Peter Gulia

The court decisions David (fmsinc) notes are mostly about how to measure and value rights that are community property or subject to equitable division. Those points might matter between divorcing spouses, but are external to an employer that administers its obligations under a deferred compensation plan. I am unaware of any Federal court decision that compelled an employer to pay a nonparticipant according to a State court’s domestic-relations order ERISA supersedes. BenefitsLink neighbors, have you ever seen such a court decision? (I ask this as an open question because sorting property rights on divorce sometimes motivates a judge to render a decision contrary to law.)

Among the many issues in the ABB fiduciary-breach litigation, the plaintiffs asserted that allowing Fidelity to lower fees for other services, including payroll services, because Fidelity was getting more than enough revenue from retirement plan investments and services was a fiduciary breach and a nonexempt prohibited transaction. From Judge Laughrey’s opinion: “[O]nce Mr. Scarpa became aware that the PRISM [401(k)] recordkeeping fees appeared to be subsidizing ABB’s corporate programs, he had a fiduciary obligation to investigate and prevent any future subsidy.” Tussey v. ABB, Inc., No. 06-cv-0430-NKL, 52 Empl. Benefits Cas. (BL) 2826, 2850, 2012 BL 84927, 2012 U.S. Dist. LEXIS 45240, 2012 WL 1113291 (W.D. Mo. Mar. 31, 2012) (finding loyalty and prudence breaches), further proceedings not cited (the case litigated for 12¼ years).

When an ERISA-governed plan does not recognize domestic-relations orders, do employers suffer difficulties with divorce lawyers and judges who assert that “the plan” must give effect to what the divorce lawyers think of as a QDRO?

Thank you for your nice help. About the nongovernmental § 457(b) plans that include DRO provisions, do you guess that the plan sponsors knew they have the choice not to provide for domestic-relations orders?

ERISA § 206(d)(3)(A) provides: “Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.” Even for a plan that is ERISA-governed, the quoted sentence about recognizing a QDRO does not apply to “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees[.]” ERISA § 201(2). BenefitsLink neighbors, in your experience how likely is it that an unfunded deferred compensation plan omits provisions for following a domestic relations order? What legal, plan-design, and other reasons motivate an employer to omit QDRO provisions? What legal, plan-design, and other reasons might motivate an employer, despite the absence of a public law command, to include QDRO provisions (within what tax law permits without defeating the plan’s tax treatment)? What practical difficulties do employers and plan administrators encounter?

A common restraint on a participant naming a beneficiary other than her spouse is that a plan, following ERISA § 205(b)(1)(C), provides its death benefit to the participant’s surviving spouse, absent the spouse’s consent. But if there is no surviving spouse when the participant dies, a plan may provide the death benefit to the participant’s designated beneficiary. See ERISA § 205(b)(1)(C)(i). The situation Bird describes suggests the spouses are not yet divorced, but perhaps relatively soon might be. Imagine a beneficiary designation, made today, naming the participant’s child. Imagine the court issues the anticipated divorce order on February 29, and the order is legally effective as of the moment it is issued. Imagine the participant dies on March 1. If the plan’s provisions restrain no more than is needed to meet ERISA § 205(b)(1)(C), the beneficiary designation that would have been ineffective for a February death becomes applicable for a March death. A participant who finds it would be difficult or burdensome to obtain the spouse’s consent in a form the plan’s administrator would accept and believes the anticipated divorce will process in a few months might risk that the participant lives long enough for the spouse to be no longer a spouse.

Some (not all) plan administrators will record a beneficiary designation that now would be ineffective—because it lack’s the spouse’s consent, on the plan’s form and notarized—but could become effective—because the spouse later might die, become divorced, or otherwise become no longer the participant’s spouse. If the administrator allows this, one might intensify a warning that naming a beneficiary other than the spouse will have the hoped-for effect only if the current spouse becomes no longer the participant’s spouse before the entitlement to the plan’s death benefit occurs. If it would be difficult or burdensome to obtain the spouse’s consent in a form the plan’s administrator would accepts as valid under ERISA § 205 and the plan’s governing documents, a participant might assume a risk about whether the marriage ends before the participant’s death.

And a class prohibited-transaction exemption sets the conditions for a purchase from the retirement plan. https://www.federalregister.gov/documents/2002/09/03/02-22376/amendment-to-prohibited-transaction-exemption-92-6-pte-92-6-involving-the-transfer-of-individual https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/exemptions/class/PTE77-8.pdf

David Rigby and Paul I, thank you for this wonderful history lesson and insight.

Does anyone remember whether Congress had a reason (or even an imagined reason) for setting up 5% as a line that treats a participant unlike an employee who need not begin a distribution if she is not yet retired?

