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VEBAs and QDROs?

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We're putting together a VEBA for retiree health care (okay, I'll admit up front to not knowing much about VEBA's; I'm giving some nominal assistance to the partner I work for who is developing the VEBA for a multiemployer client).

He's asked about the use of QDROs to divide VEBA accounts upon divorce. I'm afraid I'm missing something. It seems possible; anyone have any experience?

Thanks!

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Guest b2kates

Is this a health veba, then it would not be a QDRO but likely covered by a Qmsco

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Guest Scout

GBurns:

It is my understanding that the idea here is to create a VEBA on an individual account basis, where funds can be used, until exhausted, to pay a retiree's self-pay premium. So money will be in an individual's account.

Also -- the issue here isn't a child support order, but the division of cash, so I'm wondering about the QDRO effect -- the division of "marital property" not health benefits.

Thanks, everyone!

Scout

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Isnt CA a community property state in which 50% of all property acquired during the marriage is CP? Second ERISA preempts state CP laws so the transfer of 50% of the health care account to the spouse upon divorce would be a taxable assignment of interest by the employee. There have been cases where courts have issued QDROS on LI proceeds under an ERISA plan.

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A QDRO is merely an element among the requirements to the exception to ERISA's and the Code's anti-alienation provisions as they apply to ERISA "pension plans" (see the flush language of ERISA Sec. 206(d)(1) and qualified plan trusts (see Code Sec. 401(a)(13) and Section 414(p)).

The issue usually arises in the context of whether a court's enforcement of a DRO that is not a QDRO is preempted by ERISA. Pension Plan fiduciaries may argue that such DROs are preempted by ERISA. However, neither the Code nor ERISA affords a VEBA trustee grounds to assert federal preemption in the event a state court issues a DRO ordering the trustee to establish the nonparticipant spouse as the equivalent of an alternate payee.

This isn't a plan design issue. Obviously, a state domestic relations court would not issue an order unless it first concludes that the participant's interest in the VEBA is marital or community property subject to division. But, assuming it reaches that conclusion, a VEBA trustee would be ill-advised to tell a state court that its order is not enforceable because it's doesn't satisfy the QDRO rules.

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PJ: isnt the enforcement of a DRO against an ERISA trustee/participant a matter that could be removed to Fed court under ERISA 502(a)(3)? After all Met life did remove several DRO cases involving LI proceeds to Fed ct. for decisions that the proceeds could be divided under a qdro. Also doesnt cal joinder require notice of divorce action be provided to a benefit plan trustee? Also, since the division of the account would result in a taxable assignment of income by the participant it is more likely that the parties will agree on a transfer of other non pension assets to the spouse avoid the tax issue.

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They might have the problem of insufficient other assets so that the health "account" might be a substantial issue.

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Although it appears that QDROs would not apply to welfare benefit plans or health plans under ERISA, there has been a line of cases in Federal District Court, primarily out of New York, New Jersey and Connecticut, holding that certain types of benefits can indeed be divided up pursuant to a QDRO.

This is not a black and white issue, but a developing area of the law: stay tuned for further developments. We advise clients thatif they establish a health or welfare benefit plan which includes cash or equivalent benefits, they must be prepared to be served with DROs. And when they are they have the choice of fighting the DROs on the basis that they are barred by ERISA, or they can simply honor them anyway and save the plan thousands of dollars of legal expenses.

Such state court orders, although not technically binding on the Administrator under ERISA (in my view), are binding on the parties to the action, normally the participant and the ex-spouse. Therefore, the Administrator has no incentive to go through a protracted and expensive litigation to assert its position.

No state family court will make a decision based on ERISA. :(

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Without researching the issues, the PA may have a reason to oppose the QDRO because of the prohibited inurement rule that VEBA assets cannot benefit non eligible persons and I dont know whether an ex spouse would be eligible for benefits under a VEBA. Also the terms of providing coverage to the ex spouse under the DRO may violate the terms of the plan or the VEBA or increase the cost. Since the state of the law is uncertain the PA should retain counsel. Even if the dro is binding on the parties it is not binding on the PA who is not a party to the divorce.

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No state family court will make a decision based on ERISA.

vebaguru: that's actually quite incorrect.

