Changing DB election when in payment status.

[Thornton]

A married participant in a DB plan retired and elected a Joint & 75% Survivor annuity. Several years into retirement, he and his wife divorce. I was retained to draft the QDRO, which split the participant's monthly payment 50/50. If the participant dies first, the alternate payee receives the survivor amount of 75%. If the alternate payee dies first, the participant reverts to his full benefit. Pretty simple. The plan administrator supplied the language and of course pre-approved the QDRO.

The participant won't sign it, saying it is unfair. The plan administator now says that the J&S can be removed. The participant and the alternate payee would each receive a higher monthly benefit, which sounds like a life annuity. If the participant dies first, the alternate payee continues to receive the same amount for her lifetime. If the alternate payee dies first, the benefit reverts back to the participant, which doesn't sound like a life annuity. I recognize that none of this is my business and I should revise the order as directed, but I'm curious.

1) I has been my understanding that an elected DB benefit can rarely be changed once in payment status, especially by QDRO. Am I missing something?

2) Does my rough description of the single life payment for the alternated payee but an increase for the participant if the alternate payee dies first make sense? I'm not an actuary or anything, so thought I'd ask.

Thanks.

[QDROphile]

1.  It depends on the plan design.  Most plans do not provide for it because of adverse selection, complexity, and disclosure.  It should be in plan terms if allowed.

2. You should make sure what form of benefit applies, and how the QDRO operates to divide it (or the payments under it).  Your questions are well founded and the answers should be found in the plan terms, and be consistent with the written QDRO procedures.  I do not trust plan administrators, especially those who give advice about QDRO matters.  Distrust and verify.

[Larry Starr]

4 hours ago, Thornton said:

A married participant in a DB plan retired and elected a Joint & 75% Survivor annuity. Several years into retirement, he and his wife divorce. I was retained to draft the QDRO, which split the participant's monthly payment 50/50. If the participant dies first, the alternate payee recieves the survivor amount of 75%. If the alternate payee dies first, the participant reverts to his full benefit. Pretty simple. The plan administrator supplied the language and of course pre-approved the QDRO.

The participant won't sign it, saying it is unfair. The plan administator now says that the J&S can be removed. The participant and the alternate payee would each receive a higher monthly benefit, which sounds like a life annuity. If the participant dies first, the alternate payee continues to receive the same amount for her lifetime. If the alternate payee dies first, the benefit reverts back to the participant, which doesn't sound like a life annuity. I recognize that none of this is my business and I should revise the order as directed, but I'm curious.

1) I has been my understanding that an elected DB benefit can rarely be changed once in payment status, especially by QDRO. Am I missing something?

2) Does my rough description of the single life payment for the alternated payee but an increase for the participant if the alternate payee dies first make sense? I'm not an actuary or anything, so thought I'd ask.

Thanks.

Participant's and alternate payees don't sign QDROs. What does the divorce document say is to be done? If I draft a QDRO that meets the provisions of the property settlement, it's now the lawyers problem. There are two parties involved. The lawyer for the participant is obligated to share the drafted order with the other side if the draft is not automatically included. 

[Mike Preston]

It is highly unlikely that the plan would honor a DRO as you described.  But a little change might work.  The DRO acknowledges that the form of benefit is a 75% J&S.  Let's presume for argument's sake that the Single Life Annuity would have been $1,000/month but the plan is actually paying $920/month as a 75% J&S.  While both are alive the plan pays $460 to each. If participant dies first, the monthly amount payable to the alternate payee changes to 75% * $920, which is $690/month.  If the alternate payee dies first, the monthly amount payable to the participant changes from $460 to $920.  Easy, peasy. Note that the plan pays the same amounts no matter the marital status of the recipients.

If you want to change recipients for a portion of the monies then you'll have to horsetrade one thing or another.

[david rigby]

Agree with the advice above.  While very unusual (and very undesirable, from the plan's viewpoint), if the "plan administrator" is saying the payment form can be modified, then maybe the plan does allow it.  It's up to the lawyers to inquire.

[CuseFan]

Mike is spot on, and how the participant might think that is unfair is beyond me. The payment option can only be changed if plan terms permit and grant a new annuity starting date.

[fmsinc]

The post said, "You said, "The plan administrator now says that the J&S can be removed."  Not true. 