MoJo, thank you for sharing useful information, including a recordkeeper’s thinking about roles and responsibilities. I hope those who want the IRS’s guidance see that it might not happen. Each of § 401(k)(14)(C), § 403(b)(7)(D), § 403(b)(11), and § 457(d)(4) permits the Secretary of the Treasury to make regulations. But none of those commands or directs the Treasury or its IRS to do anything. Some lawyers in the IRS might believe that deliberate uncertainty is better than an interpretation—whether a rule or nonrule guidance—the IRS might publish. And even if they don’t believe that, some might think this point of law is less important than many others the IRS is called to interpret.

MoJo, accepting the premise you describe, might a response be different if a big-enough plan sponsored by an employer with a satisfactory financial condition indemnifies its service provider against whatever loss, liability, and expense results from following the plan administrator’s written instructions detailing nondiscretionary bright-line rules to apply forms-only facts on which claims to process as system-allowed and which are system-denied? If so, is it feasible for a recordkeeper to segment its customers between those that can transfer the risk away from the service provider, and those that can’t?

Almost a half-century after ERISA and almost 40 years after the Retirement Equity Act of 1984 (which requires a spouse’s consent), we might be disappointed by too many who think too little about the law that governs employee-benefit plans.

Assuming a plan governed by ERISA § 205: Some lawyers assert that after a plan has paid its benefit, those who would be takers under State law or an agreement external to the plan might have claims against a distributee. About a beneficiary who is not the participant’s surviving spouse, courts differ about whether ERISA supersedes a State court’s order—made after the ERISA plan has paid or delivered the plan’s benefit—that does not involve the plan or any fiduciary of it. About a beneficiary who is the participant’s surviving spouse, ERISA supersedes State law, including a State court’s order (other than a QDRO). For either situation, an ERISA-governed retirement plan’s administrator ignores the divorcing or separated persons’ settlement agreement (unless that agreement is a qualified domestic relations order). What happens after the retirement plan has paid might be “not my job” for the plan’s administrator.

A deferral limit catch-up that looks to a span of years (with other conditions) is in each of Internal Revenue Code § 403(b) and § 457(b). A § 403(b) participant who’s 50 and has 15 years with the qualified organization might defer up to $33,500 [2024]. A § 457(b)(3)(A) catch-up might allow a deferral up to $46,000 [2024] for some participants. Complete explanations of a section’s catchups are in 403(b) Answer Book and 457 Answer Book, published by Wolters Kluwer and available in its VitalLaw® products.

For practitioners who advise a plan’s administrator, here’s an important point: A plan is not tax-disqualified because the plan’s administrator relies on a participant’s written certification to the extent that the Internal Revenue Code permits that reliance. I’ve seen no suggestion that Baltimore’s § 457(b) plan suffers a tax consequence, or even an examination, because the plan’s administrator or its service provider relied on Marilyn Mosby’s self-certified claim.

Does either business have an employee beyond the shareholder-employee?

Here’s the Treasury department’s interpretive rule: 26 C.F.R. § 1.401-1(b)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401-1#p-1.401-1(b)(2). TPApril, does the business have employees other than the owner? If so, is it imaginable that an already anticipated buyer of the business might continue the retirement plan for the employees (or might merge the recently created seller’s plan into the buyer’s plan)?

I doubt the US government prosecutes a false-statement crime beyond outrageous situations. The indictment’s charge against Marilyn Mosby for her false statements to her deferred compensation plan seem related to other circumstances, including frauds against financial institutions and the US Treasury’s lien for unpaid Federal taxes, with an outstanding balance more than $69,040. The convict was a Maryland State’s Attorney, Baltimore’s prosecutor. (Someone who ought to have a deeper-than-common understanding about needs for truthfulness in signing a penalties-of-perjury statement.) She suffered no reduction in her $247,955.58 [2020] salary. She was not unable to work because of a lack of child care. She did not state an interruption in her husband’s income. (Nick J. Mosby is the president of Baltimore’s City Council.) Her coronavirus-related distributions were $90,000. The two amounts and the timing suggest an absence of a relation to a coronavirus-related change. I’ve seen no suggestion that Baltimore’s deferred compensation plan service provider, Nationwide, did anything wrong by processing the participant’s self-certifying claims.

Under an ERISA-governed individual-account (defined-contribution) retirement plan’s typical provisions, the default regime for the absence of the participant’s affirmative beneficiary designation begins with the participant’s surviving spouse. If the participant’s (not yet divorced) husband survives the participant, the typical provisions would provide the death benefit—typically, the whole of it—to the husband. ERISA § 205(b)(1)(C), 29 U.S.C. § 1055(b)(1)(C) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1055%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1055)&f=treesort&edition=prelim&num=0&jumpTo=true.

