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Surprise! A QDRO Can Apply to a Welfare Benefit Plan


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I would be interested in reading comments from our QDRO legal beagles:

http://hr.dickinson-wright.com/2019/05/24/surprise-a-qdro-can-apply-to-a-welfare-benefit-plan/

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Are you asking about how a life insurance plan’s administrator should respond if an order someone asserts is a QDRO is submitted for the administrator’s disposition?

 

Or are you asking about whether the described precedent is correct?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Yes.  Asking for comments on any of it.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I never bought into it, but no one appointed me to the bench.  QDROs are an exception to the anti-assignment rules.  If those rules do not apply, then you do not need a QDRO to divide the benefit, so the QDRO rules do not apply. That does not mean there are not issues with dividing the benefits, and some QDRO concepts are relevant, but that does not mean the QDRO rules should be applied directly.  The inquiry is double digits old.  I did not check the link.  My interest is also double digits old.  I may have missed the point.

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Has anyone had an experience in which someone submitted a domestic-relations order to a life-insurance plan's administrator before the participant's death?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Of some note is that ERISA does not appear to expressly preclude the assignment of welfare benefits such as life insurance (unlike pension benefits). See 29 USC 1056(d)(1) ("Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.") (emphasis added).  As a result, while some courts, such as the Sixth Circuit in Sun Life Assur. Co v. Jackson, 877 F.3d 698 (6th Cir. 2017), have subjected a participant's/beneficiary's assignment of welfare plan benefits to the QDRO test established in 1056(d)(3), even though that provision applies only as an exception to 1056(d)(1). See 29 USC 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."). In short, Jackson  assumed that the provision in 1103(c)(1) that "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan," imposed a non-assignability of welfare benefits requirement. The language of 1103(c)(1) does not do so (and would render 1056(d)(1) redundant and superfluous, were it read to do so). Simply put, ERISA provides no statutory rationale for either precluding the assignment of welfare benefits (although a plan document could do so) or for requiring a QDRO (as opposed to a valid state law assignment). A wise administrator/insurer is likely to seek an interpleader (as occurred in Jackson) to avoid a potential double payment.

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I think this is probably the same issue as for nonqualified deferred comp plans, which are also not subject to ERISA's antialienation rules. Section 414(p) of the Code and Section 206(d) of ERISA provide that QDROs are exceptions to the otherwise applicable nonassignability rules of the Code and ERISA, but then separately describe what QDROs are by reference to "plans," not "qualified retirement plans," or even "retirement plans." So a court can sign off on an order that is called a purported DRO, even though it is regarding benefits in a plan that is not required to provide for nonassignability or the QDRO exception to that nonassignability, which is basically everything other than qualified retirement plans. And because it is a DRO, if it meets the form requirements for a QDRO, it will be one.

I believe that at least for nonqualified deferred comp plans it is up to the plan sponsor, in the plan document, to say what force a QDRO will have, i.e., you can say in your nonqualified plan document that you do or don't take QDROs. If you say you do, then they have all the force that ERISA gives to QDROs. If you say you don't accept QDROs, then your plan document's rejection of the applicability of QDROs preempts the state marital property rules (e.g., community property) that would otherwise give the QDRO its force, and the alternate payee may face an uphill battle unless the plan document has other, non-QDRO rules for recognizing the nonparticipant spouse's interest. I haven't studied this, but it would seem like the same principles would apply to employer life insurance constituting part of an ERISA welfare benefit plan, i.e., your plan document would be controlling, but if your plan document provides for QDROs, then something that is styled as a QDRO and meets the QDRO requirements is effective as a QDRO, even though it is against a type of plan that is not required to provide for QDROs.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I confess a lack of experience about life-insurance plans.  Employers seem to fall in with an insurer’s contracts, without an employee-benefits lawyer’s advice.

 

About deferred compensation plans, here’s some practical suggestions:

 

If a plan is not governed by ERISA § 206 and does not provide for recognizing a State court’s domestic-relations order, consider the many ways in which an employer or administrator might incur expenses to resist efforts to get the plan or the obligor to recognize a non-participant’s right.  Then, the plan’s sponsor might consider whether all or some of those expenses should be a subtraction from the participant’s account, right, or benefit.

 

In my experience, few employers beyond governments and churches will commit even-handed and sustained attention to resisting domestic-relations orders.

 

For select-group and other deferred compensation plans not governed by ERISA § 206, I’ve had successes with plan provisions that recognize only a plan-approved domestic-relations order (with a definition that avoids the QDRO label) under conditions that avoid some weaknesses of the QDRO regime and do more to protect the employer, “rabbi” trustee, and administrator.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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What is the default to account for FICA taxes? The lawyers for the parties to the divorce are unlikely to know the rules and will be baffled by the taxation being heavier on the participant when they think they have ordered an “even” split.  I have no love for the compensation packages of executives, but I think people should get the results that they expect.  And plan administrators catch grief when the exec wakes up to the asymmetry too late to renegotiate.

And, yes, I have seen this in real life.

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QDROphile describes smart concerns, and a plan can’t completely solve them.

 

But one partial effort to help negotiators spot issues is this:

 

Among other conditions that are tighter than the QDRO regime, a plan-approved domestic-relations must expressly state:

 

that the court made its order after all litigants informed the court they had considered all non-U.S. taxes, all Federal taxes (including income, FICA, FUTA, estate, gift, transfer, and excise taxes), and all State and local taxes;

 

that nothing in the order can alter an employer’s or other payer’s duty to withhold taxes and to tax-report information as required by law.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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