Post retirement divorce...Spouse wants to use QDRO to waive her QJSA interest.

[mal]

Married participant retires and elects the 50% QJSA. A year later he and his wife are divorced. She is willing to submit a QDRO waiving any survivorship interest in the plan. Goal is to get his monthly benefit bumped up by switching to a single life annuity.

Our procedures don't allow for this waiver, and I know the order cannot require the plan to take this action.

My question is whether the plan has the OPTION to allow such a switch. From the administrator's point of view, the 2 forms of benefit are actuarially equivalent. May a plan allow this?

[david rigby]

From the administrator's point of view, the 2 forms of benefit are actuarially equivalent.

Not sure I agree with this, at least after the commencement date, but that may be irrelevant.

Most likely, the plan does not include this in its optional forms of payment or its QDRO provisions (not QDRO administrative practices). If not in the plan, it cannot be done. Can the plan be amended to add it? Probably so, but see ERISA counsel about whether that amendment could be applied to an existing payment.

[QDROphile]

The spouse just learned she is terminal and they are using the divorce to adverse select on the benefit.

I don't advise that the plan be amended to allow change of benefit form after benefits start. I agree that the plan probably does not allow this now and would need to be amended.

[Guest Grabitquick]

The last sentence of Q & A 25 under Treas. Reg. Section 1.401(a)-20 indicates that a plan can accept such an order without violating the joint and survivor rules.

However, having said that, I agree with both pax and QDROphile in that (1) I don't read the regulation as compelling the plan to accept such an order in the absence of a plan provision allowing it, and (2) this smells like a potential anti-selection situation and the parties could be trying to game the plan. I'd tread carefully and consult with ERISA counsel before taking any action on this one.

[QDROphile]

That is a liberal reading of the regulation. I think the QDRO reference merely says that the statement in the regulation about the former spouse's rights do not trump the QDRO rules. I don't think it goes so far as to say that a QDRO can overcome the annuity provisions of the plan. The QDRO rules themselves say that an order is not qualified if the order provides for any benefit or option not provided under the plan. Is that merely a permissive shield for a plan administrator who wants to disqualify or is that mandatory and a confirmation of the general rule that the plan must be operated in accordance with its terms? I would be very wary about a post-annuity starting date change in the form of benefit if the plan does not provide for such a change.

[Guest Grabitquick]

QDROphile, my first post may not have been entirely clear, but I think we're on the same page--I don't read the regulation as allowing a QDRO to trump the plan's annuity provisions, either, nor would I suggest that the plan be amended to allow it.

[Kirk Maldonado]

QDROphile and Grabitquick:

I want to make sure that I understand what you both agreed upon. Are you saying that if a spouse wants to waive her survivor annuity benefit, that has to be done pursuant to the plan's waiver provisions, rather than pursuant to a QDRO?

If my perception was wrong, please restate in a different fashion the point that you agreed upon.

[Guest Grabitquick]

Kirk, what I had in mind was that the plan document would have to specifically allow a change in the form of annuity mid-stream, after the annuity starting date. I think the QDRO itself could operate as the spouse's waiver (if I'm de-coding the IRS regulation correctly, it seems to be saying that's okay), but the plan would have to allow a change in annuity form post-retirement for the waiver in the QDRO to have effect and be acceptable.

[mal]

My big concern is the adverse selection problem mentioned earlier. When you make a selection at retirement, you are asked to make an educated guess as to which form of benefit best meets your needs. The terminal illness situation described above pinpoints exactly why this change should not be accepted by the plan.

[QDROphile]

Mr. Maldonado:

I don't know all the opportunities a spouse may have to waive a survivior benefit after the annuity starting date. I believe that a domestic relations order cannot force the plan to recalculate the participant's benefit and give the participant a single life annuity with higher than current payments instead of the J&S annuity that has commenced.

Can a plan administrator allow a domestic relations order to provide for the recalculation of the benefit and replacement of the J&S annuity with a single life annuity to the particpant if the plan terms are silent about the reformation of the benefit pursuant to a QDRO? I am not so sure. I would not do it.

Can a plan provide for recalculation of the benefit and replacement of the J&S annuity with a single life annuity to the particpant pursuant to a QDRO? Yes, but I would not advise to have such plan provisions.

[Guest Grabitquick]

My big concern is the adverse selection problem mentioned earlier. When you make a selection at retirement, you are asked to make an educated guess as to which form of benefit best meets your needs. The terminal illness situation described above pinpoints exactly why this change should not be accepted by the plan.

This is also my biggest concern with the scenario presented, after all is said and done.

[Guest ptpnthr]

A QDRO cannot permit an alternate payee to take a form of distribution that is not available to the participant under the plan. Under most plans, once the participant has elected and commenced a benefit distribution in the form of a QJSA, then that participant cannot revoke the election and elect a different form of benefit. In other words, the only form of distribution available to the participant is the QJSA which he elected when he commenced distributions. The QDRO cannot permit the AP to elect any other form of distribution, because no other form is available to the participant.

[QDROphile]

Are you saying that the plan cannot provide for a form of benefit available only to alternate payees or only pursuant to QDROs?

