Made pursuant to a State domestic relations law...

[J Simmons]

IRC § 414(p)(1)(B)(ii) and ERISA § 206(d)(3)(B)(ii)(II) require that the order be “made pursuant to a State domestic relations law (including a community property law)” relating to "provisions of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant" (IRC § 414(p)(1)(B)(i) and and ERISA § 206(d)(3)(B)(ii)(I)).

May the PA accept at face value an order issued by a divorce court that cites to a state statute on domestic relations or community property? or must the PA dig deeper to make sure that the order complies with the wording of such statute? or yet deeper to determine if the order complies with the statute as interpreted by the state's courts?

Situation is one where a PA I'm advising has received an order that recites the state's community property division statute. However, the order also purports to make the ex-spouse the 'surviving spouse' of benefits that the employee will accrue after the divorce (a provision as to which a PA cannot reject the order--IRC § 414(p)(5)(A) & ERISA § 206(d)(3)(F)(i)), but under state community property the state's supreme court has ruled (not in this specific situation) is an 'impermissible invasion' of the employee's separate property (property rights earned after the divorce).

Does the PA accept the order as issued under state community property law because that's what it says on the face of the order that it is issued under, and thus follow ERISA's requirement to treat the ex-spouse as the 'survivor spouse' to the extent so specified in the order?

Or does the PA reject the order as not meeting the IRC § 414(p)(1)(B)(ii) and ERISA § 206(d)(3)(B)(ii)(II) because it is not appropriately entered pursuant to the authoritative interpretation of the statute recited in the order?

[Peter Gulia]

John Simmons, you’re way smarter than the average bear, so the following sources – some ERISA Advisory Opinions and one court decision – should give you enough background.

At least one court [see my last source below] has interpreted the “pursuant to … law” phrase to mean little more than “under color of law” or “court having jurisdiction”. Further, the Labor department doesn’t mind if a plan administrator “looks the other way” on many DRO conditions as long as the result “feels” comparable to what domestic-relations law would or could provide.

A State domestic-relations law includes community-property law “only insofar as such laws would ordinarily be recognized by courts in determining alimony [sic], property settlement[,] and similar orders issued in domestic relations proceedings.” A community-property division after the nonparticipant’s death (and not incident to a divorce or other family-status proceeding) is not made under domestic-relations law. ERISA Adv. Op. 90-46A (Dec. 4, 1990).

A plan administrator need not review the correctness of a State court’s decisions. A court order described its purported “alternate payee” as the participant’s “former spouse” (and designated her as the “surviving spouse”) despite the fact that the same court’s order annulled the purported “marriage” as void from the beginning. The purported “alternate payee” had been married to the participant for 38 years and bore him six children. Perhaps because these facts were sympathetic, the Labor department struggled to reason away the condition that a QDRO must provide for a spouse or former spouse. (The order didn’t purport to describe its alternate payee as a dependent.) Likewise, the Opinion ignores the condition that an order must provide “child support, alimony payments, or marital property rights[.]” The opinion notes that “the [c]ourt approved the property division prior to granting an annulment ab initio of the marriage between the parties.” But such a fact shouldn’t mean anything because an annulment means that there never was a marriage and there never were spouses.

t is the view of the Department that, to the extent [that] the Order was executed by a court of competent jurisdiction pursuant to Michigan domestic relations law, neither the determination under the Order that Y is a “former spouse,” and thus meets the requirements to be an “alternate payee,” for purposes of section 206(d)(3)(B) of ERISA, nor the determination that Y is a “surviving spouse” for purposes of section 206(d)(3)(F) of ERISA, are [sic] required to be reviewed by the plan administrator.

ERISA Adv. Op. 92-17A (Aug. 21, 1992).

