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Help me sort this out...


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Basic facts are as follows.....

Participant (P) was married for about 15 years and divorced his first wife (W) in 1995. The divorce decree awarded W a one-half interest in P's defined benefit plan and ordered a QDRO be drafted. No QDRO was ever forthcoming.

In August, 2005, P made application for an ancillary disability benefit with the plan. The administrator noted that a divorce decree had been filed and contacted both P and W concerning the need for a QDRO. Pursuant to the procedures an administrative hold was placed on the portion of the benefit payments that appear to belong to W.

P is now remarried to W2.

Questions...

1. Can W submit an order that provides for a separate interest? P is in pay status, but only due to disability. The J&S notice is not submitted to a disabled pensioner until he converts to a normal retirement at age 62. Is she limited only to a stream of payment order? (This does not make much sense...if he recovers tomorrow, all benefits would stop...then W would be left in a lurch).

2. Should the plan ignore the fact that P is in pay status and request a separate interest order that is payable upon P's attainment of early retirement age? The intent of the benefit is to assist a disabled pensioner, not to provide a subsidized windfall to the non-disabled ex-spouse. W would still get her portion of the benefits accrued through the date of divorce.

3. Should the plan ask for some sort of hybrid order that gives W a right to a proportionate share of the disability benefits, and a separate interest in the normal accrued retirement benefits?

Am I completely off base...?? As indicated in the caption, this situation has me thoroughly confused.

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You are asking the right questions and are making sense of the issues. The most important question is the nature of the disability benefit in relationship to the retirement benefit. You make it sound like they are essentially two different benefits. The plan should design its QDRO procedures accordingly. At first blush, I would treat the disability benefits as a stream of payments and require a separate award with respect to the stream if any of the disability payments are to be awarded to the alternate payee. The separate award with respect to the retirement benefits could be a "separate interest" although that term is misleading because a truly separate interest is unlikely and usually not advisable (as well as legally impossible with respect to some technical matters). Unless there is a support issue, I suspect that the alternate payee would not be awarded any of the disability payments. There are other ways to design the QDRO procedures, and you need to make the most of the statutory provision that prevents orders from providnig for benefits that the plan is not designed to provide.

By the way, the plan does not "request" or "ask for" anything.

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Q What benefits were awarded to W under the divorce decree? If only retirement benefits were awarded there is no entitlement to the disability benefits paid to P. However W may still be entitled to retirement benefits under the DB plan if a DRO is presented to Plan adm before P commences retirement benefits. W needs to retain counsel to prepare DRO. Different situation if P retires without a DRO being presented to plan because Wife # 2 will vest in his retirement benefits and forclose rights of W. I dont believe Plan admin can advise W on what she should request in DRO which could be adverse to P's rights under the plan and would be a violation of Plan admin fiduciary duties. You need to consult with counsel.

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mjb and I respectfully disagree about the effect of P's retirement on W#1's ability under federal law to obtain a portion of the participant's retirement benefits. Start of P's retirment benefits will affect what W#1 can get, but will not preclude an interest in the payments. Certain courts have ruled along the lines of mjb's position when the order was first presented after the participant's death. Your situation is different in several respects and I think those decisons were wrong.

We agree that the plan cannot advise anyone about what course of action to take. We agree that competent legal counsel should be consulted.

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ERISA is a law of equity and there is a doctrine of equity called laches which will prevent a party with a valid claim such as W from obtaining equitiable relief where there an unreasonable delay by that party in reqesting relief which results in a detriment to the defendent, who could be the plan, W2 or P. In other words if W delays her DRO filing until after the retirement plan benefits commence she could be denied her right to benefits if another party will have to pay more (the plan) or receive less (W 2 or P).

I dont know what differences there are in this case which would protect W if she doesn't present a DRO before P retires. In Singleton v. Singleton, 290 F Supp 767, the ex spouse sued the P after retirement benefits begain for 50% of P's benefits which were incorporated in the property settlement agreement but never presented in a DRO to the plan admin. The Ct held that where the employee remarried before retirement, the former spouse must present the plan adm with a DRO before a triggering event, e.g., retirement, occurs in order to protect her right to to P's retirement benefits. I dont know if W has a right to disability benefits because the triggering event for that benefit has occurred and secondly the divorce decree may not have given her a right to such benefits. W will not have any right to retirement benefits if she does not present a DRO to the plan admin before P retires.

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Possibly W (and/or counsel?) is "deficient" by not adhering to the court's order of drafting a QDRO? Possibly P is similarly at fault? Possible malpractice?

Of course, mjb and QDROphile are correct in advising adequate counsel, both for P and W, as well as for the plan administrator. Also, advice that the PA cannot get involved, except to review draft DRO, is absolute. (BTW, in addition to adequate counsel, P and/or W may need new counsel.)

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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I analyze the situation in a slightly different manner than either mjb or QDROphile, so I'm actively soliciting the reaction of both of you as to whether you agree with my approach, which may aid in the resolution of this interesting issue.

If the disability benefit were completely unrelated to the pension benefit (say it was provided under a LTD plan), the court decisions that I've seen seem to indicate that the former spouse has no right to any portion of the disability benefit if the basis for the person's disability (e.g., a car accident) occurred after the divorce, despite the existence of a QDRO.

On the other hand, I've seen decisions that say that if the participant's disability just affect when the benefit under the tax-qualified retirement plan becomes payable (and maybe whether there is an actuarially subsidized benefit), then the former spouse does share in the disability benefits pursuant to the QDRO.

Do you both agree that these are the applicable principles of law? If you do, then that may make reaching the determination as to what is the correct conclusion much easier.

