Changing beneficiary upon legal separation

[Guest nsacramento]

I have an employee who was recently legally separated from his spouse (I have the court decree.) No QDRO has been sent in, nor does the legal separation document mention the 401(k) plan.

However, the employee has turned in a new 401(k) beneficiary form to remove the wife. I am not sure about accepting the beneficiary change due to the fact that he is still considered as having a spouse. Has anyone else come across this issue?

[Mike Preston]

Your plan's beneficiary designation form will tell you if it is ok or not. Some plans require that a spouse sign the form, witnessed by a notary, if somebody other than the spouse is to be designated. Does your form require that?

Let's assume it does.

Is your question whether this participant is to be considered "not married" for purposes of the form? Well, IANAL, but I have always thought that a legal separation was not sufficient to scissor a spouse from benefits otherwise called for under the plan, unless the separation agreement is recognized by the courts and calls for the spouse to give up all rights under the plan.

Let's see what the lawyers have to say.

[Guest nsacramento]

Yes, our beneficiary form does state "spouse" thats why I don't feel I should accept the change without the ex's notorized signature.

Also, the employee refuses to provide me with the full legal separation document. I have only received thet page that states the date of legal separation and court signatures. I informed the employee that I have not received sufficient information from him that reflects his ex is no longer eligible for his retiremet benefits. I explained and provided him with our QDRO draft.

I have a feeling that there is more to his legal separation and he is refusing to have me see it because there probably is language pertaining to the retirement plan. He is really upset but I have a fiduciary responsibility to uphold.

I just wanted to see if anyone else has had this problem come up and what everyones view was on this.

I'll mention this to our attorney next week when we deal with the new SERP issues.

[Mike Preston]

Good plan.

[mbozek]

Separation does not result in the elimination of spousal rights to retirement benefits under an ERISA plan-only divorce will result in a loss of marital rights to benefits. If participant dies prior to divorce becoming final the spouse is entitled to all death benefits because divorce action is terminated upon death of one party.

[Mike Preston]

Couldn't the separation agreement be a QDRO?

[mbozek]

I have never heard of it but any event the parties are still married and the spouse has all of rights to benefits as a spouse under ERISA. If the ee dies the spouse would be entitled to claim survivor's benefits from the plan under ERISA because the death of the participant ends the pending divorce action with the parties still married. 414p defines a DRO as a judgment, decree or order whereas IRAs can be divided upon a divorce or separation instrument (since there are no spousal rights). Separation instruments do not have to be approved by a ct.

[JDuns]

See Reg 1.401(a)-20 Q&A 27

Q-27: Are there circumstances when spousal consent to a

participant's election to waive the QJSA or the QPSA is not required?

    A-27: Yes. If it is established to the satisfaction of a plan representative that there is no spouse or that the spouse cannot be located, spousal consent to waive the QJSA or the QPSA is not required.  If the spouse is legally incompetnent to give consent, the spouse's legal guardian, even if the guardian is the participant, may give consent. Also, if the participant is legally separated or the participant has been abandoned (within the meaning of local law) and the participant has a court order to such effect, spousal consent is not required unless a QDRO provides otherwise. Similar rules apply to a plan subject to the requirements of section 401(a)(11)(B)(iii)(I).

Under this reg a plan may provide that spousal consent is not required if the participant submits a court order demonstrating that he/she is legally separated.

It is not the beneficiary designation forms that will govern but the portion of the plan document that sets the process for designating beneficiaries.

By the way, many individuals (especially those whose faith does not permit a divorce) will legally separate. By going through this process, they cease to be responsible for each other's debts after the separation but are not legally free to remarry.

Hope this helps.

[mbozek]

If the ee dies before the divorce occurs the plan would be faced with a conflict between beneficiaries since the spouse would be the beneficary under ERISA as the divorce action would be terminated but the plan would have designated another party as the bene. I dont see why the plan would permit a change of death beneficiary for benefits which are not payable in a separation agreement instead of waiting for a divorce decree.

I dont understand the logic of allowing for a change of death beneficiary without spousal consent upon legal separation if the authorization for allowing the designation of a non spouse will be invalidated upon the death of the employee. In NY and NJ death before the divorce decree is issued terminates the divorce proceeding and the parties are deemed legally married on the date of death.