Federal courts do not have exclusive jurisdiction with respect to adjudicating ERISA claims, although they do have removal power. State courts, including family law courts, have concurrent jurisdiction. Family law courts are frequently asked to determine whether its DRO, or the DRO of any other family law court in the state, is a QDRO.

The parties normally start out in family law court. In California there is a process by which the plan is joined to the family law proceeding as a party to the domestic relations proceeding. Barring removal to the Federal court, that court will adjudicate the claims.

An alternative occaisionally used by plan trustee where the parties decline to stipulate, is to file a motion for interpleader in federal court to determine the issue of who get's what? The amount is dispute is deposited with the clerk of the court and the plan makes a motion to be discharged from liability (not always granted).

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mjb: * * * the PA may have a reason to oppose the QDRO because of the prohibited inurement rule that VEBA assets cannot benefit non eligible persons * * *

Me: VEBAs are for the benefit of employees, their dependents and beneficiaries. A spouse qualifies.

mjb: Also the terms of providing coverage to the ex spouse under the DRO may violate the terms of the plan or the VEBA * * * the PA should retain counsel.

Me: I agree with you.

MB: Even if the dro is binding on the parties it is not binding on the PA who is not a party to the divorce.

Me: There are jurisdictions (notably California) which purport to make the PA a party to the divorce through service. While I consider the state's procedure to violate Federal pre-emption which should be accorded under ERISA, it still exists.

pjk: Federal courts do not have exclusive jurisdiction with respect to adjudicating ERISA claims * * *

Me: Agreed

pjk: Family law courts are frequently asked to determine whether its DRO, or the DRO of any other family law court in the state, is a QDRO.

Me: You have just proven the point you were trying to disprove. If they were applying ERISA, no court would make the determination: ERISA requires that the Plan Administrator evaluate the DRO and determine whether it's a QDRO.

pjk: In California there is a process by which the plan is joined to the family law proceeding as a party to the domestic relations proceeding. Barring removal to the Federal court, that court will adjudicate the claims.

Me: The procedure is defective and does not comply with ERISA which pre-empts state laws on this issue. The PA cannot be joined legally under this procedure. Again you are proving my point: that state courts, esp. California, ignore Federal laws when evaluating participants' rights under ERISA.

pjk: An alternative occaisionally used by plan trustee where the parties decline to stipulate, is to file a motion for interpleader in federal court to determine the issue of who get's what? The amount is dispute is deposited with the clerk of the court and the plan makes a motion to be discharged from liability (not always granted).

Me: That is the federal remedy available to a plan administrator when an attempt has been made to railroad the plan into violating its provisions or Federal law.

It turns out that your assertion of "actually quite incorrect" actually supports my argument: state courts almost never will rule in reliance on Federal law. If I am so incorrect, give me an example of a case which has been review by a Federal Discrict Court, Court of Appeal or US Sup Ct in which the defective method of handing under state procedures has been upheld under ERISA.

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While a spouse qualifies for benefits, an ex spouse does not --- regs 1.501©(9)-2(b(3) defines surviving spouse and dependents to be members of the association. I dont see any reference to the eligibily of an ex spouse. (QDROs specifically permit benefits to former spouses) Maybe there is another reference?

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Under a QDRO, no benefits are conferred on an ex-spouse. The DRO is generally issued simultaneous with the divorce itself or prior thereto. Your argument might hold water if it pertained to an order issued after a divorce was granted, although even then I cannot think of any DRO I have seen purporting to split benefits earned subsequent to a divorce, only up to the date of divorce. So the benefits are for a "spouse" not for an "ex-spouse".

Please note that the portion of ERISA which deals with QDROs is not under IRS's (sole) supervision, but the DOL's. Regs under 501©(9) will not supercede a QDRO which meets DOL's requirements.

The portion of the Regs you refer to has to do with the definition of employee for membership purposes, not who can receive benefits under a VEBA. Sec. 1.501©(9)-3 of the Regs. provides that "* * * The life, sick, accident, or other benefits provided by a voluntary employees' beneficiary association must be payable to its members, their dependents, or their designated beneficiaries. For purposes of section 501©(9), dependent means the member's spouse; any child of the member or the member's spouse * * * " Ex-spouses are not excluded, as they may in fact continue to be dependents under IRC 152(a).

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vebaguru: It's difficult to argue with someone who maintains that his position is supported by an assertion that it's based on a flawed premise ... but let's try anyway.

