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Participant retires from DB plan with QJSA; then divorces; former spouse's survivor benefit is lost?


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No, assuming the plan is subject to the J&S rules of ERISA.

Also, it is doubtful that a QDRO could "cancel" spouse benefit.

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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The answer depends on if you are based in a Circuit that has judges who can read and interpret the law correctly.

The AT&T/Hopkins decision said that a QDRO in a post retirement divorce could not invade the the annuity rights of the former spouse that "vested" at the time the annuity option was selected at retirement. The decision is wrong and has been roundly and justly criticized, has been rejected in some other Circuits, but has been adopted in at least one other Circuit.

You don't say why you are concerned with the prospect. If you are looking out for the plan, your concern at this point should not be what is going to happen with respect to this participant. It is premature to speculate what will happen, and state law has its say first. The outcome will depend on circumstances that have yet to be determined, so you won't get a simple answer.

You should be concerned with what the plan's written QDRO procedures say about dividing post retirement benefits in general. From that base you would then look at the issue of what happens if an order attempts to change the post retireent annuity interest of the designated contingent annuitant. The procedures can limit what the order can require to an assignment to an alternate payee of some or all of the actual payments that would otherwise be paid to the contingent annuitant (former spouse). I don't think it is a good idea to allow the annuity to be reformed because of the possibility of adverse selection and the extra work to recalculate. If you are in a jusridiction that takes the AT&T/Hopkins view, you can either write it into the QDRO procedures or determine that the law trumps the QDRO procedures when you evaluate and interpret the proposed order.

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I'm confused. First you say that it is wrong for the court to not allow the annuity rights of the spouse to be invaded. Then you say that recalculation of a benefit is to be avoided. Are those two things contradictory?

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There is a difference between (a) rerforming an annuity to pay different persons or in a different form and (b) spitting payments from the original annuity scheme. For example, I am against recalculating the annuity to change a 50% J&S to a 100% J&S or changing the identity of the contingent annuitant (which would cause all payments to change becuase of different ages). But suppose the participant remarries and retires with a 50% J&S with the second spouse. With the appropriate QDRO Procedures, I would accept an order that gave Spouse #1 50% of the actual prospective payments to the participant (splitting the check) during the participant's life and the 100% (or choose some other %) of the survivor payments to spouse #1 during the life of spouse #2, subject to cancellation of the payments to spouse #1 and returning to the original scheme upon death of spouse #1. The split the check approach is different from reforming the annuity to substitute spounse #1 in the J&S annuity and recalculating the payments to fit the different actuarial factors.

To go back to what pax wrote, I agree that the plan should not allow the QDRO to cancel the annuity, but I would allow scheduled payments to be redirected in some fashion. The split the check approach is a function of plan design and QDRO Procedures, not what the law requires, but the plan does have to accomodate post retirement QDROs in some way. The plan could be designed to allow reformation of annuity payments to fit some new scheme described in the QDRO, but I think split the check is the best compromise in a situation that does not have a perfect solution.

The Hopkins/AT&T decision would prevent both reformation of the annuity and redirecting any of the spouse #2 survivor annuity payments to spouse #1, which I believe is incorrect.

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I dont think spouse's #1's 50% J & S benefit can be curtailed or altered if there is no provision for a substitution or assignment of the benefit to another person under the plan. If the plan only provides a 50% survivor benefit to a spouse and no other person then the spousal benefit is vested at retirement and a qdro cannot require the plan to provide any other form of benefit not provided by the plan. IRC 414(p)(3)(A). I dont think the plan must provide a survivor annuity to a spouse who marries a participant after benefits commence. If the employee and spouse 2 divorce, then spouse 2's right to his retirement benefit will be limited to the amount he is receiving under the plan but could not reduce spouse's 1 right to the 50% J & S benefit.