[Ron Snyder]

Even if the separate maintenance order is a domestic relations order, it cannot be a QDRO since it does not purport to divide the benefits.

[david rigby]

By the way, many individuals (especially those whose faith does not permit a divorce) will legally separate.

It is my understanding that this is the primary reason for a "permanent separation", and hence the reason for the reference to "legally separated" in the quoted Q&A.

[Mike Preston]

mbozek, you keep talking about a divorce action being terminated. In the case of a legal separation, there is sometimes no intent to ever have a divorce. I think the regulation is pretty clear: in the case of a legal separation, the plan document can, if it chooses, decide that spousal consent is no longer necessary.

Further, even if the document does not invoke that special consideration, if the legal separation document satisfies the definition of a QDRO it would continue to be valid upon death.

Of course, the OP should determine what is really going on in the plan by referencing the plan document and then getting confirmation from the plan's lawyer.

[mbozek]

Mike: I dont have clients in a state where a QDRO terminating spousal rights can be issued before the parties are divorced. I dont see how the IRS reg would prevent the plan from being liable to pay benefits to the surviving spouse under a separation agreement at the participant's death if state law terminated the divorce proceedings (including the separation of the parties) at the death of the participant. Its easier to get the spouse to waive spousal rights upon separation then to determine whether state law permits spousal rights to benefits to be terminated upon a separation without a final divorce.

[Mike Preston]

mbozek.. Interesting. I certainly concur that if the result upon death is the revocation of previously issued orders, be they separation agreements or QDROs in anticipation of divorce finalization, there is a distinct disconnect.

I can't provide a citation, but out here in California, the QDRO in the absence of divorce is almost common. Well, not really common, but not so rare as to be unheard of, either.

Thanks for the dialog. I agree that if the spouse has given up rights via an anticipatory QDRO, they should also be willing to execute a beneficiary designation agreeing to somebody else as beneficiary. I would suppose that a properly drafted separation agreement might direct the spouse to do so at the behest of the participant.

[Kirk Maldonado]

JDuns:

Thanks for providing that insight as to why someone would seek a legal separation.

I've spoken with many domestic relations attorneys about that topic over the years, and not one of them had ever even heard of someone seeking a legal separation. In fact, they couldn't understand why somebody would do that, because the costs of obtaining a legal separation decree as much as obtaining a divorce decree (in California at least), and when it is all over, you're still married to the person.

Now I know why someone would choose the legal separation route.

[Belgarath]

Re-upping this old thread. We have a situation where there is apparently a "legal separation" - whatever that means, and it apparently will never be a divorce (or not for a long time) and it has something to do with the "ex" remaining on health insurance. I really don't have any details. But, the DB plan provides for a pre-retirement death benefit ONLY for a spouse. So is this a question of State law now, as to what constitutes a "spouse" for this purpose? The plan language is silent on this issue. Or, is there some other guidance that would apply where ERISA would override state law - e.g. that until there is a divorce, you are a "spouse" and a legal separation doesn't change that.

Thanks!

[MoJo]

I would look at this a little bit differently.  The spouse is the spouse - the legal separation does NOT change that status, but the legal separation (court approved under the laws of the appropriate jurisdiction) *may* alter the rights of a spouse with respect to the property of the other.  If the plan is "clear" that ONLY a spouse may take under the plan (and under no circumstance can the participant name a non-spousal beneficiary), then I don't see the legal separation as having any effect on the plan provision.  If the plan provides that the participant may name non-spousal beneficiaries, then you have the issue of whether or not the legal separation has the effect of eliminating the spousal consent rules for naming a non-spousal beneficiary - and that is something counsel should be consulted on.

I haven't looked into it in a while, but I think there is some guidance on point....

[Belgarath]

"If the plan is "clear" that ONLY a spouse may take under the plan (and under no circumstance can the participant name a non-spousal beneficiary), then I don't see the legal separation as having any effect on the plan provision."

Thanks MoJo. Yeah, the plan language is very clear that the there is no preretirement death benefit if you are "unmarried." But that brings up the issue of whether "legal separation" means "unmarried." So this is probably a question for ERISA attorney in this state. Here's the actual applicable language - I cut out (b) and (c) as inapplicable to the question at hand:

(a)   Death prior to retirement benefits beginning. The death benefit provided under this Plan shall be the "minimum spouse's death benefit" provided in Section 5.5(c). In the case of an unmarried Participant who dies prior to such Participant's Retirement Date, no death benefits shall be payable under this Plan.

