Madison71

Beneficiaries

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Good Afternoon -

I should know this answer, but I'm unsure and was hoping I could get some thoughts from this board of experts.  401(k) plan has the language in it where divorce or legal separation does not revoke the beneficiary designation.  Participant completed beneficiary designation naming his spouse (at the time) as the primary beneficiary which I know is required unless waived.  Participant gets divorced a couple years back and plan never receives a QDRO.  Participant subsequently remarries and dies shortly thereafter.  There is no one-year marriage rule in the plan.  Participant never completes a new beneficiary form prior to his death naming his current spouse.  Who gets the money?  I can argue both sides which I'm going to blame on a long week.

Thank you!

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From the facts stated it seems pretty clear that the surviving spouse is the beneficiary as a matter of law.  What would you argue in favor of something else?

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The plan says that the spouse is the beneficiary? Then the spouse is the beneficiary.  When he got married, THAT revoked the prior designation.

BTW, I think it is absolutely foolish to not have divorce automatically revoke a prior spouse designation. Not revoking is much more likely to cause all kinds of problems.  I actually have never seen a plan that has language that keeps a designation in place after divorce, FWIW.

In this case, the spouse is legally the beneficiary.

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Thank you both.  Larry - I agree with you as to the foolishness.  Unfortunately, I did not draft the document.  Ex-spouse is claiming a QDRO is in the works for 1/2 the account which they were obviously very slow to draft, but I guess it is stated in the divorce decree which has not been provided.  Notice of a QDRO being drafted is not enough to freeze the account according to QDRO procedures - an actual order is required.  Current spouse wants paid out now.  Just checking with this board.  Thanks again

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With that additional info (why don't people give us all the info the first time).. the answer is obvious.

You have a competing claim from two individuals who each are claiming they are entitled.  The plan doesn't care who gets paid because it knows it owes the money to someone. That is 100% a job now for lawyers. Either the plan goes interpleader (not a good idea because that usually screws up tax ramifications for whomever wins) or the parties go to court and the plan waits.

We have one where the owner die with $1million in his account. Turns out he has an illegitimate child in destitute foreign country.  He divorced his wife before he died but did not change his beneficiary designation but the plan has automatic revocation.  Ex-spouse is claiming she is the beneficiary; very interesting case since we have tons of lawyers involved.  The child has a lawyer in the foreign country and one here representing him.  The ex-spouse has a lawyer. The plan has a lawyer. The employer has a lawyer because the guy died and the business is now being run by a receiver. It went to federal court and the parties just agreed to give the ex $300k under agreement and a federal court order.  That's what the plan will do, with the balance to the foreign kid via his reps.  FASCINATING....

 

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Thanks again Larry.  I was specifically holding out on the additional information hoping you specifically would answer and then I would add additional details and you would respond with  "why don't people give us all the info the first time."  I was then thinking about adding some additional questions to that...Just kidding - my apologies on holding out info the first time.  I appreciate the time.

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If the participant dies before a QDRO exists, and there is surviving spouse with statutory ERISA rights, can a post-death QDRO trump those rights?  I would be very surprised if the answer is "yes," but someone will have to research the case-law.  Not sure why the Plan Administrator would give a hoot about potentially tricky tax consequences if interpleader is the best risk/cost management strategy from the plan's perspective.  The Plan Administrator is just going to do what the court tells it to do and the tax and tax reporting chips will fall where they may. 

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21 minutes ago, Madison71 said:

Thanks again Larry.  I was specifically holding out on the additional information hoping you specifically would answer and then I would add additional details and you would respond with  "why don't people give us all the info the first time."  I was then thinking about adding some additional questions to that...Just kidding - my apologies on holding out info the first time.  I appreciate the time.

You are forgiven my son; go in peace!

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20 minutes ago, jpod said:

If the participant dies before a QDRO exists, and there is surviving spouse with statutory ERISA rights, can a post-death QDRO trump those rights?  I would be very surprised if the answer is "yes," but someone will have to research the case-law.  Not sure why the Plan Administrator would give a hoot about potentially tricky tax consequences if interpleader is the best risk/cost management strategy from the plan's perspective.  The Plan Administrator is just going to do what the court tells it to do and the tax and tax reporting chips will fall where they may. 