And classifying a payment as restoration might be unnecessary if the plan includes as reimbursement provision as Paul I describes.

To fit Paul I’s suggestion about classifying a payment as something other than a contribution: The plan’s administrator might want its lawyer’s advice about whether the amounts to be restored to participant accounts might be a restorative payment. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). That classification might fit if the plan’s administrator arguably breached ERISA § 102 or § 404(a)(1) in communicating (or failing to communicate) the plan’s provisions, or arguably breached a fiduciary responsibility in instructing the service provider. A fiduciary’s breach need not be proven or conceded; it is enough that there is “a reasonable risk of liability[.]” If a restorative payment meets the reasonable-risk condition, is allocated to restore the harm that follows from the fiduciary’s arguable breach, and meets further conditions the rule specifies, it is not an annual addition. Thus, it does not count in measuring a § 415(c) limit. Likewise, it might not count in a coverage or nondiscrimination test to the extent that the test looks to annual additions. Because the participant does not control a restorative payment, it should not be treated as an elective deferral, and so should not count for a § 402(g) limit, or for a coverage or nondiscrimination test that looks to elective deferrals. This is not accounting, tax, or legal advice to anyone.

Many plan administrators and their third-party administrators, recordkeepers, and other service providers limit their communications to describing what the plan’s administration will or won’t do, and avoid suggestions about what an individual should do. Suggestions that might be sensible if a domestic-relations lawyer or an estate-planning lawyer presents them could be inapt or unwise for a nonlawyer service provider to present. That might be especially so when a service provider routinely warns that it does not provide tax or legal advice. Further, a service provider might have much less than complete information about an individual’s facts and circumstances.

As always, Read The Fabulous Document and ERISA § 205. Is a separated spouse a spouse for spouse’s-consent purposes? Yes. No matter how long a separation continues, a marriage does not end until a court orders the divorce. See Davis v. College Suppliers Co., 813 F. Supp. 1234 (S.D. Miss. 1993). Just to pick one example, although a husband and wife were separated for the last 15 years of their 19 years’ marriage, they remained spouses until the participant’s death. Further, their written separation agreement had no effect under his retirement plan, and the surviving spouse was entitled to her qualified preretirement survivor annuity. Board of Trustees of the Equity-League Pension Trust Fund v. Royce, 238 F.3d 177, 25 Empl. Benefits Cas. (BL) 2394 (2d Cir. 2001). Likewise, a division of the spouses’ marital property does not end the marriage. For example, Callegari v. Scottrade, Inc., No. 16-1750, 2016 U.S. Dist. LEXIS 105468 (E.D. La. Aug. 10, 2016) (court-approved consent judgment to separate community property did not end the marriage); Gallagher v. Gallagher, No. 12-40027-TSH, 57 Empl. Benefits Cas. (BL) 2648, 2013 U.S. Dist. LEXIS 26061 (D. Mass. Feb. 26, 2013). What about a legal separation? A plan’s governing documents may (but need not) provide that a spouse’s consent is excused if the plan’s administrator decides (1) the participant and the spouse are legally separated, (2) the participant has a court order to that effect, and (3) no QDRO requires the spouse’s consent. See 26 C.F.R. § 1.401(a)-20, A-27. The combination of these three conditions is unlikely. Divorce? After 16 years’ separation, one imagines the participant likely has sufficient grounds to obtain a divorce. None of this is accounting, tax, or legal advice to anyone.

In 2023, I worked on what those who sell it call a near-site clinic. The plan was designed under assumptions that the plan does not fit relief for an onsite clinic, and is a group health plan. That includes provisions about COBRA continuation coverage (102%), ERISA communications, ERISA claims procedure, Family and Medical Leave Act leave, HIPAA privacy, military service, qualified medical child support orders (QMCSOs), and other group health plan provisions. The employer offers its near-site clinic to all employees (and one’s spouse and children not yet 26). The employer excludes no one based on a preexisting condition. The employer sets no lifetime limit, or yearly limit, on the care provided. The plan recognizes some covered persons might prefer no coverage beyond high-deductible health coverage. (This can be so even when the employer provides no other group health plan; for example, a spouse and an employee might have health coverage under the spouse’s employer’s plan. And it might matter when a participant’s child has coverage under the child’s employer’s health plan or the child’s spouse’s employer’s health plan) The plan lets each covered person elect against care that cannot be provided within what’s allowed while being limited to only high-deductible coverage. I added provisions for allocations of fiduciary responsibilities (especially about claims, and for a separate COBRA administrator), a time bar on lawsuits, and an exclusive forum for lawsuits. The near-site clinic I helped design is for only one employer. A plan for access to a clinic shared with other employers might involve yet more design issues. Nothing in this is accounting, tax, or legal advice to anyone.