State Court TRO

[Guest Grumpy456]

X and Y are married. X files for divorce. Y is a participant is an ERISA retirement plan. X's lawyer obtains a state court TRO ordering the plan sponsor not to make any distributions to Y. The TRO is perpetual--i.e., it continues to apply until withdrawn by the court. The TRO may or may not be a DRO, but definitely isn't a QDRO. Doesn't ERISA preempt such state court TROs?

[david rigby]

Could this issue go away if X's lawyer reads this, and elects to use correct procedures?

http://www.dol.gov/ebsa/Publications/qdros.html

[J Simmons]

X and Y are married. X files for divorce. Y is a participant is an ERISA retirement plan. X's lawyer obtains a state court TRO ordering the plan sponsor not to make any distributions to Y. The TRO is perpetual--i.e., it continues to apply until withdrawn by the court. The TRO may or may not be a DRO, but definitely isn't a QDRO. Doesn't ERISA preempt such state court TROs?

ERISA does preempt a state court TRO attempting to preclude an ERISA plan from paying benefits out to an EE. If necessary--that is, X's lawyer cannot be convinced as David Rigby suggests--then the plan might need to file in federal court for protection from the state court, its TRO and otherwise.

[QDROphile]

The TRO is probably a domestic relations order and has the effect of restricting distribution and loans for a reasonable period pending resolution of qualification. If a DRO that looks like it wants to be qualified is not forthcoming within a reasonable time, the TRO will be determined to be not qualified and of no effect. The plan administrator should handle the TRO according to the QDRO procedures, and the notices should spell out what the plan administrator expects to do and when.

[Peter Gulia]

Imagine that a retirement plan’s written procedure “for determining the qualified status of domestic relations orders” [ERISA § 206(d)(3)(G)(i)(I)] includes putting an administrative “stop” on a participant’s plan account when the plan administrator has received a court order that appears to identify or relate to the participant’s plan account. Imagine that this “stop” begins with the day that the order was received, and ends with the day that the plan administrator signed the communication stating its decision that the order is not a QDRO (or, if the plan administrator decides that the order is a QDRO, with the day that a segregated subaccount for the alternate payee was established).

The plan administrator receives a State court’s order that does not ask the plan to pay anything; rather, the order asks the plan not to pay anyone.

Imagine that the plan administrator’s DRO reviewer reads this order on the day that it arrived and in a few minutes decides that it is not a QDRO. In a letter dated, signed, and mailed that same day, the plan administrator informs the participant, the other litigant, and both attorneys that the order submitted is not a QDRO.

A few days later, the participant submits a claim for a hardship distribution based on medical expenses. Assume that this claim seems regular and is supported by written evidence attached to the claim. Assume that all of the facts stated in the claim are such that a plan administrator that performed with the skill, care, prudence, and diligence required by ERISA § 404(a) would not have known that the participant’s claim is false. The participant’s claim is for a “hardship” expense of $10,000. Applying a “gross-up” for Federal, State, and local income taxes, the plan pays the participant $15,000.

When the would-be alternate payee later discovers that the participant “cleaned out” a significant portion of her account, his lawyer threatens to pursue legal remedies.

What legal claim (even if wrong) might the would-be alternate payee assert?

Assuming that the would-be alternate payee is unwilling to allege facts inconsistent with those described above, is there any legal claim that would survive the plan’s and its administrator’s motions to dismiss?

Does ERISA preempt all State-law claims so that the would-be alternate payee’s only claims must be grounded on Federal law?

If the would-be alternate payee wants to allege that the plan administrator breached an ERISA fiduciary duty, what duty might that be and what facts would show that the administrator breached it?

[J Simmons]

Imagine that!

Claims against the plan for benefits could be brought in state court or federal court, but could be removed by the plan to federal court.

Claims against the plan administrator for breach of fiduciary duty would have to be brought in federal court (exclusive jurisdiction).

Claims against the participant/spouse could be brought in the state divorce court for taking steps to subvert the property division then going on. The TRO would better have been directed at the participant/spouse, so that upon violation the state divorce court could hold the participant/spouse in contempt.