In its opinion about sham “divorces”, the Labor department suggested that a plan administrator’s general fiduciary duty might require it to make some effort to avoid acquiescing in an obvious fraud. ERISA Adv. Op. 99-13A (Sept. 29, 1999).

f the plan administrator has received evidence calling into question the validity of an order relating to marital property rights under State domestic relations law, the plan administrator is not free to ignore that information. Information indicating that an order was fraudulently obtained calls into question whether the order was issued pursuant to State domestic relations law, and therefore whether the order is a “domestic relations order.” …. When made aware of such evidence, the administrator must take reasonable steps to determine its credibility. If the administrator determines that the evidence is credible, the administrator must decide how best to resolve the question of the validity of the order without inappropriately spending plan assets or inappropriately involving the plan in the State domestic relations proceeding. The appropriate course of action will depend on the actual facts and circumstances of the particular case and may vary depending on the fiduciary’s exercise of discretion. However, in these circumstances, … appropriate action could include relaying the evidence of invalidity to the State court or agency that issued the order and informing the court or agency that its resolution of the matter may affect the administrator’s determination of whether the order is a QDRO under ERISA. Appropriate action could take other forms, depending on the circumstances and the fiduciary’s assessment of the relative costs and benefits, including actual intervention in or initiation of legal proceedings in State court. The plan administrator’s ultimate treatment of the order could then be guided by the State court or agency’s response as to the validity of the order under State law. If, however, the [plan] administrator is unable to obtain a response from the court or agency within a reasonable time, the [plan] administrator may not independently determine that the order is not valid under State law and therefore is not a “domestic relations order” … but should rather proceed with the determination of whether the order is a QDRO.

This last quoted sentence tells us the Labor department’s view that ERISA plan administrators should review a court order almost exclusively for offense against the plan’s terms, without considering the truth or falsehood of the assumed facts or findings that support the order. Although the Labor department wanted to help the plan administrator combat fraudulent divorces, it didn’t want to break the line that State courts decide State-law issues and plan administrators decide plan/ERISA issues. The Labor department’s guidance tells a plan administrator to rely on the status and characterization findings stated by a court order, even if they’re openly suspect or wrong.

The background of this Advisory Opinion was the United Air Lines plan’s exposure to a use of a divorce as a way to defeat a § 401(k) plan’s distribution restriction and extra 10% tax on early distributions. After UAL’s attorney received the Opinion, the plan administrator informed the domestic-relations judges; the State courts changed nothing.

At least one court has found that a plan administrator need not determine whether a court order violates State law. “ERISA does not require, or even permit, a pension fund to look beneath the surface of the [state-court] order.” It observed that the fact that an order violates State law does not cause the order to fail to qualify as a QDRO. The court further explained a reason to defer to plan administrators’ need for administrative certainty:

ERISA’s allocation of functions--in which state courts apply state law to the facts, and pension plans determine whether the resulting orders adequately identify the payee and fall within the limits of benefits available under the plan--is eminently sensible. Pension plan administrators are not lawyers, let alone judges, and the spectacle of administrators second-guessing state judges’ decisions under state law would be repellent. Unsuccessful litigants would refile their briefs from the state litigation with pension administrators, in the hope that lightning may strike as laymen review the work of judges. Far better to let the states’ appellate courts take care of legal errors by trial judges. Pension plans are high-volume operations, which rely heavily on forms, such as designations of beneficiaries. Administrators are entitled to implement what the forms say, rather than what the signatories may have sought to convey. [citation omitted] So, too, plans may mechanically implement orders from state courts. Reviewing the substance of these orders would increase the costs of pension administration (costs ultimately passed on to beneficiaries), increase the error rate (to the detriment of participants and their loved ones), and cause delay as plans carried out the additional inquiries (again to the detriment of beneficiaries, who may need the income quickly).

Blue v. UAL Corp., 160 F.3d 383, 22 EBC (BNA) 1941 (7th Cir. 1998).

One last point: an order that’s a QDRO for ERISA purposes isn’t necessarily a QDRO for Internal Revenue Code purposes. A plan administrator should tax-report a QDRO distribution following its evaluation of whether the order is a QDRO within the meaning of 26 U.S.C. § 414(p).

[J Simmons]

Wow, Peter, thanks for the thorough response. It's exactly what I needed to know. Answers like those you provide are what make this board so valuable.

