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Changing beneficiary upon legal separation


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#1 nsacramento

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Posted 27 August 2005 - 12:26 AM

I have an employee who was recently legally separated from his spouse (I have the court decree.) No QDRO has been sent in, nor does the legal separation document mention the 401(k) plan.

However, the employee has turned in a new 401(k) beneficiary form to remove the wife. I am not sure about accepting the beneficiary change due to the fact that he is still considered as having a spouse. Has anyone else come across this issue?

#2 Mike Preston

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Posted 27 August 2005 - 12:30 PM

Your plan's beneficiary designation form will tell you if it is ok or not. Some plans require that a spouse sign the form, witnessed by a notary, if somebody other than the spouse is to be designated. Does your form require that?

Let's assume it does.

Is your question whether this participant is to be considered "not married" for purposes of the form? Well, IANAL, but I have always thought that a legal separation was not sufficient to scissor a spouse from benefits otherwise called for under the plan, unless the separation agreement is recognized by the courts and calls for the spouse to give up all rights under the plan.

Let's see what the lawyers have to say.

#3 nsacramento

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Posted 28 August 2005 - 12:35 AM

Yes, our beneficiary form does state "spouse" thats why I don't feel I should accept the change without the ex's notorized signature.

Also, the employee refuses to provide me with the full legal separation document. I have only received thet page that states the date of legal separation and court signatures. I informed the employee that I have not received sufficient information from him that reflects his ex is no longer eligible for his retiremet benefits. I explained and provided him with our QDRO draft.

I have a feeling that there is more to his legal separation and he is refusing to have me see it because there probably is language pertaining to the retirement plan. He is really upset but I have a fiduciary responsibility to uphold.

I just wanted to see if anyone else has had this problem come up and what everyones view was on this.

I'll mention this to our attorney next week when we deal with the new SERP issues.

#4 Mike Preston

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Posted 28 August 2005 - 03:09 AM

Good plan.

#5 mbozek

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Posted 29 August 2005 - 10:11 AM

Separation does not result in the elimination of spousal rights to retirement benefits under an ERISA plan-only divorce will result in a loss of marital rights to benefits. If participant dies prior to divorce becoming final the spouse is entitled to all death benefits because divorce action is terminated upon death of one party.
mjb

#6 Mike Preston

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Posted 29 August 2005 - 10:35 AM

Couldn't the separation agreement be a QDRO?

#7 mbozek

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Posted 29 August 2005 - 11:28 AM

I have never heard of it but any event the parties are still married and the spouse has all of rights to benefits as a spouse under ERISA. If the ee dies the spouse would be entitled to claim survivor's benefits from the plan under ERISA because the death of the participant ends the pending divorce action with the parties still married. 414p defines a DRO as a judgment, decree or order whereas IRAs can be divided upon a divorce or separation instrument (since there are no spousal rights). Separation instruments do not have to be approved by a ct.
mjb

#8 JDuns

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Posted 29 August 2005 - 12:32 PM

See Reg 1.401(a)-20 Q&A 27

Q-27: Are there circumstances when spousal consent to a
participant's election to waive the QJSA or the QPSA is not required?
    A-27: Yes. If it is established to the satisfaction of a plan representative that there is no spouse or that the spouse cannot be located, spousal consent to waive the QJSA or the QPSA is not required.  If the spouse is legally incompetnent to give consent, the spouse's legal guardian, even if the guardian is the participant, may give consent. Also, if the participant is legally separated or the participant has been abandoned (within the meaning of local law) and the participant has a court order to such effect, spousal consent is not required unless a QDRO provides otherwise. Similar rules apply to a plan subject to the requirements of section 401(a)(11)(B)(iii)(I).


Under this reg a plan may provide that spousal consent is not required if the participant submits a court order demonstrating that he/she is legally separated.

It is not the beneficiary designation forms that will govern but the portion of the plan document that sets the process for designating beneficiaries.

By the way, many individuals (especially those whose faith does not permit a divorce) will legally separate. By going through this process, they cease to be responsible for each other's debts after the separation but are not legally free to remarry.

Hope this helps.

Edited by JDuns, 29 August 2005 - 12:34 PM.


#9 mbozek

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Posted 29 August 2005 - 01:02 PM

If the ee dies before the divorce occurs the plan would be faced with a conflict between beneficiaries since the spouse would be the beneficary under ERISA as the divorce action would be terminated but the plan would have designated another party as the bene. I dont see why the plan would permit a change of death beneficiary for benefits which are not payable in a separation agreement instead of waiting for a divorce decree.
I dont understand the logic of allowing for a change of death beneficiary without spousal consent upon legal separation if the authorization for allowing the designation of a non spouse will be invalidated upon the death of the employee. In NY and NJ death before the divorce decree is issued terminates the divorce proceeding and the parties are deemed legally married on the date of death.
mjb

#10 vebaguru

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Posted 29 August 2005 - 01:17 PM

Even if the separate maintenance order is a domestic relations order, it cannot be a QDRO since it does not purport to divide the benefits.

#11 pax

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Posted 29 August 2005 - 01:26 PM

By the way, many individuals (especially those whose faith does not permit a divorce) will legally separate.

It is my understanding that this is the primary reason for a "permanent separation", and hence the reason for the reference to "legally separated" in the quoted Q&A.

#12 Mike Preston

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Posted 29 August 2005 - 01:40 PM

mbozek, you keep talking about a divorce action being terminated. In the case of a legal separation, there is sometimes no intent to ever have a divorce. I think the regulation is pretty clear: in the case of a legal separation, the plan document can, if it chooses, decide that spousal consent is no longer necessary.

Further, even if the document does not invoke that special consideration, if the legal separation document satisfies the definition of a QDRO it would continue to be valid upon death.

Of course, the OP should determine what is really going on in the plan by referencing the plan document and then getting confirmation from the plan's lawyer.

#13 mbozek

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Posted 29 August 2005 - 03:52 PM

Mike: I dont have clients in a state where a QDRO terminating spousal rights can be issued before the parties are divorced. I dont see how the IRS reg would prevent the plan from being liable to pay benefits to the surviving spouse under a separation agreement at the participant's death if state law terminated the divorce proceedings (including the separation of the parties) at the death of the participant. Its easier to get the spouse to waive spousal rights upon separation then to determine whether state law permits spousal rights to benefits to be terminated upon a separation without a final divorce.
mjb

#14 Mike Preston

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Posted 29 August 2005 - 11:37 PM

mbozek.. Interesting. I certainly concur that if the result upon death is the revocation of previously issued orders, be they separation agreements or QDROs in anticipation of divorce finalization, there is a distinct disconnect.

I can't provide a citation, but out here in California, the QDRO in the absence of divorce is almost common. Well, not really common, but not so rare as to be unheard of, either.

Thanks for the dialog. I agree that if the spouse has given up rights via an anticipatory QDRO, they should also be willing to execute a beneficiary designation agreeing to somebody else as beneficiary. I would suppose that a properly drafted separation agreement might direct the spouse to do so at the behest of the participant.

#15 Kirk Maldonado

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Posted 30 August 2005 - 10:46 PM

JDuns:

Thanks for providing that insight as to why someone would seek a legal separation.

I've spoken with many domestic relations attorneys about that topic over the years, and not one of them had ever even heard of someone seeking a legal separation. In fact, they couldn't understand why somebody would do that, because the costs of obtaining a legal separation decree as much as obtaining a divorce decree (in California at least), and when it is all over, you're still married to the person.

Now I know why someone would choose the legal separation route.
Kirk Maldonado