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New Jersey Law Journal
August 6, 2001
Family Law
Former Spouse Can Receive Retirement Plan Benefits as a Spouse
A QDRO may provide for treatment of a former spouse as the participant's
spouse with respect to survivor benefits that must be provided under ERISA
By Joel R. Brandes
The author has offices in Garden City and New York City .... He wrote Law and the
Family New York, second edition (West Group revised 2000) and co-authored
Law and the Family New York Forms, (West Group revised 2000) and writes
a regular monthly column in the New York Law Journal.
If you've handled just one divorce case, doubtless you know that all or
part of your client's interest in a retirement plan may be divided, without
any tax consequences to the transferor, by a transfer to a spouse or a child
that is authorized by a Qualified Domestic Relations Order. But there are many
nuances of the law that are called for in the preparation of the order to
ensure it will be qualified by the plan administrator.
Most pension plans are governed by the Employees Retirement Income Security
Act, which applies to private, employer-sponsored plans and limits the time,
manner and method of the distribution of the plan benefits. Both the newly
admitted attorney and the seasoned attorney must become familiar with ERISA in
order to make the division of these assets upon divorce as stress and
malpractice free as possible.
Anti-alienation
ERISA's anti-alienation rule, USCA 1056(d), IRC §401(a)(13), requires all
pension, profit-sharing or stock bonus plans of which the pension trust is a
part to provide that the plan benefits may not be anticipated, assigned or
alienated, or be subject to attachment, garnishment, levy, execution or other
legal or equitable process. It was intended to ensure that the employee and
his beneficiaries would reap the ultimate benefits due on retirement.
Assignment or alienation includes any arrangement providing for the payment
to the employer of plan benefits that would otherwise be due the participant
under the plan. It also includes any direct or indirect arrangement, whether
revocable or irrevocable, whereby a party acquires from a participant or
beneficiary an enforceable right or interest against the plan in, or to, all
or any part of a benefit payment which is, or may become payable to the
participant or beneficiary.
However, the anti-alienation rule does not apply to a transfer of a
participant's benefits to a spouse, former spouse, child or dependent,
pursuant to a qualified domestic relations order. So, in order to transfer an
interest in a pension trust to a spouse without violating the anti-alienation
rule, there must be a QDRO.
Major problems may occur for a recipient spouse, and her counsel, if the
participant dies or retires before the QDRO becomes effective. Counsel should
consider holding entry of the divorce or dissolution judgment in abeyance
pending the qualification of the domestic relations order by the plan
administrator. If the participant makes the decision to retire, he is usually
offered several payment options by the plan administrator. If he elects a
higher paying life-only annuity payment, rather than a joint and survivor
annuity, he receives the payments for the rest of his life. Once he dies all
the payments end.
If the participant dies before the QDRO is approved, having elected a
life-only annuity payment prior to marriage, the recipient spouse may receive
nothing because the deceased participant
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election of a form of a pension under an ERISA plan is irrevocable. If the
participant retires and receives payments before the QDRO becomes effective,
the recipient spouse may not receive her share of those payments because the
plan administrator is not required to make retroactive payments. Therefore, if
the intention is to share the payments, the qualified domestic relations order
must be approved before the participant retires.
Most of the benefits provided by qualified retirement plans are retirement
benefits that are paid during the participant's life and survivor benefits
that are paid to beneficiaries after the participant's death. Usually, a
spouse can assign all or a portion of each of these types of benefits to an
alternate payee.
Plan Types
There are two basic types of qualified retirement plans; a defined-benefit
plan and a defined contribution plan.
A defined-benefit plan is one that pays each participant a specific benefit
at retirement. It is usually based on a formula that takes into account the
number of years the participant has been employed and the participant's
compensation. The basic retirement benefits are usually periodic payments for
the participant's life beginning at the plan's normal retirement age. This is
known as an annuity. The plan may also provide that these retirement benefits
may be paid in other forms, such as a lump-sum payment.