[mphs77]

Shakespeare was right....

First thing we do is kill all the lawyers.

[Guest mjb]

Imagine that!

Claims against the plan for benefits could be brought in state court or federal court, but could be removed by the plan to federal court.

Claims against the plan administrator for breach of fiduciary duty would have to be brought in federal court (exclusive jurisdiction).

Claims against the participant/spouse could be brought in the state divorce court for taking steps to subvert the property division then going on. The TRO would better have been directed at the participant/spouse, so that upon violation the state divorce court could hold the participant/spouse in contempt.

What would be the basis for a claim by the AP if the plan administrator had properly rejected the DRO thereby negating any right to benefits by the AP at the time of the distribution? The only party who was injured by the fraud is the plan, not the AP, so how does the AP have standing to sue the plan under ERISA in either federal or state court?

Under 414(p)((1)(A)(i) a valid QDRO must create or recognize the AP's rights to, or assign to the AP the employees rights to benefits. An order preventing the payment of benefits to the employee cannot meet the requirements of a QDRO.

The APs remendy is against the employee under state law.

From the Senate Report on REA:

Of course the provisions of the bill do not affect any cause of action that the alternate payee may have against the participant. For example, if an order is determiend to be qualified after the 18 month period, the alternate payee may have a cause of action under state law against the participant for amounts paid to the participant that should have been paid to the alternate payee.

[J Simmons]

What would be the basis for a claim by the AP if the plan administrator had properly rejected the DRO thereby negating any right to benefits by the AP at the time of the distribution? The only party who was injured by the fraud is the plan, not the AP, so how does the AP have standing to sue the plan under ERISA in either federal or state court?

Dunno. Maybe in QDROphile's "reasonable time" for a QDRO-looking DRO to come forward. My comments were strictly procedural, not substantive.

[Guest mjb]

What would be the basis for a claim by the AP if the plan administrator had properly rejected the DRO thereby negating any right to benefits by the AP at the time of the distribution? The only party who was injured by the fraud is the plan, not the AP, so how does the AP have standing to sue the plan under ERISA in either federal or state court?

Dunno. Maybe in QDROphile's "reasonable time" for a QDRO-looking DRO to come forward. My comments were strictly procedural, not substantive.

From the Senate Finance Committee Report on REA:

"If the plan administrator determines that the order is a non qualified order, or after the 18 month period has expired has not resolved the issue of whether the order is qualified, the segregated amounts are paid to the person who would have received the amounts if the order had not been issued."

[Guest Sieve]

If the TRO specifies some but not all of the necessary elements of a QDRO, then the plan administrator should have an obligation to "separately account for the amounts . . . which would have been payable to the alternate payee during such time period if the order had been determined to be a [QDRO]" since this would be occurring "[d]uring [a] period in which the issue of whether a [DRO] is a [QDRO] is being determined." (IRC Section 414(p)(7)(a).)

I can't believe, based on EBSA's pub on QDROs, that the PA can ignore the work that is being done by the parties to produce a QDRO by simply determining that a specific document is not yet a QDRO and thus the account no longer must be segregated for the benefit of the alternate payee. That just doesn't compute for me.

[K2retire]

Sieve, your logic seems reasonable to me. On the other hand, it doesn't seem reasonable that this order that is not a QDRO can perpetually restrict the distribution of funds either.

[QDROphile]

The Tise case inteprets the law to include a reasonable time for resolution of qualification defects. The Plan administrator cannot determine that an order is not qualfied and then distribute the account the next week, even though that is what the statute could mean. Given that, the plan administrator should be practical about its handling of the TRO. The plan is not served by being dragged into a dispute even when it can win on technical points. Holding back a distribution for a reasonable time under the circumstances is less dangerous than paying.

[IRA]

I agree with QDROphile on all counts here. Somebody should be paying him well for this advice.

[Peter Gulia]

Looks like I succeeded in sparking some discussion.

Many practitioners suggest that a plan's administration procedures build in some go-slow features, including some of the ideas that QDROphile mentioned.