"Under [ERISA], then, whether an alternate payee has

an interest in a participant's pension plan is a matter decided

by a state court according to the state's domestic relations

law. Whether a state court's order meets the statutory require-ments to be a QDRO, and therefore is enforceable against the

pension plan, is a matter determined in the first instance by

the pension plan administrator, and, if necessary, by a court

of competent jurisdiction. See 29 U.S.C.§ 1056(d)(3)(H)(i)." Directors Guild of America-Producer Pension and Health Plan v. Tise , 255 F.3d 661 (9th Cir. 2000).

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pjk: It's difficult to argue with someone who maintains that his position is supported by an assertion that it's based on a flawed premise ... but let's try anyway.

VG: Huh? "position is supported by an assertion that it's based on a flawed premise"? Do you mean "that is"? And if so, what is the flawed premise? I made several points in my post. With which one are you arguing?

pjk, citing: "Whether a state court's order meets the statutory require-ments to be a QDRO, and therefore is enforceable against the pension plan, is a matter determined in the first instance by the pension plan administrator * * *.

VG: I believe that's what I said. ERISA 1056(d):

"(3)(A) Paragraph (1) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that paragraph (1) shall not apply if the order is determined to be a qualified domestic relations order. Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.

(B) For purposes of this paragraph--

(i) the term "qualified domestic relations order'' means a domestic relations order--

(I) which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and

(II) with respect to which the requirements of subparagraphs

© and (D) are met, and

* * *

© A domestic relations order meets the requirements of this

subparagraph only if such order clearly specifies--

(i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order,

(ii) the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,

(iii) the number of payments or period to which such order applies, and

(iv) each plan to which such order applies.

(D) A domestic relations order meets the requirements of this

subparagraph only if such order--

(i) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan,

(ii) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and

(iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

(E)(i) A domestic relations order shall not be treated as failing to meet the requirements of clause (i) of subparagraph (D) solely because such order requires that payment of benefits be made to an alternate payee--

(I) in the case of any payment before a participant has separated from service, on or after the date on which the participant attains (or would have attained) the earliest retirement age,

(II) as if the participant had retired on the date on which such payment is to begin under such order (but taking into account only the present value of benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement), and

(III) in any form in which such benefits may be paid under the plan to the participant (other than in the form of a joint and survivor annuity with respect to the alternate payee and his or her subsequent spouse).

* * *

(F) To the extent provided in any qualified domestic relations order--

(i) the former spouse of a participant shall be treated as a surviving spouse of such participant for purposes of section 1055 of this title (and any spouse of the participant shall not be treated as a spouse of the participant for such purposes), and

(ii) if married for at least 1 year, the surviving former spouse

shall be treated as meeting the requirements of section 1055(f) of this title.

So to answer mbozek, section 152 "dependent" status is not required for a former spouse.

Check out http://www.benefitslink.com/links/20020322...22-015661.shtml

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state courts almost never will rule in reliance on Federal law.

You'll observe this is a quote from a post you left earlier in this thread, along the lines of the statement that I said was "actually quite incorrect." State courts are frequently confronted with a legal issue that requires the application of Federal. Your assertion to the contrary would be the "flawed premise" in your argument.

Now it's obvious from such a statement that you are not the beneficiary of a law school education, so you may not have known that state courts are courts of general jurisdication in our judicial system and, unless Congress has made special provision for the exclusive jurisdiction of federal courts, a state court may be the appropriate forum even if the disposition of the issue requires application of Federal law. In ERISA litigation planning, it's common for the plaintiff to run to state court in the hope of getting a judge with less experience in interpreting ERISA and for the defendant to make a motion for removal for fear of the same thing. But, if both parties agree, ERISA does not prevent a state court from making a determination that the a DRO is a QDRO, if that court is a court of "competent jurisdiction."

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pjk: * * *Your assertion to the contrary would be the "flawed premise" in your argument.

VG: I stand by what I said. I have yet to see a family court judge in a divorce court proceeding choose to apply ERISA over conflicting state law. I did not say that a state court judge won't pretend to interpret or hold under applicable Federal standards.

pjk: Now it's obvious from such a statement that you are not the beneficiary of a law school education * * *

VG: It is specifically because I have been a practicing attorney for 20 years that I posted what I did. My specialty is ERISA and I get to review DROs for clients regularly.

pkj: * * * unless Congress has made special provision for the exclusive jurisdiction of federal courts, a state court may be the appropriate forum even if the disposition of the issue requires application of Federal law.