A defined-contribution plan is a plan that provides an individual account
for each participant. The benefits are based solely on the amount contributed
to the account, and any income, expenses, gains and losses, as well as any
forfeitures of accounts of other participants that may be allocated to the
participant's account.
A profit-sharing plan, a 401(k)plan, an employee stock ownership plan and a
money-purchase pension plan are defined contribution plans. These plans
usually permit retirement benefits to be paid in the form of a lump sum
payment of the participant's entire account balance.
Dividing Benefits
The "separate interest" method divides the participant's benefits into two
separate parts, one for the participant and one for the alternate payee. The
treatment of subsidies provided by a plan, such as early retirement benefits,
and the treatment of future increases in benefits due to increases in the
participant's compensation, additional years of service, changes in cost of
living, or as a result of other plan provisions, should be considered when
negotiating a property settlement based on the separate-interest approach to
allocate benefits under a defined benefit plan. A QDRO may transfer to the
alternate payee all or part of the participant's basic retirement benefits. It
can also address the disposition of any subsidy to which the participant may
become entitled after the QDRO has been entered.
If you are dividing an interest in a defined contribution plan under the
separate-interest method, the participant's account may be invested in more
than one investment fund. If the plan provides for participant-directed
investment of the participant's account, consideration should be given to how
the alternate payee's interest will be invested.
A participant's account balance may later increase due to the allocation of
contributions or forfeitures after the QDRO has been entered. The property
settlement should provide that the amounts assigned to the alternate payee
will include a portion of such future allocations.
If the parties use the "shared payment" method, under which benefit
payments from the plan are split between the participant and the alternate
payee, the alternate payee receives payments only when the participant
receives payments. You may provide that the alternate payee will commence
receiving benefit payments when the participant begins receiving payments or
at a later stated date, and that the alternate payee will cease to share in
the benefit payments at a stated date, or upon a stated event, provided that
adequate notice is given to the plan.
In splitting the benefit payments, you may give the alternate payee either
a percentage or a dollar amount of each of the participant's benefit payments.
However, the amount given cannot exceed the amount of each payment to which
the participant is entitled under the plan. If a QDRO transfers a percentage
of the participant's benefit payments, rather than a dollar amount, then
unless the QDRO provides otherwise, the alternate payee generally will
automatically receive a share of any future subsidy or other increase in the
participant's benefits.
Transfer of Survivor Benefits
Survivor benefits include benefits payable to surviving spouses and other
benefits that are payable after the participant's death. These benefits can be
awarded to an alternate payee.
A QDRO may provide for treatment of a former spouse of a participant as the
participant's spouse with respect to all or a portion of the spousal survivor
benefits that must be provided under ERISA. 29 USCA 1056(d)(3)(B). Only a
spouse or former spouse of the participant can be treated as a spouse under a
QDRO.
Retirement plans do not need to provide the special survivor benefits to
the participant's surviving spouse unless the participant is married for at
least one year. If the retirement plan to which the QDRO relates contains such
a one-year marriage requirement, then the QDRO cannot require that the
alternate payee be treated as the participant's spouse if the marriage lasted
for less than one year.
Form of Payment
ERISA requires that defined benefit plans and certain defined contribution
plans pay retirement benefits to participants who were married on the
participant's annuity starting date, which is the first day of the first
period for which an amount is payable to the participant, in a qualified joint
and survivor annuity. 29 USCA 1055(a). Under a QJSA, retirement payments are
made monthly, or at other regular intervals, to the participant for his or her
lifetime.
After the participant dies, the plan pays the participant's surviving
spouse an amount each month, or other regular interval, that is at least one
half of the retirement benefit that was paid to the participant. At any time
that benefits are permitted to commence under the plan, a QJSA must be offered
that commences at the same time and that has an actuarial value that is at
least as great as any other form of benefit payable under the plan at the same
time. A married participant can choose to receive retirement benefits in a
form other than a QJSA if the participant's spouse agrees in writing to that
choice.