Has anyone experience complaints from the opposite direction - that a plan administrator's go-slow resulted in a participant not getting a benefit that he or she was entitled to under the plan, or suffering some investment loss or other harm because of a delay.

Varying my hypo described above, what if the medical expenses and hardship claim were legitimate? Imagine that lacking money to pay the past-due medical expenses resulted in the participant's bankruptcy and the loss of her second job.

A fiduciary's duties include administering a plan according to its terms. (A "policy" decision about whether a retirement plan should or shouldn't have a hardship provision doesn't belong to a fiduciary.) Is there some tension between conflicting fiduciary duties: a duty to protect the plan from the expense of a would-be alternate payee's claim that the plan paid a participant's claim too hastily, and a participant's claim that the plan didn't pay quickly enough.

Please understand that I'm not "taking sides" or advocating a particular view. Rather, I'm hoping to widen my experience by learning from yours.

[J Simmons]

The Tise case, mentioned by QDROphile, suggests that maybe the statute provides an 18 month delay before payout to the employee may be made.

There, Tise was trying to get a DRO that qualified. First, in 1991 a show cause order issued by the divorce court was presented to the ERISA plan. It was not a QDRO as it merely required notice (from the union, not the plan) to Tise's lawyer before paying benefits to the employee.

A 1994 writ of execution follwed, specifying that $209,988.84 from the employee's benefits be paid by the plan to satisfy a judgment in Tise's favor. "At this point, Tise had only to obtain a QDRO, compliant with the statutory requirements, to enforce the interest created by the 1994 state court order." The plan, it was noted by the 9th Circuit, "should have determined whether the 1994 order was a QDRO, and, if the Plan concluded that it was not, allowed Tise to return to state court to secure a proper order--precisely what Tise was trying to do when [the employee] died."

The employee died in early 1995. "At that time, the Plan was obliged to segregate the funds that would be due to Tise if her order was ultimately deemed to be a QDRO within the 18-month period for which ERISA provides. Only if Tise could not obtain an order determined to be a QDRO within 18 months would [the] death benefit become payable" to the employee's death beneficiary.

"Because Tise had placed the plan on notice of her interest in [the] pension plan proceeds before [the employee's] death, the fact that he died before the QDRO issued is immaterial. Tise obtained her QDRO well within the 18-month period the statute provides for segregating funds for the alternate payee's benefit. Because she is therefore entitled to a share of [the employee's] pension plan proceeds as determined by the state court pursuant to state law, we affirm the district court's distribution of $323,438.85 from [the employees'] death benefit to Tise."

[Peter Gulia]

John Simmons' mention of the 18-month period and how the Tise court understood that period opens at least two more questions:

For a typical temporary restraining order that doesn't specify a payment but rather asks for the absence of a payment, when does the 18-month period end? The statute says that the 18-month period "begin with the date on which the first payment would be required to be made under the domestic relation order." ERISA 206(d)(3)(H)(v). If the order would not require a payment, does the 18-month period never begin? Or does it begin on the day that the plan administrator received the order?

ERISA 206(d)(3)(H)(iii) states in part that "f within the 18-month period ... it is determined that that the order is not a qualified domestic relations order, ... then the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order." Does this mean that once the plan administrator decides that an order is not a QDRO the plan administrator may (not must) approve a participant's claim for a distribution (if there is one, and if it's proper)?

[J Simmons]

As Peter's questions point out (Post #17), it was not pretty what the 9th Circuit did in Tise from a statutory interpretation point of view. If anything, it could hamstring the plan administrator in just the way that Peter's earlier posting (Post #15) draws out. "Damned if you do, damned if you don't". Sounds like the grist of litigation.

[QDROphile]

Tise did not cover the issue of the staututory period very well, if at all, but it gives a workable framework and a lot of power to the fiduciary. The fiduciary has to decide what is reasonable and inform the parties so they can get with it or go to the fiduciary and explain why more time is needed. The 18 month period starts in most cases when the participant requests a loan or distribution. The fiduciary's notice can be taken to the state court to get the court to move, though not at the direction of the fiduciary.