Finally the Hopkins decison could be viewed as applying the law as written since 414(p)(1)(A) only permits an assignment of benefits payable to a participant and after retirement benefits begin the 50% spousal annuity is not a benefit payable to the employee (since that benefit is vested in the spouse).

mjb

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http://www.access.gpo.gov/nara/cfr/cfrhtml...26cfrv5_00.html

IRS Reg. 1.401(a)-20, Q&A-25

(b)…

(3) Divorce. If a participant divorces his spouse prior to the annuity starting date, any elections made while the participant was married to his former spouse remain valid, unless otherwise provided in a QDRO, or unless the participant changes them or is remarried. If a participant dies after the annuity starting date, the spouse to whom the participant was married on the annuity starting date is entitled to the QJSA protection under the plan. The spouse is entitled to this protection (unless waived and consented to by such spouse) even if the participant and spouse are not married on the date of the participant's death, except as provided in a QDRO.

My understanding of this is that changes after the divorce (assuming divorce occurs after annuity commencement) are possible only if the spouse gives consent and the plan permits. If the plan does not permit such change, no QDRO can order it. I have never seen a plan which would permit such change.

Agree? Disagree?

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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pax:

I agree that no domestic relations order may require a plan to reform a J&S annuity that has been put in place. The statute says that an order will not be qualified if it would require the plan to provide a benefit that the plan is not otherwise designed to provide. Once an annuity is elected or provided because of plan terms it is irrevocable, or least I have never seen a revocable one. Also, a plan can't be made to pay more than if the order did not exist. But look at the exceptions for QDROs that pepper the regulation, and then consider that the redirection of payments that the plan would make anyway under the terms of the orignal annuity does not increase the cost to the plan and would not change the form of benefit. I don't think the plan can effectively say that an order can make no changes.

To get back to the original question, most of the discussion about Hopkins/AT&T is academic under the circumstances described. I can't imagine that a state court would award any of the former spouse's survivor interest to a post-retirement new spouse in a contested matter. But the parties might want to use the retirement assets in an agreed settlement of property rights.

mbozek:

The words of the statute are not about benefits payable to an employee. They are about "benefits payable with respect to a participant." All benefits payable under a plan are "with respect to" the participant, including benefits payable to a beneficiary. A beneficiary is entitled to nothing unless the beneficiary has some relationship with the participant. The beneficiary's rights are completely derived through the rights accrued by the participant. The Hopkins/ATT court made up the concept of post-retirement "vesting" in the surviving spouse. I don't find any such "vesting" of a spouse or any other beneficiary in any applicable statute. Vesting applies to how much of the participant's nominal accrued benefit is payable to a participant (or beneficiary "in respect of the participant").

If you rely on the J&S rules as the required form of benefit for married participants, how do you reconcile the statutory provision that says that an alternate payee can be treated as the surviving spouse? Seems to me that if there is a J&S annuity and the QDRO treats the former spouse as the surviving spouse, the alternate payee can get paid under the "survivor spouse" benefit, because "S" in J&S is the surviving spouse benefit.

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Holy smokes...I didn't realize this was such

a can of worms.

Currently there is no spouse #2...only the participant

and spouse #1 who are going through a divorce.

When he retired, they elected a 50% QJSA in the amount

of $950 per month. Thus, if he were to pass away, her benefit

would have been $475 per month.

Now that they are divorcing, he would like the plan

to approve a QDRO granting her 50% of the marital

portion of the benefit. This means she will receive only

$300 of the $950 monthly benefit. I take the ATT/Hopkins

decision to mean that this would effectively deny her

a vested benefit.

Do we avoid these concerns if the parties agree to

a stream of payment QDRO that assigns the ex-wife

the same amount of monthly benefit as her "vested"

QJSA?

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  • 2 months later...
Guest Kevin A. Wiggins

You determine who is the "surviving spouse" by looking at to whom the participant was married on the "annuity starting date." Because she was the spouse on the annuity starting date, then she is the surviving spouse. Naming the former spouse as the surviving spouse is necessary only if the divorce occurs before the annuity starting date.

As for your second question, the answer is you can only assign those benefits to which you are entitled. As someone noted earlier, once a distribution election is made and commences, you typically don't have the right under the plan to change that election. Accordingly, the benefits to which he is now entitled is the QJSA (again, look at the plan to make sure). Because he is only entitled to a QJSA, he can only assign benefits he will get in the future under the QJSA. Thus, he can assign to her 50% (or any other percentage) of all future payments to be made to him under the QJSA, e.g., $475 per mo (50% of $950). When he dies she will still get the death benefit.