ERISA requires that defined benefit plans and certain defined contribution
plans pay a monthly survivor benefit to a surviving spouse for the spouse's
life when a married participant dies prior to the participant's annuity
starting date, to the extent the participant's benefit is nonforfeitable under
the terms of the plan at the time of his or her death. This benefit is called
a qualified preretirement survivor annuity.
An individual loses the right to the QPSA survivor benefits when she is
divorced from the participant. However, if a former spouse is treated as the
participant's surviving spouse under a QDRO, the former spouse is eligible to
receive the QPSA unless she consents to the waiver of the QPSA. 29 USCA
1055(c)(1)(A)(i). If the spouse does not waive the QPSA, the plan may allow
the spouse to receive the value of the QPSA in a form other than an annuity.
Alternate Payee Treated as Spouse
A QDRO may provide that an alternate payee who is a former spouse of the
participant will be treated as the participant's spouse for some or all of the
benefits payable upon the participant's death, so that the alternate payee
will receive benefits provided to a spouse under the plan. To the extent that
a former spouse is to be treated under the plan as the participant's spouse
pursuant to a QDRO, any subsequent spouse of the participant cannot be treated
as the participant's surviving spouse.
Under a defined-benefit plan, or a defined-contribution plan that is
subject to the QJSA and QPSA requirements, to the extent the former spouse is
treated as the current spouse, the former spouse must consent to payment of
retirement benefits in a form other than a QJSA or to the participant's waiver
of the QPSA.
For example, in a defined-benefit plan, the participant would not be able
to elect to receive a lump-sum payment of the retirement benefits for which
the alternate payee is treated as the participant's spouse unless the
alternate payee consents.
Similarly, the former spouse's consent might be required for any loan to
the participant from the plan that is secured by his retirement benefits. In a
defined-contribution plan that is not subject to the QJSA and QPSA
requirements, to the extent the QDRO treats the former spouse as the
participant's spouse under the plan, the survivor benefits under the plan must
be paid to the former spouse unless she consents to have those benefits paid
to someone else.
ERISA requires the plan to allow the participant to elect at any time,
during the applicable election period, to waive the "qualified joint and
survivor annuity" form of benefit or the "qualified preretirement survivor
annuity" form of benefit, or both. However, the participant cannot make the
election or revoke it without the written consent of his spouse.
"Spouse" has been construed to mean the spouse of the participant at the
time he makes the election. Thus, a waiver in a pre-nuptial agreement of a
surviving spouse's rights in a participant spouse
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ERISA governed retirement plan is ineffective because the waiver is not made
by a person who is a spouse of the participant, just a spouse to be.
If the participant retires and has elected a joint and survivor annuity,
the spouse will receive the survivor annuity on the death of the participant.
If a participant dies, and has selected a life-only pension, it is too late to
provide the spouse with survivorship rights. If a participant retires and
starts to collect payments before a QDRO is approved, the plan may not make
retroactive pension payments to the former spouse.
These rules are based on the requirement of ERISA that a pension plan may
not be required to (1) provide any type or form of benefit, or any option, not
otherwise provided by the plan, (2) provide increased benefits (determined on
the basis of actuarial value) and (3) make payment of benefits to an alternate
payee that are required to be paid to another alternate payee under another
order previously qualified as a qualified domestic relations order.
Case law developments in this area demonstrate that these rules are
unbending, and although counsel may obtain a QDRO in a state court, it does
not mean that it will be recognized or enforced by the federal courts.
Preemption
ERISA
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preemption of state law in this area was emphasized by the U.S. Supreme Court
in Egelhoff v. Egelhoff, 121 S. Ct. 1322, (2001). While David A.
Egelhoff was married to petitioner, he designated her as the beneficiary of a
life insurance policy and pension plan provided by his employer and governed
by ERISA. Shortly after petitioner and Mr. Egelhoff divorced, he died
intestate.