VG: No one is going to sue for divorce in Federal court because one issue involves ERISA. So what?

pkj: In ERISA litigation planning, it's common for the plaintiff to run to state court in the hope of getting a judge with less experience in interpreting ERISA and for the defendant to make a motion for removal for fear of the same thing. But, if both parties agree, ERISA does not prevent a state court from making a determination that the a DRO is a QDRO, if that court is a court of "competent jurisdiction."

VG: But the state court cannot make that determination until the parties have gone through the motions of having the Plan Administrator make a determination first.

Cases arise as follows: (1) Divorce is granted and DRO is issued. (2) Plan Administrator is served. (3) Plan Administrator makes QDRO (or non-QDRO) determination. (4) One party or the other disagrees with Administrator's determination. or (4) Somebody dies before the Administrator makes determination (as in case you posted), or (4) One party wishes to have the DRO modified. (5) Either party sues the other (order to show cause). or (5) Either party sues the Administrator to stop a payout to the former spouse or other beneficiary. (6) Administrator either invokes interpleader or steps out of case. (7) Court is left to make a determination on the facts as to whether the Administrator's determination was appropriate and correct as applied to the facts. The cases never(?) arise under the original divorce action, except perhaps under a supplemental order.

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VEBA: I think you misunderstand the eligibilityissue. I am not contesting the availbility of benefits under the QDRO provisions. IRC 414(p) expressly permits qualified retirement plans to pay benefits to former spouses (who are defined as alternate payees) after divorce without disqualifing the plan. However, there is no similar provision in IRC 501© (9) to allow payment of benefits to be made some one who is not a spouse or dependent of the the employee who are the only eligible members. Therefore a DRO cannot order that benefits from a VEBA be paid to an ex spouse since they are not benefits which can be paid under the VEBA plan as required under ERISA for a valid QDRO. Since the awarding of a benefit to an ex spouse under a QDRO would disqualify the VEBA it is not a permissible benefit.

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mbozek: The Ninth Circuit has determined that a nonparticipant former spouse may be awarded a QDRO with respect to the participant's interest in a pension plan. See Directors Guild of America-Producer Pension and Health Plan v. Tise , 255 F.3d 661 (9th Cir. 2000). There, the ex-spouse of the deceased plan participant sought to obtain the survivor benefit under the plan that was payable on the participant's death as the survivor annuitant. The deceased participant had long since named a co-habitant as the survivor annuitant. And to make matters more interesting, the IRS placed a lien on his pension benefit for nonpayment of income taxes. The plan brought an interpleader action. The Federal district court gave the ex-spouse leave to request a DRO in state court, which she did. The District Court then determined that even though she did not have the DRO in hand when the judgment for dissolution was entered, it was nonetheless proper for the state court to issue a DRO and that the plan administrator should have determined this to have been a QDRO. At least in the Ninth Circuit, an ex-spouse may be an alternate payee with respect to a QDRO, at least with respect to the participant's interest in a pension plan. (The Ninth Cicuit has not yet joined the 2nd, 7th and 11th in holding that the QDRO exemption from ERISA preemption applies to welfare benefit plans).

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mbozek: I think you misunderstand the eligibilityissue. * * * However, there is no similar provision in IRC 501© (9) to allow payment of benefits to be made some one who is not a spouse or dependent of the the employee who are the only eligible members.

VG: The regulations under IRC 501©(9) specifically permit surviving spouses to receive benefits. And ERISA specifically permits "the former spouse of a participant shall be treated as a surviving spouse of such participant for purposes of section 1055 of this title (and any spouse of the participant shall not be treated as a spouse of the participant for such purposes) * * *. This is comparable to IRC 417(p)(5) which applies to retirement plans.

mbozek: Therefore a DRO cannot order that benefits from a VEBA be paid to an ex spouse since they are not benefits which can be paid under the VEBA plan as required under ERISA for a valid QDRO. Since the awarding of a benefit to an ex spouse under a QDRO would disqualify the VEBA it is not a permissible benefit.

VG: Your conclusion is in error because you rely on the Code and ignore the provisions of ERISA as explained above.

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