New Jersey Law Journal
August 6, 2001
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.
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=s 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.
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.
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=s 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.
ERISA=s 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=s 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= 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