post-death QDRO shared interest with current spouse

[Guest Tax nerd]

I'd like to get some opinions on the following situation:

Participant retires and elects a joint and survivor pension with spouse as beneficiary (plan is a defined benefit plan). Former spouse has a DRO, but Plan has no knowledge of it until after Participant dies. Plan is allowing her to go back to court and get a QDRO that would award her a piece of the surviving spouse pension.

My question is what happens to the AP's share if she dies before the surviving spouse? At first I thought the AP's share would go back to the current spouse, but is it okay to allow the AP to designate a beneficiary that would get the AP's payments until the current spouse dies? Does the AP's beneficiary have to also satisfy the definition of an AP?

[QDROphile]

AP cannot designate a beneficiary, whether or not the beneficiary could be an AP. The order could designate another alternate payee, but who would that be? It may be possible that under state domestic relations law the the plan participant could be ordered to pay support to another person (e.g. a disabled adult child), but I would not expect that to happen.

In certain jurisdictions the federal courts have ruled (incorrectly) that the first spouse cannot get anything from the surviving spouses's payments.

[Guest Kevin A. Wiggins]

If you're in the 4th or 5th Circuit, maybe others, the courts have ruled (correctly) that the former spouse can't get anything because the AP is already vested in the survivor benefit.

[mbozek]

The Surviving spouse's right to a spousal annuity vested when benefits commenced to the employee. AP has no right to portion of survivor annuity since DRO was not approved as a QDRO before benefits commenced. Court cant issue DRO awarding portion of surviving spouses benefit to AP because surviving spouse annuity is vested property of surviving spouse, not employee and divorce court has no jurisdicton over vested benefits payable to surviving spouse. Only option for plan would be to pay the AP a separate benefit without reducing payment to the surviving spouse if plan permits such a payment.

[david rigby]

Another option might be for the former spouse to inquire (of her attorney) why the DRO was never qualified (or even attempted) as a QDRO. Possible mal-practice against the attorney? This inaction is not the fault of the plan or the second spouse.

[Kirk Maldonado]

QDROphile:

You stated:

AP cannot designate a beneficiary, whether or not the beneficiary could be an AP.

Isn't it more correct to say that the AP does not have a unilateral right to designate a beneficiary under the QDRO rules? But couldn't the plan be more generous? Admittedly, the odds of the plan being that generous are less likely than the odds of Ralph Nader being elected president, but isn't it theoretically possible?

Or is there some distribution or other qualification requirement that might prevent that from occuring that I've not thought of?

I've seen many defined contribution plans allow the alternative payee to designate a beneficiary (if the alternate payee dies before the amount is actually paid to the alternate payee but after the plan has accepted the QDRO).

[QDROphile]

Defined benefit plans are different. Although there is the remote possibility of an unconventional design in another plan, this plan is paying benefits in the form of a joint and survivor annuity. When you get to the survivior, no further designations are allowed. The survivor's life defines the benefits.

My answer mixes two concepts, and one could argue about that. Because the benefit is in pay status, I would not allow a life benefit for the alternate payee. The alternate payee can only get some portion of the stream of payments, not a life benefit based on the life of the alternate payee. Then I switch concepts and assert that if either there had been no divorce or if the benefit had been divided before payments started, the wife/alternate payee could not pass anything to a beneficiary. The form of benefit, by design, limits the benefit to the wife/alternate payee, not some futher sucession of persons. In other words the joint and survivor annuity is designed to take care of the participant and the participant's wife, and no one else. Some plans will allow a contingent beneficiary in place of a wife, but they do not allow a succession when the benefit is a life benefit (life and term certain is another matter -- a series of beneficiaries is possible to exhaust the term certain, but most of the plans look to the estate of the designated beneficiary rather than a beneficiary designated by a beneficiary designated by a beneficiary). The alternate payee should not be allowed to extend the benefit beyond the alternate payee's life because the form of benefit is not designed for that purpose -- it is not an estate planning vehicle; it is a spouse support vehicle.

You could argue that once we are lookintg at a stream of payments, it is more like a defined contribution plan. While there is a life factor, it is not the life of the alternate payee that determines the potential aggregate payments. Therefore, the alternate payee should be able to be awarded the alternate payee's "share" of the the payments and that share should not be defeated by the alternate payee's death. Either the alternate payee's beneficiary or the alternate payee's estate should get the alternate payee's full due. The subsequent spouse should not get more than the subsequent spouse share of the benefits, as expressed in the survivor annuity after taking away the alternate payee's portion.