...

(d)   Beneficiary. The Beneficiary of the death benefit shall be the Participant's spouse, who shall receive such benefit in the form of a Pre‑Retirement Survivor Annuity pursuant to Section 5.8.

 

 

 

[MoJo]

I would agree that counsel should opine on the issue, but in the jurisdictions in which I'm licensed, a "legal separation" only settles "property" and possibly "custody" issues of the parties.  It does not affect their status of being "married."  Think of it this way - if either party subject to a "legal separation" order attempts to marry another, they are guilty of the crime of bigamy. Only a "divorce" (or "dissolution of marriage" - depending on jurisdiction) can render them "unmarried."

[Belgarath]

Thanks MoJo - that makes good sense to me...

[My 2 cents]

Can a QDRO be obtained, making it clear that the plan is to treat the legally separated spouse as being the spouse for purposes of the plan?  That might resolve any ambiguities with respect to the plan.

[Belgarath]

That sort of circles back to the question of: CAN a QDRO be valid if the parties are still married - which in a "legal separation" they are.???

I don't know. Since a legal separation apparently provides for a division of property, it would seem reasonable that it can. But a legal separation is a creature of State law, as I understand it, so ERISA preemption might come into play?

I really, really don't know the answer to this, but I'd love to hear from someone who does! Thanks.

[david rigby]

IRC 414(p) does not contain the word "divorce" or the phrase "dissolution of marriage".  Of course a QDRO can be issued if the parties are still married. 

However, in the case above, what is the reasoning for the parties to bear the cost of obtainging a QDRO, when the plan (as described above) does not care about "legal separation"?   If the plan has no ambiguities, why fix something that isn't broken?

BTW, in my state (NC), there is no definition of "legal separation".

[Belgarath]

Thanks David - I was looking at 414(p) and ERISA 206(D) just a moment ago, and found he same thing. So it seems like the general answer is yes, a DRO issued by a state court CAN be recognized as a QDRO, if all the other requirements are satisfied.

[MoJo]

16 minutes ago, Belgarath said:

Thanks David - I was looking at 414(p) and ERISA 206(D) just a moment ago, and found he same thing. So it seems like the general answer is yes, a DRO issued by a state court CAN be recognized as a QDRO, if all the other requirements are satisfied.

I concur.  We see them occasionally, and I have one on my desk right now - where the husband and wife have "stipulated" to the issuance of a DRO despite not getting divorced, basically because he's doing 5 to 10 in the big house for embezzlement (which may be why they want the money assigned to her sooner rather than later - but that's another story....).

[My 2 cents]

What happens if the legal separation, approved by a court, denies the non-participant spouse any rights to the plan benefits (i.e., a sort of anti-QDRO)?  Would the plan be able to accept a beneficiary designation not agreed to by the separated non-participant spouse?

All questions become moot if the separated non-participant spouse is willing to sign off on the new beneficiary designation, don't they?  Assuming that the plan allows that action when the participant is legally married.

[MoJo]

14 minutes ago, My 2 cents said:

What happens if the legal separation, approved by a court, denies the non-participant spouse any rights to the plan benefits (i.e., a sort of anti-QDRO)?  Would the plan be able to accept a beneficiary designation not agreed to by the separated non-participant spouse?

All questions become moot if the separated non-participant spouse is willing to sign off on the new beneficiary designation, don't they?  Assuming that the plan allows that action when the participant is legally married.

Interesting question, but to be honest, a rather far-fetched one.  In my experience, in "legal separation" cases, the court is only going to order what the parties have agreed to.  In the jurisdictions I'm familiar with, a "separation agreement" needs to be filed at the time the "legal separation" petition is filed, and both parties need to "agree" to it again at the time of the final hearing - just as in the case of an uncontested or "no-fault" divorce.  The court ordinarily won't order anything not agreed to.  If there is a disagreement, it turns from a "legal separation" into a restraining order and possibly an order for spousal support, plus any child custody/support issues.

Now, if after a legal separation is obtained a participant names the estranged spouse as beneficiary, the beneficiary designation is going to trump the separation agreement (which only would be operative to eliminate the need for spousal consent if the participant chose to name someone else - if that issue is even addressed in the order).