Aside from the concept of QJSA used in preparing a QDRO, a 75% Joint and Survivor Annuity means that the Participant will receive the same monthly pension as long as he lives.  If he dies before his designated beneficiary, monthly payments of 75% of the amount received by the Participant during his lifetime will be paid to the beneficiary for the rest of her life.  The amount paid to the Participant will have been actuarially reduced to pay for the "cost" of providing payments over two lifetimes.  

A QDRO can be used to address the allocation of the retirement annuity, but the same is not true of the survivor annuity IF the Participant retired before divorce.  The retirement locks in the survivor annuity election and it cannot be changed by a Court using a QDRO, or by the parties without meeting the waiver requirements of ERISA.   

    In Vanderkam v. Vanderkam, 776 F.3d 883, 892 (D.C. Cir. 2015) -  https://scholar.google.com/scholar_case?case=18372616915023449748&q=vanderkam&hl=en&lr=lang_en&as_sdt=20000003&as_vis=1
a number of matters were made clear, as follows: 

    It is undoubtedly true that when a Participant in an ERISA qualified plan retires, his then wife (the Alternate Payee) will immediately become irrevocably vested in her entitlement to a Qualified Joint and Survivor Annuity.  The only way the Alternate Payee can lose this entitlement is via a waiver previously executed by her within 180 days prior to the commencement date of the Participant’s retirement annuity.  See 29 U.S.C §§(c)(1)(A)(I) and (c)(7)(A).  [There is another section of the law dealing with the time frame for waiver of a Qualified Pre-retirement Survivor Annuity.]  During that 180 day period, the Alternate Payee may also revoke such waiver.  See §(c)(1)(A)(iii).  If the waiver is executed prior to the applicable election period, it is void.   

    It would seem clear that if the retired Participant and his wife later divorce, it is not necessary to prepare a QDRO confirming her entitlement to a QJSA.  While a QDRO would be required to award a share of the Participant’s retirement annuity, and while it might be a good idea to confirm the Alternate Payee’s entitlement to a QJSA, failure to set forth the entitlement of a QJSA in a QDRO will not negatively impact the Alternate Payee’s right to receive such benefits, and the Participant will not have such QJSA benefits restored to him so that he can name his new wife as the beneficiary thereof.     

    It would seem safe to conclude that, in a situation where the Participant has retired from an ERISA plan with a current wife, that the interest of the now ex-wife in the QJSA is protected whether or not the Agreement or the ad damnum or the JAD mentions the QJSA (or even the QPSA) and whether or not a QDRO addressing those entitlements is ever prepared or submitted to the Plan Administrator. 

    Read the District Court opinion in Vanderkam v. PBGC, 943 F.Supp.2d 130 (USDC - DC Cir. 2014).  https://scholar.google.com/scholar_case?case=12124402217069574423&q=vanderkam+v.+pbgc&hl=en&lr=lang_en&as_sdt=20000003&as_vis=1

    Read also the well written opinion of the United States District Court for the District of South Carolina in Setzer v. Michelin Retirement Plan  - C.A. No. 3:13-cv-00192-MGL -  https://scholar.google.com/scholar_case?case=4368934987489954107&q=setzer+v.+michelin&hl=en&lr=lang_en&as_sdt=20000003&as_vis=1.  

In this case the parties were married when the husband retired and was required by ERISA to elect a joint and survivor benefit for his wife.  The only way for him to make another election would have been with the consent of his wife.  Five years later, after their divorce, Mr. Setzer asked the Plan to permit him to change the survivor annuity election and to name his new wife as the beneficiary.  Here is the well written ruling of the District Court: 

         “In his benefit claim, Setzer requests that in light of his divorce, 1) he be permitted to change the Joint and Survivor annuity (50%) form of pension benefit which he elected at the time he was married to Jessica and prior to his retirement and Annuity Commencement Date; 2) Jessica receive no Surviving Spouse Benefits if she survives him; and 3) he be allowed to name a new spouse beneficiary of his pension benefit should he remarry. (AR 19, 38.) As discussed fully below, ERISA and interpreting Fourth Circuit case law preclude Setzer's request.