ERISA says that alternate payees are treated as beneficiaries. So unless the plan allows beneficiaries to designate beneficiaries, the alternate payee has no inherent right to do so. Once the survivor annuity is locked I cannot imagine that the plan has been designed to allow any sort of reformation or has specific provisions from which one could reasonably infer an ability to inject strange beneficiaries.

This whole discussion jumps over the important question of how a court state court will decide what is to be awared to the alternate payee. It is tempting to adopt the rules of the Fourth and Fifth Circuits to preclude the difficulties at the expense of the alternate payee who created the mess by waiting too long to notify the plan. I don't know how the state court will proceed, but it will depend in part on on the original division of the retirement benefit. Will the original award be carried through simply by mathematical adjustment to take into account the current situation? Or is the original decision compromised too much by the passing of time and concern for the ability of the adverse subsequent spouse to be heard?

[mbozek]

I dont think the state ct can proceed with a DRO because the death of the employee after benefits commence to the 2nd spouse would require that the ct obtain jurisdiction over the a person who is not a party to the divorce. This is different than where the employee dies shortly after divorce but before the DRO is sent to the plan because the ct had jurisdiction over the employee. An AP rights as a beneficiary under the plan is limited to the extent of the rights that the AP has against the employee's benefit- not against a vested benefit payble to another person under the plan. Reducing the surviving spouse's benefits to pay the AP will result in a law suit by the spouse.

[QDROphile]

I disagree with your conclusion that the spouse has a "vested" benefit. The spouse has only a derivative of the participant's benefit. That is what the Fifth Circuit got wrong. But I agreee that there are some very thorny issues that may cause the state court not to proceed.

What if the spouse still has some item in the garage that the state court awarded to the former spouse, or the proceeeds of that item? I think the state court would be willing to allow enforcement of its award notwithstanding that the spouse might resist.

[mbozek]

In the absence of a QDRO, the surviving spouse becomes vested in a contingent survivor annuity upon commencement of the retirement benefit to the employee. After the employee's death the only surviving spouse has a vested right to an annuity benefit because the employee's vested rights to the benefit were extinguished at his death when his vested payment was reduced to 0 and the reminder interest was transferred to his spouse. More importantly a state divorce court has no jurisdicton over the survivor benefits paid to the surviving spouse who was not a party to the divorce action. Therefore a state ct action by the AP to reopen the divorce proceeding will fail. See Samoroo v. Samoroo, 193 F3d 185 which cites the varous court cases holding that the rights of the surviving spouse to the survivor annuity vested on the date the employee retired in order to prevent the plan from being exposed to unforseen liability after death from an ex spouse which was not anticipated when the employee retired.

[QDROphile]

Does a named death beneficiary in a defined contribution plan become "vested" in the account balance in the same way when the particpant dies?

By the way, how do you explain Treas. Reg. section 1.401(a)-20 Q&A 25(b)(3)?

[mbozek]

A QDRO is necessary to designate the AP as a vested beneficary whose rights to the employee's benefits have a priority over a sucessor spouse or AP. In Rivers v. Central and Southwest, 186 Fed 3 681, the 5th circuit in adopting the Hopkins precedent held that the failure of the AP to protect her rights by getting a QDRO results in the rights of the surviving spouse being vested under ERISA when the employee retires. The IRS regs limit QDROs to benefits payable to the participant, e.g., benefits payable to a prior spouse under a QDRO are not payable to the participant in a divorce from a subsequent spouse. APs frequently delay paying lawyers to file QDROS to protect their rights to contingent future benefits because they do not wish to spend money for benefits that they will not receive if they die prior to the employee. They prefer to delay filing a QDRO for survivor benefits until the employee dies.

[QDROphile]

I know that is what the Fifth Circuit said. I maintain that the Fifth Circuit is wrong, although particular circumstances may well justify denial to a tardy alternate payee, consistent with the 9th Circuit Tise decision. The "vesting" of a surviving spouse is not a "vesting" that I find in ERISA. I am more inclined to think that ERISA respects community property and other property rights under state law to the extent identified under domestic relations law, and would preserve a community property or other interest beyond the death of the participant unless other ERISA provisions are clearly to the contrary or the facts warrant a different result. The point of QDRO law was to accommodate state domestic relations law and marital property interests protected by state law within the regime of the anti-assignment and preemption provisions of ERISA. The bright line approach of the Fifth Circuit simplifies, but it does not follow that principle.

