A supplemental benefit paid to a pension plan participant was an accrued benefit and subject to the terms of a qualified domestic relations order (QDRO), according to the U.S. Court of Appeals for the Third Circuit. Gruber v. PPL Retirement Plan, No. 12-2123 (3d Cir. 4/9/13). Under the facts of this case, the participant's former spouse was entitled to receive 53% of his pension plan's accrued benefit under an existing QDRO that also granted the former spouse 53% of any early retirement subsidy. The participant received a supplemental benefit, providing additional benefits due to organizational changes, after his job was eliminated as part of a workforce reduction program. Under the supplemental benefit, due to the participant’s age and years of service, he was entitled to receive 100% of his age 65 pension benefits. In a lawsuit filed by the former spouse seeking division of the supplemental benefit, a federal district court determined that the supplemental benefit was paid as a workforce reduction benefit and was not subject to the QDRO's early retirement provision.

However, on appeal, the Third Circuit found that the supplemental benefit included a full retirement subsidy that only applied to qualifying participants who had not yet reached normal retirement age. The appeals court determined that the supplemental benefit was an “employer subsidy for early retirement so that eligible participants would not have to receive actuarially reduced retirement benefits when they were effectively forced to retire before age 65.” According to the court, the employer’s reason for providing the supplemental benefit — its workforce reduction — did not change the fact that the benefit increased a participant’s pension benefits over the actuarially-calculated amount. Examining the QDRO, the Third Circuit concluded that the QDRO entitled the former spouse to any subsidy provided to the participant for early retirement. The Third Circuit reasoned that the district court recognized that the supplemental benefit was a retirement-type subsidy, but failed to consider its effect, which was to provide more substantial early retirement benefits. Therefore, the Third Circuit decided, the QDRO entitled the former spouse to any employer subsidy that enhanced early retirement benefits, including the supplemental benefit.

Can and should QDROs be more carefully drafted to avoid this result?

Mark C. Wolf

Editor (Compensation Planning)