Good questions.  The answer is a definite MAYBE. First, it is worth saying that the attorney who was supposed to draft the order is very definitely in a risk for a legitimate malpractice claim by the ex-spouse.  Second, depending on which Circuit you live in. Apparently, the Eighth, NInth and Tenth Circuit Court of Appeals allows for QDROs in this circumstance, but it will be a headache that can disappear with a properly drafted QDRO. Lawyers are required!  The Third and Fourth circuits continue to reject posthumous nunc pro-tunc orders. https://en.wikipedia.org/wiki/Nunc_pro_tunc

It is possible that my listing of the circuits on each side is out of date as my resource is a number of years old and I am not likely to do the research myself at this point.  Did I say LAWYERS REQUIRED?  If you read the cases, they are VERY MESSY and in all cases you want to shoot the original lawyers for royally f'ing it up!  The equity arguments in the cases are always strong, and seems to have spawned a growing number of pro posthumous QDRO cases.

Interpleader also requires the plan to incur costs; sometimes its just better to let the parties battle it out until the court issues an order that the plan can then follow.

Did I mention that this is now a job for the lawyers???? :-)

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Depends on what the pre-death divorce decree (or its equivalent under applicable state law) says about the plan benefits.  The decree is a DRO and does not have to be qualified, but it must say something about awarding an interest under the plan to the former spouse.  Qualification defects can be cured by a post-death order.  The outcome also depends on when the plan receives a DRO and what the QDRO procedures say about what is required before the plan takes any extraordinary action relative to receipt of a DRO.

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The appropriate fiduciary has a duty to make various determinations in this matter and cannot simply punt to interpleader.

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23 hours ago, jpod said:

If the participant dies before a QDRO exists, and there is surviving spouse with statutory ERISA rights, can a post-death QDRO trump those rights?  I would be very surprised if the answer is "yes," but someone will have to research the case-law.

I think the short answer is yes it can, but like @QDROphile says, it really depends on whether the division of assets in the divorce created a right to the ex-spouse.  

 

17 hours ago, QDROphile said:

The outcome also depends on when the plan receives a DRO and what the QDRO procedures say about what is required before the plan takes any extraordinary action relative to receipt of a DRO.

Even if the plan pays the full balance to the surviving spouse before receipt of the QDRO, it would be a civil matter between the ex spouse and surviving spouse.  I don't see how it is any different than one spouse taking a full distribution after the division of assets but before the plan was served with a QDRO.  They are taking something they know they no longer have a legal right to, even if the plan has not yet been put on notice.  

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On 5/11/2018 at 3:49 PM, Madison71 said:

Thank you both.  Larry - I agree with you as to the foolishness.  Unfortunately, I did not draft the document.  Ex-spouse is claiming a QDRO is in the works for 1/2 the account which they were obviously very slow to draft, but I guess it is stated in the divorce decree which has not been provided.  Notice of a QDRO being drafted is not enough to freeze the account according to QDRO procedures - an actual order is required.  Current spouse wants paid out now.  Just checking with this board.  Thanks again

What if....  The ex-wife submits the divorce decree as a QDRO.  It is not a QDRO, but the PA still has to determine that it isn't a QDRO, and notify all the parties and all that fun stuff. While the PA is determining that it is not a QDRO, the actual QDRO can be submitted.  If you are going to deny the surviving spouse distribution, this at least creates a reason for the PA to not immediately distribute the assets which is better than "we were told they were working on a QDRO"

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Golfing’s “What if” is exactly the optimal path, and if I were the Plan Administrator, I would even suggest as much in order to make life easier for the plan. It is really the job of the former spouse’s lawyer to do this, but most domestic relations lawyers do not understand procedural niceties for QDROs even if they can manage to draft a qualifying order that achieves the intent of the parties.

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On 5/11/2018 at 10:59 PM, QDROphile said:

The appropriate fiduciary has a duty to make various determinations in this matter and cannot simply punt to interpleader.

Interpleader IS a fiduciary decision when the merits of two claims give rise to the inability of the fiduciary to decide which claim takes precedence and it is appropriate for a court of competent jurisdiction to make such a decision. 

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Here is the language in our document

(f) Divorce revokes spousal Beneficiary designation. Notwithstanding anything in this Section to the contrary, unless otherwise elected in Appendix A to the Adoption Agreement (Special Effective Dates and Other Permitted Elections), if a Participant has designated the Spouse as a Beneficiary, then a divorce decree that relates to such Spouse shall revoke the Participant's designation of the Spouse as a Beneficiary unless the decree or a "qualified domestic relations order" (within the meaning of Code §414(p)) provides otherwise or a subsequent Beneficiary designation is made.
 

