Administering Cash Balance Pension Plans to Conform With Qualified Divorce Orders

Abstract

This article provides an overview of the unique issues that normally arise under a cash balance pension plan to conform with qualified domestic relations orders (or QDRO). Presently, many plan administrators treat a cash balance plan just like a defined contribution plan only to find that the benefits within a cash balance plan are not as easily divided as those within a defined contribution plan. The apparent similarity of hypothetical account balances in a cash balance plan and the actual account balances in a 401(k) plan can result in mishandled QDROs. The similarities between a cash balance plan and a traditional defined benefit plan can also confound plan administrators, particularly when a defined benefit plan was subsequently converted to cash balance plan. Then all or a part of a participant’s benefit subject to a QDRO has the option to be determined under a traditional defined benefit formula, such as a percentage of final average pay. And while a QDRO administered under a pure cash balance plan can split the benefit in a fashion similar to that used for 401(k) plans, QDROs remain distinct and involve important differences between a cash balance plan and a 401(k) or other defined contribution plans. These unique features of a cash balance plan can drastically affect the monetary impact on alternate payees. To fulfill the duties prescribed under both ERISA and the IRC, plan administrators must engage in a very targeted fact-specific analysis involving the participant (employee), alternate payee and the Plan within a taut web of federal laws, regulations and mandates.