Respondents, Mr. Egelhoff's children by a previous marriage, filed separate
suits against petitioner in state court to recover the insurance proceeds and
pension plan benefits. They relied on a Washington statute that provides that
the designation of a spouse as the beneficiary of a nonprobate asset --
defined to include a life insurance policy or employee benefit plan -- is
revoked automatically upon divorce. Respondents argued that in the absence of
a qualified named beneficiary, the proceeds would pass to them as Mr.
Egelhoff's statutory heirs under state law.
The trial courts concluded that both the insurance policy and the pension
plan should be administered in accordance with ERISA, and granted petitioner
summary judgment in both cases.
The Washington Court of Appeals consolidated the cases and reversed,
concluding that the statute was not pre-empted by ERISA. The state Supreme
Court affirmed, holding that the statute, although applicable to employee
benefit plans, does not "refe[r] to" or have a "connection with" an ERISA plan
that would compel preemption under that statute.
The U.S. Supreme Court, however, held that the state statute had a
connection with ERISA plans and was expressly preempted. It noted that ERISA's
preemption section, 29 U.S.C. §1144(a), states that ERISA "shall supersede any
and all State laws insofar as they may now or hereafter relate to any employee
benefit plan" covered by ERISA. A state law relates to an ERISA plan "if it
has a connection with or reference to such a plan."
The Court stated that requiring administrators to master the relevant laws
of 50 states and to contend with litigation would undermine the congressional
goal of minimizing their administrative and financial burdens. It also noted
that differing state regulations affecting an ERISA plan's system for
processing claims and paying benefits impose precisely the burden that ERISA
preemption was intended to avoid.
ERISA
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unbending nature was emphasized in Samaroo v. Samaroo; AT&T Management
Pension Plan v. Robichaud, 193 F.3d 185 (3d Cir, 1999), where Robichaud
and Samaroo were divorced on October 25, 1984, by the New Jersey Superior
Court, Chancery Division.
The divorce decree incorporated a property settlement reached by the
parties which had the following language concerning Robichaud's rights in
Samaroo's pension benefits: "(d) Pensions, Profit Sharing and Bell System
Savings Plan Savings Plan -- (1) Husband has a vested pension having a present
value, if husband were to retire at this time, of $1,358.59 per month. At the
time of husband's retirement and receipt of his pension he agrees to pay to
wife one half of said monthly amount."
Neither the decree nor the property settlement mentioned any rights to
Samaroo's survivor's annuity. Samaroo died at the age of 53 on September 20,
1987, about three years after the divorce, while still actively employed by
AT&T. He was covered under the AT&T Management Pension Plan, a defined-benefit
plan that provided pensions and survivors' annuities in amounts based on a
percentage of the employee's average salary times years of service.
Based on Samaroo's age and years of service, he had a vested right to a
deferred vested pension, which would have begun, at the earliest, at age 55.
Because Samaroo did not live to the age to qualify to receive pension
payments, there were no pension benefits that ever became payable in respect
of Samaroo. Therefore, the benefit expressly mentioned in the divorce
settlement agreement never came to fruition.
However, the plan provided a pre-retirement survivor annuity available to
the surviving spouse of any plan participant who died after vesting but before
retiring. If there is no surviving spouse, there is no annuity.
The plan denied Robichaud's claim for a preretirement survivor's annuity
because the divorce decree did not mention any entitlement to such rights, and
in the absence of a surviving spouse or a QDRO designating a former spouse as
such, there was no pre-retirement survivor's annuity payable in respect of
Samaroo.
Robichaud filed a motion in the New Jersey Superior Court, to amend the
final judgment of divorce nunc pro tunc to convey to her a right to 50 percent
of the preretirement survivor's annuity payable in respect of Samaroo. She
joined the plan as a defendant in the divorce case. The plan removed the
action to federal court and also filed a complaint for declaratory relief in
the same court. The two cases were consolidated. The district court remanded
that portion of the removed case that involved the terms of the divorce, but
retained jurisdiction of Robichaud's claim against the plan for the retirement
benefits.