[mbozek]

Under Rev. rul 81-140 a vested benefit cannot be waived unless permitted as a forfeiture under IRC 411(a). If a spousal annuity benefit is a vested benefit how can it be waived ougtside of a QDRO?

[Guest Kevin A. Wiggins]

I generally agree with ptpnthr, but I think the rule is a QDRO generally cannot require a plan to provide an optional form of benefit that is not available under the plan. That is straight out of Section 206(d)(3)(D)(i) of ERISA and the IRC equivalent. In that regard QDROphile is right because a plan can offer a form of benefit to an AP that is not available to the participant. The question is whether, once the participant has elected the QJSA, any other form of benefit is available under the plan (as opposed to being available to the participant - as QDROphile correctly pointed out).

I would be surprised if, once the QJSA has been elected, the plan would permit any other form of benefit - QDRO or no QDRO. If it does not, then a QDRO that tried to permit the participant or the alternate payee to get anything other than the QJSA would violate Section 206(d)(3)(D)(i) of ERISA and the IRC equivalent - because once the QJSA is elected that is the only form of benefit available under the plan. One could argue that other forms are still available under the plan, just not to the participant, but absent an affirmative provision that gives the AP distribution rights in addition to what participants get - here, an additional right to revoke the waiver and elect something else - I think that would be a difficult argument to make.

[Kirk Maldonado]

Here's a copy of Revenue Ruling 81-140, for those that might be interested:

Rev. Rul. 81-140, 1981-1 C.B. 180, 1981-19 I.R.B. 6.

Suspension of benefits due to reemployment. Four examples illustrate whether the requirements of sections 401(a)(14) and 411(a)(3)(B) of the Code are satisfied under defined benefit plan provisions that suspend benefits due to reemployment of the participant.

Advice has been requested as to whether a defined benefit plan in each of the situations described below satisfies sections 401(a)(14) and 411(a) of the Internal Revenue Code. In the absence of special circumstances, these sections require the commencement and uninterrupted continuation of payment of pension benefits to a participant of a pension plan who has attained normal retirement age and terminated service with the employer. This ruling clarifies the circumstances under which these sections would permit a plan to withhold pension payments from such a participant due to the participant's employment.

Situation 1:

Employer M maintains a defined benefit pension plan with a normal retirement age of 65. The plan provides for a life annuity benefit of $x per month payable at attainment of age 65, except in the case of a participant who continues in or returns to employment with M. During any month that a participant works for M after normal retirement age, regardless of whether there is section 203(a)(3)(B) service during that month, the $x will not be paid. When employment ceases, benefits of $x per month will resume without any actuarial adjustment for either the unpaid amounts or later payments. For purposes of this ruling, the term 'section 203(a)(3)(B) service' has the same meaning as that term is defined in section 2530.203-3© of the Department of Labor regulations, promulgated under section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1. In general, the term is used to describe an employee's service on account of which an employee benefit plan may suspend the payment of pension benefits without resulting in a prohibited forfeiture under the minimum vesting standards.

Situation 2:

Employer N maintains a defined benefit pension plan with a normal retirement age of 65. The plan provides for a life annuity benefit of $y per month payable at attainment of age 65, but also provides for a five-year suspension of benefit payments in the event that a participant is employed for one month in section 203(a)(3)(B) service regardless of the period for which such service continues. The plan also provides that all missed payments will be returned to the participant with interest (or to the participant's beneficiaries in the event of death of the participant) at the end of the five-year period, and that benefits of $y per month will resume at that time.

Situation 3:

Assume the same facts as in Situation 2, except that benefit payments are only suspended during months when the participant is employed in section 203(a)(3)(B) service (whether or not such service is with an employer who maintains the plan).

Situation 4:

Employer O maintains a defined benefit pension plan with a normal retirement age of 65. The plan provides for a life annuity benefit of $z per month payable at attainment of age 65, but also provides for the suspension of benefit payments for any month that a participant is employed with an employer not maintaining the plan, regardless of whether there is section 203(a)(3)(B) service during that month.

Section 401(a)(14) of the Code and section 1.401(a)-14(a) of the Income Tax Regulations provide that, unless the participant otherwise elects, the payment of benefits under a plan to the participant must begin not later than the 60th day after the latest of the close of the plan year in which-

(A) occurs the date on which the participant attains the earlier of age 65 or the normal retirement age specified under the plan;

(B) occurs the 10th anniversary of the year in which the participant commenced participation in the plan; or

© the participant terminates his service with the employer.

Although section 401(a)(14) authorizes, in some cases, a delay in the commencement of benefits beyond the time a participant attains normal retirement age, that section does not authorize the forfeiture of such delayed benefits.

Section 411(a) of the Code and sections 1.411(a)-1 and 1.411(a)-4(a) of the regulations require that certain rights in an employee's accrued benefit be nonforfeitable. Once such an employee's right becomes nonforfeitable (i.e., it is an unconditional right), then, generally, it may not be forfeited.

