50% of the contributions and interest credits from the date the plan converted to a cash balance plan through the parties’ date of separation. The nature of the plan, the length of the employee’s employment, and whether the employee had a traditional pension plan that was converted to a cash balance plan during the marriage are critical issues for purposes of drafting a Qualified Domestic Relations Order. As you can imagine, the language in your cash balance plan QDRO must be carefully drafted to address these issues.
DO YOU NEED HELP WITH A CASH BALANCE PLAN QDRO?
If you have questions about the division of a cash balance plan due to your California dissolution of marriage or legal separation, or if you would like to get started on your Qualified Domestic Relations Order today, please call QDRO Helper at (619) 786-QDRO / (619) 786-7376. You can also request a new client package by sending an email to firstname.lastname@example.org. We proudly assist clients throughout the United States as long as the divorce or legal separation took place in California.
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