        “Under ERISA Section 205, 29 U.S.C. §1055(a)(1), a pension plan must provide that "in the case of a vested participant who does not die before the annuity starting date, the accrued benefit payable to such participant shall be provided in the form of a qualified joint and survivor annuity . . . ." (Id.) ERISA defines "qualified joint and survivor annuity" to mean an annuity

                “(A) for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse, and

                “(B) which is the actuarial equivalent of a single annuity for the life of the participant.

        “29 U.S.C. §1055(d)(1).

        “In accordance with ERISA, the Plan in the present matter provides that "the mode of payment to a Married Participant whose retirement Pension commences upon his retirement on a Retirement Date" and is the actuarial equivalent of the regular pension benefit for an unmarried participant "payable as a reduced monthly retirement Pension for the Married Participant for life commencing on his Retirement Date with the provision that fifty percent (50%) of his reduced retirement Pension shall be continued to and during the life of his spouse, if his spouse is living at the time of his death. . . ." (Plan at 79.)

        “In pertinent part, the Plan defines Married Participant as "a Participant who is lawfully married on the earlier of his or her Annuity Commencement Date, or the date of his or her death." (Plan at 63.) Under the Plan, the Annuity Commencement Date is defined as "the first day of the first month for which an amount of Pension is payable to such Participant or Beneficiary as an annuity. . . ." (Plan at 55.) Setzer's Annuity Commencement Date was December 1, 2004, which is the same date as his retirement. (AR 40.) Setzer was married to Jessica on December 1, 2004. (AR 31.) Thus, Setzer was a Married Participant under Plan terms.

        “A Married Participant "may elect during the Election Period not to receive his retirement Pension in the mode of a joint and survivor benefit . . . ." (Plan at 81.) The Plan defines the "Election Period" as the ninety (90) day period ending on the Participant's Annuity Commencement Date.[5] (Id.) Thus, under Plan terms, Setzer could have elected (with Jessica's consent) to forgo the Joint and Survivor form of benefit payment if he had made the election to do so during the Election Period, which ended on December 1, 2004. (Plan at 81.) Setzer did not make such an election; rather, he elected the Joint and Survivor 50% annuity form of benefit, and he named his wife Jessica as his Plan beneficiary to receive the Surviving Spouse Benefits. (AR 30-31.) Moreover, under the Plan, if Setzer had divorced Jessica prior to his Annuity Commencement Date, he could have canceled the form of benefit elected. (Plan at 80; "In the event that a Married Participant ceases to remain married, due to divorce . . . prior to the Participant's Annuity Commencement Date, the coverage elected by the Participant under Section 6.2 "shall be canceled as of such date. . . .")  [Note that Jessica’s right to a survivor annuity could have been reinstated by a QDRO.] (Emphasis and comment supplied.)

        “Setzer, however, did not divorce Jessica until more than five years after his Annuity Commencement Date. In Hopkins v. AT&T Global Information Solutions Co., 105 F.3d 153 (4th Cir. 1997), the Fourth Circuit directly addressed the question of when a surviving spouse benefit vests in a participant's spouse. The Fourth Circuit concluded that under ERISA, "the Surviving Spouse Benefits vest in the spouse married to the participant on the date of retirement." Id. at 156. The Court went on to conclude that "nless the form of benefit is properly changed prior to retirement, the participant is locked into the joint and survivor annuity upon retirement . . . [and] cannot change the form of benefit, even with the current spouse's consent." Id. at 157. Here, the vesting of the Surviving Spouse Benefits occurred on December 1, 2004, the date of Setzer's retirement and commencement of benefits. Consequently, as a matter of law, Setzer cannot change the Joint and Survivor form of benefit, even though Jessica purported to waive any claim or interest she might have in Setzer's pension benefits.

        “ERISA requires "[e]very employee benefit plan [to] be established and maintained pursuant to a written instrument," 29 U.S.C. § 1102(a)(1), "specify[ing] the basis on which payments are made to and from the plan," § 1102(b)(4). "The plan administrator is obliged to act `in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [Title I] and [Title IV] of [ERISA],' § 1104(a)(1)(D), and ERISA provides no exemption from this duty when it comes time to pay benefits." Kennedy v. Plan Adm'r for DuPont Sav. and Inv. Plan, 555 U.S. 285, 300 (2009). In sum, ERISA requires that the Appeals Board follow the Plan terms. Under the Plan terms and in accordance with the law, a Married Participant may not change the elected form of benefit after the Participant's Annuity Commencement Date.