Section 411(a)(3) of the Code provides for limited exceptions to the requirement of nonforfeitability. One such exception is provided for under section 411(a)(3)(B) (section 203(a)(3)(B) is the comparable Department of Labor provision under Title 1 of ERISA) and section 1.411(a)-4(b)(2) of the regulations. The exception in section 411(a)(3)(B) provides that, even though benefits that must otherwise be nonforfeitable are not paid to an employee, this failure to pay will not violate section 411(a) if it occurs during a period that the employee is employed as described in section 411(a)(3)(B).

Section 1.411(a)-4(b)(2) of the regulations provides that the regulations prescribed by the Secretary of Labor under 29 CFR Part 2530 apply to section 411(a)(3)(B). That Department of Labor regulation is found at 29 CFR section 2530.203-3. In general, these Department of Labor regulations provide that a participant's benefit may be forfeited during any month of section 203(a)(3)(B)

service.

Section 1.411(a)-4(a) of the regulations provides that certain adjustments to plan benefits, such as adjustments in excess of reasonable actuarial reductions, can result in rights being forfeitable in violation of the minimum vesting requirements of section 411(a) of the Code.

Section 411©(3) of the Code and section 1.411©-1(e) of the regulations provide that if an employee's accrued benefit in a defined benefit plan is to be determined as an amount other than an annual benefit commencing at normal retirement age, such benefit shall be the actuarial equivalent of the annual benefit at normal retirement age.

Section 1.411©-1(f)(1) of the regulations provides that no actuarial adjustment of an employee's accrued benefit is required on account of a suspension of benefits permissible under section 203(a)(3)(B) of ERISA. Section 1.411©-1(f)(2) of the regulations provides that no actuarial adjustment of an employee's accrued benefit is required on account of an employee's working after normal retirement age. The effect of these two provisions is that, when an individual is employed after retirement age in section 203(a)(3)(B) service, the nonforfeitability requirements are not violated even though actuarial adjustments to the employee's accrued benefit in a defined benefit plan are not made.

The statutory requirement of section 401(a)(14) of the Code that payments commence includes an implicit requirement that such payment, once begun, must continue (absent receipt by the participant of a total distribution of accrued benefits) unless the individual is reemployed with an employer maintaining the plan. Thus, except where the individual is reemployed with such an employer, the suspension of a benefit required to be nonforfeitable violates section 401(a)(14). This is true regardless of whether a forfeiture occurs under section 411(a) because of such suspension. However, a suspension of benefits will not violate section 401(a)(14) to the extent a benefit could be forfeited in accordance with section 411(a)(3)(B) of the Code (203(a)(3)(B) of ERISA) (even though the suspension occurs while the individual is not employed by an employer maintaining the plan).

In Situation 1 above, the benefit of $x is not paid during any month when a participant is employed with M, an employer maintaining the plan, after normal retirement age. Accordingly, this provision does not violate section 401(a)(14). However, because the benefit that commence after separation are not adjusted to reflect the value of the unpaid benefits, there is a forfeiture of benefits. Because the forfeited benefit must be nonforfeitable in order to satisfy section 411(a) of the Code, and the forfeiture is not permitted by section 411(a)(3)(B), this plan does not satisfy section 411(a). To the extent that a forfeiture is not permitted under section 411(a)(3)(B) with respect to section 203(a)(3)(B) service, the provisions of section 1.411©-1(f) of the regulations permitting a plan not to make actuarial adjustments in certain situations without violating the nonforfeitability rules do not apply.

In Situation 2, the benefits not paid during continued employment or reemployment are used to provide an extra single sum payment at the end of the suspension period. This amount reflects the value of the unpaid benefits. Thus, the benefits are not forfeited, and this plan provision does not cause a violation of section 411(a) of the Code.

However, when a participant has been reemployed after age 65 and later terminates service with the employer, benefit payments will not recommence until the 5-year suspension period has ended. This time of resumption of benefits may be later than the time required by section 401(a)(14) of the Code. Therefore, because the suspended benefits cannot be forfeited under section 411(a)(3)(B) (that is, such suspension occurs regardless of whether the individual is actually employed in section 203(a)(3)(B) service), this plan provision fails to satisfy section 401(a)(14).

In Situation 3, as in Situation 2, there is no forfeiture of benefits. Also, the plan does provide for the commencement of and continuation of benefits as required by section 401(a)(14) of the Code except for the instances where the participant is employed with an employer (whether or not that employer maintains the plan), but where the service is still considered section 203(a)(3)(B) service. However, because the suspended benefits could be forfeited under section 411(a)(3)(B), the mere suspension of these benefits will not cause a violation of section 401(a)(14).

In Situation 4, the plan provides that benefits will be suspended during any month of employment with an employer which does not maintain the plan, whether or not that service is section 203(a)(3)(B) service. This provision fails to satisfy section 401(a)(14) of the Code because it permits benefits which would have commenced (or continued) to cease during a period of service which is neither service with an employer maintaining the plan nor section 203(a)(3)(B) service. If a forfeiture of benefits may occur during this period of suspension, the provision also fails to satisfy section 411(a).

Rev. Rul. 81-140, 1981-1 C.B. 180, 1981-19 I.R.B. 6.