Kirk Maldonado

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Many QDROS and property settlements are prepared by attorneys who are ignorant of the benefits that are provided under a DB plan. If the divorce decree provides that the AP is entitled to the retirement benefits but not ancillary benefits such as disability benefits then the AP has to wait until the p retires. In many cases the AP gives up surviving spouse benefits because the QDRO doesnt provide for pre retirement or post retirement death benefits.

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I am unfamiliar with decisions that say federal law prevents assignment of ancillary disability benefits. I am aware that some decisons say that a "QDRO" can assign welfare benefits, although such decisions are questionable because they do not relate to terms of the statutes (which apply to retirement plans), and commentators and other decisions observe that they are unnecessary becuase the benefits can be assigned without a qualified order. Subject to my ignorance about case law authority to the contrary, it seems to me that the disability benefits can be assigned under one theory or the other if state law allows and the order is properly drafted.

The terms of the plan, and its QDRO procedures, and the terms of the order, are of primary importance. If the terms are not all in line, the former spouse does not get any part of the benefit. Most orders are inadequately written to provide an interest in disability benefits that are not , in the view of the plan, retirement benefits. It might be interesting if the plan provides that the ancillary disability benefits simply cannot be assigned and the plan terms do not compromise the ability of an alternate payee to receive "true" retirement benefits whether or not the particpant receives disability benefits. Making sure that the right to receive retirement benefits is not compromised requires a lot of thought.

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Update....

We just learned that this plan has, in the past, allowed alternate payees to share in a pro-rata portion of the ancillary disability benefit....although the plan is silent on the issue. To further complicate the issue, the QDRO that has been submitted is a separate interest order that does not appear to grant the alternate payee any portion of an ancillary benefit.

Is there any "correct" answer here? It seems the Plan needs to ensure everyone is treated fairly.

For example...allow P to keep 100% of the subsidized disability benefit. The alternate payee is awarded a separate interest in the accrued benefit that can commence upon early retirement age. The subsequent spouse is awarded a QPSA and QJSA with respect to the unassigned portion of the accrued benefit.

This accomplishes a couple of things...1) the plan is not paying any more than it would have paid in absence of the order; 2) the alternate payee receives the benefit ordered by the court; 3) the new spouse is protected in the event of the death of the participant.

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...the QDRO that has been submitted is a separate interest order that does not appear to grant the alternate payee any portion of an ancillary benefit.

Is there any "correct" answer here? It seems the Plan needs to ensure everyone is treated fairly.

Yes, there is a correct answer and you have it, below. However, I disagree with you as to the fairness concept. The plan needs to engage counsel so that the plan does the legally correct thing, whether that is fair or not is irrelevant.

For example...allow P to keep 100% of the subsidized disability benefit. The alternate payee is awarded a separate interest in the accrued benefit that can commence upon early retirement age. The subsequent spouse is awarded a QPSA and QJSA with respect to the unassigned portion of the accrued benefit.

This accomplishes a couple of things...1) the plan is not paying any more than it would have paid in absence of the order; 2) the alternate payee receives the benefit ordered by the court; 3) the new spouse is protected in the event of the death of the participant.

Seems right to me, but this needs to be reviewed by plan counsel.

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2 cents:

I work with a number of db plans which provide an ancillary disability benefit to a retirement age (65 or early retirement). For QDRO purposes, the plans treat the ancillary disability benefit and the retirement benefit as separate benefits and treats the ancillary disability benefit as a welfare type benefit. For example:

(1) Spouse AP obtains separate interest qdro for retirement benefits providing for payment to the AP at earliest retirement age. The Plan will not treat the later payment of an ancillary disability benefit as a distribution to establish the earliest retirement age for payment of the separate interest assigned retirement benefit to AP.

(2) Plan will allow a stream of payment assignment of the disability benefit in addition to separate interest assignment of the retirement benefit - in separate or the same QDROs. I've been told the state law in many states would not treat benefits payable as the result of disability after a divorce as marital property capable of assignment, but plan does not look beyond state court order to make that determination. This may explain why I have encountered only a couple of these QDROs. In any case, if the state court assigns the disability benefit under a QDRO stated to be issued pursuant to state domestic relations law, the plan will assume this to be the case (and not independently review for complaince with state law).

(3) Plan would accept a separate interest QDRO for the retirement benefit while participant is in receipt of disability benefit (and would also accept stream of payment QDRO for disability benefit).

Thus to Mal's questions:

1.

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Follow up to prior post. I pushed the wrong button and off it went. I hope it reads ok.

Thus to Mal's questions:

1. I think W can submit a separate interest QDRO for retirement benefit. (Also stream of payment for disability benefit).

2 & 3. Plan should not ask or request anything, but should advise parties of their options under Plan terms and QDRO procedures.

Re Kirk's approach:

1. Never received a welfare plan QDRO of any type. Not sure what I would advise, although I am aware that a fair number of circuits have said ok to welfare plan QDROs in life insurance context. (In such a case, I may just count up number of circuits and the amount of dollars plan has to pay in legal fees at that time.)

2. Depends upon type of QDRO or plan terms. For a separate interest QDRO assigning an alternate payee his or her own retirement benefit payable over his or her life, and assuming that plan does not allow payment to AP before earliest retirement age, my position (so far - never seen a case) is that payment of a disability benefit (i.e. contingent on participant's ongoing disability) will not establish earliest retirement age permitting payment of AP's separate interest lifetime award to begin. I have some difficulty with the idea that payment of a welfare type benefit contingent on participant's ongoing disability would allow payment of separate award of lifetime retirement benefit to AP to begin. Consistent with above, though, would accept stream of payment QDRO for disability benefit.

Another issue: If plan's ancillary disability benefit is based on accrued benefit, and if separate interest QDRO unconditionately assigns a portion of accrued benefit to AP, would that then reduce the amount of ancillary disability benefit payable to participant. I have seen plan terms and procedures address both ways.

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