        “In his Memorandum in Support of Judgment, Setzer maintains that the Plan wrongly denied his request in light of Jessica's refusal of the benefit and believes the Plan documents' use of the phrase "may not" instead of "cannot" leaves room for the Plan to authorize the change requested. (ECF No. 25 at 3.) Setzer also argues that the Plan's position fails to distinguish between a beneficiary who has died and a beneficiary who has refused a benefit, and therefore creates the "absurd result" of forcing a beneficiary to take benefits she does not want. (ECF No. 25 at 4.) Setzer's arguments are simply unavailing and fail to account for the operation of the controlling law and the discretion of the Appeals Board in interpreting the Plan's governing language. Contrary to Setzer's assertions, nothing in the Plan's terms forces Jessica to take the Surviving Spouse Benefits if she does not want them and the Plan is "statutorily required to distribute benefits in accordance with the documents on file." Boyd v. Metropolitan Life Ins. Co., 638 F.3d 138, 141 (4th Cir. 2011) (citing Kennedy v. Plan Adm'r for DuPont Sav. and Inv. Plan, 555 U.S. 285, 299-300 (2009). Further, the Fourth Circuit squarely addressed and rejected Setzer's core argument in Boyd by carefully considering the key language in Kennedy and concluding that a beneficiary who has relinquished his or her interest in certain proceeds by way of a divorce decree or otherwise, "ha every chance to waive his right and refuse the. . . proceeds." Boyd, 638 F.3d at 143; see also Matchiner v. Harford Life & Accident Insurance Co., 622 F.3d 885, 888 (8th Cir. 2010)(noting that while the plan at issue did not set forth any formal procedures for waiver, the "plan documents and not the divorce decree are controlling"). As the Fourth Circuit noted in Boyd, it is the plan administrator's role to follow the Plan documents in distributing benefits and the enforcement — the interpretation of personal divorce decrees and separation agreements are ultimately not matters for the plan administrator's concern. Id. at 145. This Court cannot grant Setzer's request to reject the Plan's clear terms and "unwind Kennedy and make a puzzle of plan administration," where "Congress has provided an alternative that is simultaneously clearer and more sensible." Boyd, 636 F.3d at 145.

        “Thus, this Court concludes that in making its decision, the Appeals Board followed the language, purpose and goals of the Plan in light of the procedural and substantive requirements of ERISA and controlling law.”

>>>>>>>>>>>>>>>>>>>>>>

Bottom line is that the Alternate Payee in the case at issue can be awarded a share of the retirement annuity via a QDRO, but the 75% survivor annuity for the Alternate Payee cannot be changed except by a waiver, and I think that ship has sailed.  It might be possible to mollify the ex-husband in this case by reducing the Alternate Payee's share  of the retirement annuity to a percentage less than 50% in order to allocate 1/2 of the cost of the survivor annuity to her.  That would be fair.  

David Goldberg

 

[fmsinc]

Since my Memo's keep getting truncated (are we run by Twitter?), I have attached a portion of my post in PDF.  Goldberg Memo.pdf

And here is my last paragraph....

Bottom line is that the Alternate Payee in the case at issue can be awarded a share of the retirement annuity via a QDRO, but the 75% survivor annuity for the Alternate Payee cannot be changed except by a waiver, and I think that ship has sailed.  It might be possible to mollify the ex-husband in this case by reducing the Alternate Payee's share  of the retirement annuity to a percentage less than 50% in order to allocate 1/2 of the cost of the survivor annuity to her.  That would be fair.  

David Goldberg

 

[Larry Gagnon]

Mr. Goldberg is correct. There is no need to change the JSA and a JSA in payment mode cannot be changed. However, the Plan Administrator can be ordered to send half the amount to be paid to the alternate payee beginning a date certain and ending with death of alternate payee. It is custom also to mention that the alternate payee will be responsible for taxes on the amount received. It is also custom to require each recipient to transfer any allocation received in error to the intended recipient within a certain number of days (e.g. 10). QDRO will have to contain alternate payees correct SS# in body or in an attachment. All of this causes a little extra effort by Administrator but total payment stream should not change at all.