After a hearing, the New Jersey state court held that the plan did not have
standing to object to alteration of the divorce decree. Samaroo's estate did
not oppose Robichaud's request to amend the decree nunc pro tunc, since
conveying the survivorship rights once Samaroo was dead did not cost the
estate anything, but undid the effect of Samaroo dying without a survivor. The
attorney who drafted the agreement testified that the issue of survivors
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benefits never came up at the time of the agreement. Robichaud herself
testified that "neither Winston [nor his attorney] or I thought about the
survivor rights to this pension."
Based on the evidence that the divorce was amicable, the state court
amended the divorce decree retroactively to give Robichaud "rights of
survivorship to 50 percent of [Samaroo's] vested pension benefits."
The court noted, however, that whether or not the state court order
resulted in any benefits becoming payable to Robichaud under the plan was a
question of federal law over which the federal court had retained jurisdiction
and which would have to be resolved by the federal court.
After the state court's ruling, Robichaud and the plan filed cross motions
for summary judgment in the pending federal district court action. The
district court examined the statutory requirements for a QDRO under 29 U.S.C.
§1056(d)(3)(C) and (D). The district court held that a domestic relations
order is not a QDRO if it requires the plan either to provide any type of
benefits not otherwise provided by the plan or to provide increased benefits.
The court relied on the reasoning of Hopkins v. AT&T Global Information
Solutions Co., 105 F.3d 153 (4th Cir. 1997), to conclude that entitlement
to a survivor's annuity in respect of Samaroo had to be determined as of the
day Samaroo died, and that the amended divorce decree represented an attempt
to obtain increased benefits from the plan. The court therefore entered
summary judgment for the plan and against Robichaud.
On appeal the Third Circuit affirmed. It noted that the lower court relied
on the statutory language defining QDROs. The court held that a domestic
decree that would have the effect of increasing the liability of the plan over
what has been provided in the plan (read in light of federal law) is not a
QDRO, no matter what the decree's status under state law.
The District Court held that a decree conferring survivor's benefits on
Robichaud after those benefits have lapsed would provide increased benefits
and therefore cannot be a QDRO. The district court relied on the Fourth
Circuit's decision in Hopkins, which recognized that defined benefit
plans are based on actuarial calculations that would be rendered invalid if
participants were allowed to change the operative facts retroactively.
The Third Circuit held that because the disbursement of plan benefits is
based on actuarial computations, the plan administrator must know the life
expectancy of the person receiving the surviving spouse benefits to determine
the participant's monthly pension benefits. As a result, the plan
administrator needs to know, on the day the participant retires, to whom the
surviving spouse benefit is payable.
Robichaud argued that by determining the right to benefits as of the day of
Samaroo's death, the plan has cheated Samaroo out of receiving any benefit
from participating in the plan. The court rejected this argument because
successful operation of a defined benefit plan requires that the plan's
liabilities be ascertainable as of particular dates. The annuity provisions of
a defined benefit plan are a sort of insurance, based on actuarial
calculations predicting the future demands on the plan.
The fact that some participants die without a surviving spouse to qualify
for benefits is not an unfair forfeiture, as Robichaud contended, but rather
part of the ordinary workings of an insurance plan. Allowing the insured to
change the operative facts after he has lost the gamble would wreak actuarial
havoc on administration of the plan.
When Samaroo died without remarrying or naming Robichaud as alternate payee
of the survivor's rights, the right to dispose of the benefits lapsed.
Allowing Samaroo or his estate to preserve the right to confer the benefits on
a new wife as long as he was alive and had the possibility of remarrying, and
then to designate Robichaud as the surviving spouse after his death, is
allowing him to have his cake and eat it, too.
"Reprinted with permission from the August 6, 2001 New Jersey Law Journal.
Copyright 2001 NLP IP
Company."