By the way, QDROphile, the result in Hopkins is correct. First, you say that "[a] beneficiary is entitled to nothing unless the beneficiary has some relationship with the participant." However, nothing in ERISA's definition of beneficiary requires any relationship to the participant (unless you define a "relationship" to include the participant's designation, but that is only 1/2 of ERISA's definition).

Second, as the Supreme Court said in Boggs, ERISA does not permit non-participant or non-beneficiary interests. The former spouse is not a beneficiary until he or she gets a QDRO (some courts say when the DRO is signed by the state court judge), and so he or she has no interest in the plan until he or she gets a QDRO. Instead, the subseqeuent spouse becomes the "surviving spouse" (and thus the beneficiary), by operation of ERISA and the terms of the plan, on the annuity starting date. The subsequent spouse's consent is therefore needed to name anyone else as the beneficiary. It appears the former spouse didn't have the current spouse's consent in Hopkins, and I doubt they'll get it anywhere else. The QDRO rules do not override the J&S rules retroactively. Prospectively, they clearly can, but only because there is not yet any "surviving spouse."

We can debate the semantics and connotations of the words in the statute (e.g., 206(d)(3)(i) uses future tense suggesting the QDRO cannot be retroactive for purposes of that provision or the parenthetical in 206(d)(3)(i) uses the word "spouse" but not "surviving spouse"), but forget the semantics, look at Boggs again, and see how important the Court felt about protecting current spouses (Boggs dealt with a current spouse vs. a former dead spouse whereas Hopkins deals with a current spouse vs. a former living spouse, but I think the court's analysis of Congress's desire to protect current spouses is relevant). So the result in Hopkins is correct. Most important for me, my Circuit says it is, so for me it is.

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Mr. Wiggins:

I composed three different responses to your post, but each time concluded that that you can't persuade me and I wasn't likley to persuade you, even if we explore the angles further. I also appreciate being stuck with the decisions of a Circuit. I restate my disagreement with ATT/Hopkins and also state that I am shocked by the injustice of the result that it allows. True, the former spouse could have prevented the outcome by being more on top of the proceedings, but there was no need to put her completely at risk of fairly common delay or fairly common lack of skill or diligence of a lawyer.

You did ultimately interpret correctly my assertion that a beneficiary must have a relationship to the participant, even if only by the act of designation. But you disconnected from the point, which was that no "beneficiary" has an indepedent right to a benefit. The beneficiary interest is derived from the participant's interest and therefore is a "benefit payable with respect to a participant." Without the participant, there is no benefit. A domestic relations order can reach "any benefit payable with respect to a participant" if it meets the qualification requirements. ATT/Hopkins rests absolutely on the view that because the particpant had died, there was no benefit payable with respect to the participant. The stuff about "vesting" is sophistry. I agree that no benefit was payable TO the participant, but the benefit payable TO the surviving spouse is still a benefit "with respect to the participant." Where else did it come from? And since a QDRO can make an alternate payee into a surviving spouse, the QDRO can put the alternate payee into the annuity shoes of even the designated (or default) surviving spouse annuitant. The QDRO can do it without making the plan pay a differentt amount or in a different form. Congress expressly allowed for the possibility that a QDRO could cut though other statutory provisions that favor a subsequent actual spouse or surviving spouse. For that and other reasons I do not think that the Boggs decision supports ATT/Hopkins.

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  • 2 weeks later...
Guest Kevin A. Wiggins

I think the answer is not cut and dried. It really is a question of current spouse v. former spouse. In Boggs, the Court said if the former spouse is deceased, the current spouse wins. In Hopkins etc., some courts have said the current spouse wins even if the former spouse is alive and even if the former spouse gets a DRO. Other courts - the ones with which you agree - hold the former spouse wins if she is alive and gets a QDRO. What did Congress intend? I don't know. Can we say 536 individuals really thought about this issue and intended for it to go one way or the other? I would be surprised if they did. A lot of technical clarification is needed for QDROs. If and when we get it, maybe they will address this issue.

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