The statute says "benefits payable with respect to a participant" not "payable to a participant." I cited a regulation that at least implies that a QDRO can invade the benefit of the surviving spouse. You have not explained it away, unless your first sentence is meant to be an explanation. You have have mentioned regulations that are more limiting than the statute, but have not identified them.

I continue to seek an explanation that is well founded in the statute and based on rigorous analysis. The remarriage/death situation is messy in may ways, but that does not justify a ham fisted solution.

[mbozek]

Q: You havent put up one precedent for your position--while there are cases from three circuits- 3, 4 and 5 that contradict you opinion based upon the concept of vesting the survivors annuity in the spouse when the employee retires which is consistent with ERISA that benefits vest at retirement and the prohibition against a cutback of benefits payable to a spouse under reg. 1.411(d)-4 Q-2(a)(4).

Under your interpretation, the fed cts must give full faith and credit to decisions of state cts, after the death of the employee without regard to increasing liabilityof plans beyond what the plan expected to pay at the time benefits commenced- which was not the purpose of QDRO legislation and is preempted by ERISA because it increases the cost of the plan. Also your interpretation is illogical in that the rights of an AP who does not file for a QDRO never lapse which would result in the plan owing benefits to estate of a deceased AP which was not the purpose of QDROs.

[QDROphile]

Your entire second paragraph is a misunderstanding or a misstatement of my position, and has blithely skated over the contrary statements in this thread. An alternate payee who is not diligent will lose. An order that violates section 414(p) will not be qualified. But that depends on the facts, not a rule of law. As I already stated, the issues can get difficult and the limitations have to be respected, but the fact that the plan is paying s surviving spouse should not be the end of the question.

Treas. Reg. section 401(a)-20 Q&A 25(b)(3) is consistent with allowing a QDRO to reach a survivor benefit. The the regulation repeatedly provides an exception for QDROs. The anti-cutback regulation you cite has nothing to do with QDROs. QDROs are not a cut back, they provide for assignment of benefits to another. If you were correct, all QDROs under all circumstances would violate the regulation because they reduce the particpant's benefit an thereby reduce the benefit of all beneficiaries.

Bailey v. New Oreleans Steamship Association, 100 F3d 28 (8th Cir 1996) adopts the position that a QDRO can reach a survivor benefit. Of interest to "vesting" fans, the court held that the first wife "vested" in the pension benefits during the marriage.

[Belgarath]

I find these discussions very interesting.

What happens in a compressed time situation where there's no "neglect" by the original AP. For example, Mr. & Mrs. Bumbledicker get divorced. Divorce settlement calls for a 50/50 split of the pension payments. Whilst the QDRO is being drafted, but has not yet been submitted to the Plan Administrator, Mr. Bumbledicker, who will attain Normal Retirement Age in 1 week, marries his 21 year old secretary, the former Miss Riggafrutch.

Mr. Bumbledicker retires immediately, the better to enjoy the pleasure of his new spouse's company aboard his yacht, the Enron Star. After receiving his first payment (at the 415 maximum, of course) he dies.

Does the newly widowed Mrs. Riggafrutch/Bumbledicker continue to receive the entire J&S payment, or does the QDRO, submitted a month later, require that 50% of this benefit go to the gay divorcee, if this takes place in Circuits 3-5? Or is this unanswerable until such situation is placed before the Courts?

[QDROphile]

The practical solution is that the divorce decree should be submitted to the plan the moment the ink is dry. That will protect the alternate payee while the "real" domestic relations order is prepared even if the particpant remarries or dies in the mean time (Tise). However, there could still be problems if the divorce decree was not definite enough to support the real QDRO or if the decree did not deal adequately with death contingencies (Samaroo). But who knows what happens in the Fifth Circuit? I think the Fifth Circuit is off on an unprincipled tangent, so I don't know if the filing of the unqualified divorce decree will provide the stopper.

Your fact situation shows exactly what is offensive about the Fifth Circuit's bright line approach.