[david rigby]

Wow is right.

One last point: an order that’s a QDRO for ERISA purposes isn’t necessarily a QDRO for Internal Revenue Code purposes. A plan administrator should tax-report a QDRO distribution following its evaluation of whether the order is a QDRO within the meaning of 26 U.S.C. § 414(p).

Can you elaborate for those of us who are idiots?

[Steelerfan]

Wow is right.

One last point: an order that’s a QDRO for ERISA purposes isn’t necessarily a QDRO for Internal Revenue Code purposes. A plan administrator should tax-report a QDRO distribution following its evaluation of whether the order is a QDRO within the meaning of 26 U.S.C. § 414(p).

Can you elaborate for those of us who are idiots?

Yes please, I've never heard of a QDRO for ERISA not being a QDRO for the Code or vice versa. Are you saying it's like the prohibited transactions rules, where at least the statutory language in that case is different thus making different interpretations more plausible?

[Peter Gulia]

Sorry for the wait (clients who keep the lights turned on come first).

Federal courts’ decisions under ERISA § 206(d)(3) include several cases in which a Federal court ordered a plan administrator to pay an amount (or provide something) based on a State court’s order that the court found was a QDRO for ERISA purposes. Some of these opinions found a QDRO when an employee-benefits practitioner would find (and sometimes a plan administrator had decided) that the order was not a QDRO. (For discussion, we’ll ignore the worse problem of California and its Federal court, which said that a State court can have jurisdiction to declare that an order is a QDRO.)

If a proceeding is about an ERISA claim (and not a dispute about a Federal tax assessment or claim), usually the Secretary of the Treasury or the Commissioner of the Internal Revenue Service is not a party to the court proceeding; most involve competing claimants, the plan, and the plan administrator. Even if collateral estoppel arguably might preclude the participant or the alternate payee from asserting a tax position that’s inconsistent with the Federal court’s decision on a similar issue, it won’t preclude the IRS if it wasn’t a litigant in that proceeding. While a Federal court’s finding on whether an order is a QDRO under 29 U.S.C. § 1056(d)(3) could be argued as some information that’s relevant to whether the order is a QDRO under 26 U.S.C. § 414(p) for Federal income tax purposes, it doesn’t necessarily control the plan administrator’s or payer’s tax-reporting.

Without more, I’d feel uncomfortable advising a plan administrator to tax-report a payment as a QDRO distribution if the plan administrator’s evaluation did not conclude that the order is a QDRO within the meaning of IRC § 414(p). (That’s not to say a plan administrator wouldn’t do it; I just wouldn’t advise it.)

This discomfort has at least some sense because ERISA’s QDRO statute and the Internal Revenue Code’s QDRO statute have different legislative purposes and effects. ERISA affects whether an amount is paid to a nonparticipant or isn’t; IRC § 414(p) affects also whether a payment is an exception to the general rule against pre-retirement distribution, whether an extra 10% tax on a before-59½ distribution applies, and which person recognizes income because of the payment. Some of the cases in which the Labor department has helped find an ERISA QDRO as a way to let a plan pay money to a nonparticipant are less sympathetic if one considers income-shifting and even the non-application of a tax.

This tax-reporting question is a difficult one because Form 1099-R and its Instructions don’t readily recognize that a retirement plan might pay an amount in ambiguous circumstances. This question gets easier if a plan pays on an order when no one (not even the State court) finds that the order is any kind of QDRO: this sometimes happens with a non-ERISA plan.

Let’s all hope that we don’t need to think about these questions.

[J Simmons]

Note, in Hawkins v Commissioner of Internal Revenue, 86 F3d 982, 998 n5 (10th Cir 1996), quoted approvingly in Hamilton v Washington State Plumbing & Pipefitting Industry Pension Plan, 433 F.3d 1091 (9th Cir 2006), because the QDRO rules are codified both in the labor code and the tax code and "the two parallel provisions were created by the same legislative act and contain precisely the same language, they are interpreted identically."