 

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Correct, but those instances should be rare.  The fiduciary cannot just claim, "Whoops, I've got two claims, each on its face with some merit, I will invoke interpleader."  The fiduciary has to consider the claims, and may have to investigate directly or indirectly,  and make some factual and legal determinations.  For example,  in the circumstances described in this thread, the fiduciary may have to investigate the implied claim that the former spouse had been awarded an interest under the plan before death, determine whether or not the order awarding that interest is a QDRO, and apply the correct law regarding post-death qualification of domestic relations orders (unassisted by the Department of Labor in its irresponsible failure to comply with the Congressional mandate to adopt competent regulations concerning post-death QDROs, further demonstrating that the DOL doe not understand either the law or the practicalities of QDROs) as part of evaluating the merits of the claims.  If the fiduciary does its job of evaluating the two claims, it is very likely that there will NOT be an "inability of the fiduciary to decide which claim takes precedence."  The glib advice to use interpleader is too easily given by those who know the basics if what it is, but do not understand how it works in practice, especially when ERISA fiduciary duty is involved.  The ERISA fiduciary is not merely a bag holder who has a good faith desire to see that the better claimant gets the goods.

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Having been involved in exactly TWO contested situations in over 35 years of doing this stuff, I certainly do not recommend interpleader glibly.  Go back and look at the commentary I provided that different circuit courts have held differently on this basic issue.  I disagree that the fiduciary is required to do as much in depth research as you suggest is necessary; it is enough to know that there should have been a QDRO drafted for the ex-spouse and it was not done before the death of the participant. We know that for a fact.  The court ordered some sort of division and it was not done. Beyond that, now that there are two competing claims, either or both of which might be legitimate, this is a situation absolutely ripe for interpleader.  The fiduciary is NOT required to figure out the law in this situation; it clearly ISN'T clear and now that's the job of the courts to figure it out. There is just NO WAY that the fiduciary is violating his fiduciary duty by recommending interpleader (if he were to go that route) in this situation.  The fiduciary is actually exercising his appropriate judgement and as an expert witness (which I am), I would fully back him up in his decision.

Now, if you review my prior posts, I actually suggested they AVOID interpleader. Since the parties appear to be represented let them fight it out and have the plan tell them that they will wait for a court order telling the plan what to do. That is also a good fiduciary decision since now the plan does not have to incur the costs of going to court and ultimately, the distributions will be made with all the proper paperwork.  However, if the client is a law firm and it won't cost them any real money to do the interpleader thing, then go right ahead with my blessing, though I do wonder how the court will deal with all the disclosure stuff and reporting stuff (I have never seen an actual interpleader with a retirement plan, though in my insurance company home office days I know we had bunch of them, but the corporate legal department took it over once my operation determined we could not figure out who to pay in a given situation.

 

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33 minutes ago, Larry Starr said:

Having been involved in exactly TWO contested situations in over 35 years of doing this stuff, I certainly do not recommend interpleader glibly.  Go back and look at the commentary I provided that different circuit courts have held differently on this basic issue.  I disagree that the fiduciary is required to do as much in depth research as you suggest is necessary; it is enough to know that there should have been a QDRO drafted for the ex-spouse and it was not done before the death of the participant. We know that for a fact.  The court ordered some sort of division and it was not done. Beyond that, now that there are two competing claims, either or both of which might be legitimate, this is a situation absolutely ripe for interpleader.  The fiduciary is NOT required to figure out the law in this situation; it clearly ISN'T clear and now that's the job of the courts to figure it out. There is just NO WAY that the fiduciary is violating his fiduciary duty by recommending interpleader (if he were to go that route) in this situation.  The fiduciary is actually exercising his appropriate judgement and as an expert witness (which I am), I would fully back him up in his decision.

Now, if you review my prior posts, I actually suggested they AVOID interpleader. Since the parties appear to be represented let them fight it out and have the plan tell them that they will wait for a court order telling the plan what to do. That is also a good fiduciary decision since now the plan does not have to incur the costs of going to court and ultimately, the distributions will be made with all the proper paperwork.  However, if the client is a law firm and it won't cost them any real money to do the interpleader thing, then go right ahead with my blessing, though I do wonder how the court will deal with all the disclosure stuff and reporting stuff (I have never seen an actual interpleader with a retirement plan, though in my insurance company home office days I know we had bunch of them, but the corporate legal department took it over once my operation determined we could not figure out who to pay in a given situation.

 

Im not sure I see the problem with the post death QDRO in this case.  It would have been better if it had been done timely, but if the QDRO simply provides the plan with the documentation to carry out what was settled during the divorce, what is the controversy?  Its not like the surviving spouse already started drawing a benefit or an annuity was purchased, the assets are still in the plan.  The only real questions seem to be 

  1. Can they delay a distribution request from surviving spouse without getting the actual QDRO
  2. How long can they delay a distribution request from surviving spouse without getting the actual QDRO

If they actually receive a QDRO from ex-spouse, it seems pretty clear she is entitled to what the court said she was entitled to, and the surviving spouse is entitled to whatever the court said participant was entitled to.  Or do you see an issue Im overlooking?