[mbozek]

The problem with Bailey is that it was not followed in a subsequent case in the same Circuit (5th not 8th as you stated) Rivers, 186 F3d 681, 1999 as well as Hopkins (4th) in 1997 and Samaroo (3rd) in 99 which have all held that the right to the survivor annuity vest at the retirement of the employee or are forfeited at the death of the employee (Samaroo). It appears that since Hopkins was decided there has been no published case which allowed an AP to obtain a QDRO after the death of the participant. The IRS reg merely recites the fact that the rights to a survivor's annuity is subject to a QDRO which the above decisions have held cannot be issued to a former spouse after the death of the participant.

B- the rights to the pension will be subject to the jurisdiction of the divorce ct which could issue a QDRO if state law permits. Counsel for the AP would normally notify the plan of the pending QDRO and send a copy of the divorce decree to the Plan administrator. There are ct cases where the plan has been held liable for cashing out the AP benfits before a QDRO was issued where the plan was on notice of a pending QDRO. The differernce between your facts and the cases cited above is that the court reserves jurisdiction to issue the QDRO after the divorce whereas in the other cases the divorce case was closed prior to the death of the participant.

[QDROphile]

You are correct that the Rivers and Dorn cases came out after Bailey in the Fifth Circuit. Interesting that neither mentioned Bailey. Bailey is of questionable precedent in the Fifth Circuit after the later cases followed Hopkins from the Fourth Circuit.

I am not aware of any other cases on the subject. Samaroo is correct but is very limited in its holding and not on the subject, so I do not think you can say the 3rd Circuit follows. I don't accept your glib dismissal of the regulation, but I can't say the regulation proves me right.

Hopkins has been criticized by respectable commentators, e.g. ERISA Litigation Reporter, April 1997. Other recent federal decisions have allowed QDROs to be submitted after the participant's death and have effect, but I can't say if any of them have been formally published. They do not speak to the validity of Hopkins because they do not involve the survivor annuity, but they do allow QDROs effectively to encroach upon the amount of the death benefit that would otherwise be paid. Do other forms of death benefit "vest"?

So it boils down to whether or not you agree with Hopkins. I think Hopkins made itself up. If you agree with Hopkins, you can defend it against all the indications that Hopkins is wrong because Hopkins did not look far outside itself. Perhaps it is not surprising that Rivers and Dorn, in subscribing to Hopkins, did not think it necessary to mention Bailey. If you believe, you believe.

[mbozek]

The underlying theme of Hopkins, Rivers, Samaroo is it that the AP has a security interest in the participant's retirement benefit similar to a mortgage on a home and the AP must protect the security interest by having the Plan issue a QDRO which is similar to recording a mortgage. If the APs interest is not recorded by the date benefits commence or the participant dies prior to retirement the AP's interest will be forfeited. The cut off date is necessary to protect the plan and the participant from latent claims by APs.

I dont see how the IRS reg subjecting the survivior annuity to the QDRO rules madates that the AP has the right to enforce a claim for retirement benefits after benefits commence where a QDRO was not obtained prior to commencemnet of benefits. The IRS does not have the authority to determine what is a QDRO- this is the province of the courts.

[QDROphile]

If you believe what you say about the underlying theme, then take Belgarth's facts and tell me why it is "necessary" to absolutely prevent the former Mrs. B from showing up with a state court determination that she has an interest under the plan, determined while Mr. B was a participant and before remarriage, and obtaining an appropriate portion of the future payments that would otherwise go to Mrs. R/B?

You can say that the former Mrs. B can't obtain more than the plan would pay to Mrs. R/B. You say that the former Mrs. B can't complain about the actions of the plan administrator in starting benefits in the form of a J&S annuity. There are federal court cases that say that the state court determination of the former Mrs. B's interest is effective to define that interest and make it the former Ms. B's property, subject to collection via a QDRO. If the former Mrs. B can't come up with a QDRO, she loses, but the participant's death is not the stopper. State law might be the stopper. So there are many reasons why the Former Mrs. B is more restricted or might lose out under the circumstances, but I am offended if Mrs. R/B gets the full benefit of the former Mrs. B's pension interest, duly and fairly determined in the divorce and effected unde a QDRO, by an unnecessary, overbroad, simplistic rule based on a notion of "vesting" that is not supported by the terms of ERISA. There is a cut off date determined by the circumstances of each case, but I don't think you can say the mechanical cut off date is "necessary." If someone is being cut out of property rights, I would like a more intellectually satisfying reason than Hopkins provides.