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The problem is that the participant has now DIED; so benefit rights to spouses and ex-spouses have matured but we are not sure what they are.  There is no QDRO for the ex-spouse (yet). There is a beneficiary designation that still provides the ex-spouse as the beneficiary, a plan provision that does not revoke that automatically upon divorce, and a new spouse who is entitled to her own ERISA rights to the account.  The widow wants her money NOW: their still is not QDRO from the ex-spouse. I think that is sufficient complexity for throwing this to the courts to decide.

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 Would your answer change if the divorce decree were submitted to the plan today?

Are you assuming that a claim for benefits has been filed by one, or both, of the claimants?

I think the fiduciary has to at least conform to express statutory procedural requirements.  In the process, the complexity may resolve, which is one of the things required procedures are intended to accomplish.  And an informed competent practical fiduciary will guide the process to an efficient resolution.  And which court is going going to be happy about receiving the case before the fiduciary has completed the statutory procedures*, and do a better of unraveling the complexities of a strange plan, a strange federal statute, and  matters that are currently before a state domestic relations court? 

And "benefit rights to spouses and ex-spouses have matured but we are not sure what they are" is the answer to the widow who wants benefits now and why the statutory claims procedures have reasonable times built in for adjudicating claims.

*Courts really do not want to hear disputes, especially complex ones that involve overlap of state and federal laws and jurisdiction, so we have doctrines like ripeness, exhaustion, and abstention that will have to be addressed in the filing of an interpleader.

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Unless the divorce decree qualified as a QDRO (and  they RARELY do), then, no, my answer would not change.

Let's assume that there are competing claims (the provider or the original question did not so state but it's reasonable to assume that's why he's asking).

I don't know of "express statutory procedural requirements".  The DOL has provided some guidance for the type of things that should be in your plan's QDRO procedures, and we have a standard QDRO Procedure that is pretty vanilla (like most of them that I have seen over the years).  The problem is that the procedure will not deal with conflicting claims where it is not clear who is entitled to what.  It is an absolutely perfect decision to throw your hands up in the air and say "I don't know" and let someone else resolve it. And that is what the courts are for.

I don't understand your concern about courts "being happy". Courts deal with resolving issues all the time; that is what they do; that is their job (whether they are "happy" or not is irrelevant).

Federal courts (where this will be heard) are quite capable of doing exactly what they are supposed to do.  The judges are (mostly) very good and competent at dealing with both the legal issues and the issues of equity. 

We will just have to agree to disagree on those issues.

 

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I agree to disagree.  Also, please do not take personally my terse and irreverent comments about blithely invoking interpleader. I was making a the comment based on observation of comments on Benefitslink about interpleader over years, not on your particular comment (although your comment was a trigger to riff about interpleader).  As your response recounted, your reference was based on consideration, whether or not we agree on the outcome of consideration and the speculation underlying it.

I will make one further comment about QDROs, triggered by this situation, but not in furtherance of a discussion about interpleader.  The statute requires action by a plan if the plan receives a domestic relations order.*  While most divorce decrees do not try to be a QDRO, they are domestic relations orders.  If a plan receives a domestic relations order, it must, within a reasonable time, determine whether or not the order is qualified.  If the order is not qualified, the proponent has a reasonable time to cure qualification defects.  Implicit in the requirement is that distributions that might compromise the rights under the ultimate QDRO (assuming defects are cured) should be suspended pending the resolution of the proposed QDRO.  Also, as a concept, death of the participant pending resolution of the QDRO does not prevent qualification and implementation, although the facts can make a mess of this concept, especially under DB plans.  In short, it can be a valid and intelligent move to submit a non-qualifying domestic relations order to preserve an alternate payee's rights while efforts are being made to come up with a QDRO (very often because the lawyers are derelict in getting to the technical QDRO part of the divorce).  All within a reasonable time and clearly holding other would-be distributees in full or partial abeyance without putting the fiduciary in a bind because of the delay, assuming reasonable diligence by the fiduciary in the proceedings.

*Plan terms or terms of written QDRO procedures can require the fiduciary to take action before the receipt of a domestic relations order upon some notice about an intended QDRO, but  such provisions are ill-advised.  The Department of Labor incorrectly asserts that a plan must always take some action when notified about an intended QDRO, another demonstration of the DOL's ineptitude in this area of law.

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QDRO, I agree with everything you've said.  However, I believe Madison has stated that to this day not even a mere DRO has been provided to the plan, and now it's long past the participant's death.  Given these facts/timing, I would be surprised if the law permit a post-death purported QDRO to be effective, but as I said in my one and only entry here I have not done the research.  But on the other hand, if the surviving spouse has already made a viable claim for her benefits, and if the plan has not received a DRO, how can the plan deny her claim? 

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