QDRO in this new age

[pmacduff]

Ok - I thought perhaps there was a thread regarding this, but cannot seem to find one exactly on point...

I have a client here in NY who has an employee residing in MA. Said employee was married under MA law to a partner of the same gender. Said marriage is now dissolved. Employee's partner's attorney has prepared a DRO and forwarded it to the Plan Administrator for review. The DRO seems to be in order as far as the necessary information required by the client's plan.

This specific issue is NOT addressed in the Plan QDRO procedural section nor any other section of the Plan.

Can/should/must the plan recognize the marriage and therefore the DRO? Are there any other special issues that the client needs to be aware of?

all opinions appreciated.

[david rigby]

Search for DOMA.

[QDROphile]

QDROs are creatures of federal law and federal law (because of DOMA) does not recognize same sex marriage. The would-be alternate payee would not be recognized as a spouse or former spouse, so it seems that the order would not qualify. And since QDROs are an exception to the anti-assignment rule, the plan cannot expand on its own the scope of domestic relations orders to provide for an assignment to another person.

[Peter Gulia]

Even if a plan's administrator assumes that 1 U.S.C. 7 makes a same-sex spouse not a spouse within the meaning of ERISA 206(d)(3)(B)(ii), it might further consider whether the proposed alternate payee might be a dependent of the participant. In doing so, a plan's administrator might look closely at the text of the domestic-relations court's order.

[mbozek]

Ok - I thought perhaps there was a thread regarding this, but cannot seem to find one exactly on point...

I have a client here in NY who has an employee residing in MA. Said employee was married under MA law to a partner of the same gender. Said marriage is now dissolved. Employee's partner's attorney has prepared a DRO and forwarded it to the Plan Administrator for review. The DRO seems to be in order as far as the necessary information required by the client's plan.

This specific issue is NOT addressed in the Plan QDRO procedural section nor any other section of the Plan.

Can/should/must the plan recognize the marriage and therefore the DRO? Are there any other special issues that the client needs to be aware of?

all opinions appreciated.

Since the non employee cannot be recognized as an Alternate Payee under DOMA there could not be any alienation of the employee's benefits under a QDRO or a rollover to the APs IRA. However, if the plan permits, the partner of the employee could be designated as a beneficiary of the employee's benefits that would be paid when a distribution event occurs, e.g. termination, but the amount paid could be taxable to the employee under the assignment of interest rule and could not be rolled over because the partner is not a spouse.

Stay tuned- Congress is considering whether to repeal DOMA and there is litigation in MA over the validity of DOMA.

[pmacduff]

thank you for all the good information and direction. I have passed a lot of info on to the client for review. They are consulting their attorney.

The client would like to help the participant without, of course, jeopardizing the Plan. The plan allows for loans and does not have any restrictions on the purpose of the loan, so we're thinking perhaps the participant could take a plan loan and be able to make the payment to the "ex" that way.

[BG5150]

Is a loan a good option? What if the participant takes a $20,000 loan and pays the proceeds the ex. Then, three months later, the participant gets downsized? Now the outstanding loan amount is taxable to the participant. Talk about rubbing salt in the wound: paying the taxes on money you pay the ex!

(On a side note, what would be the taxation on the money paid to the ex? There are no tax forms generated for a loan.)

[pmacduff]

The original DRO that was prepared called for the recipient to pay the taxes. But I guess there would be no taxes to the ex if the participant goes the loan route. Perhaps the participant could take a smaller loan in that case?!?!? The loan idea was mentioned as it seems to be the only option available for this participant to get funds out of the Plan in order to pay the ex. The participant works for a pretty healthy company and the company is extending themselves to help this employee - so long term employment is assumed...as much as it can be....

[BG5150]

The DRO may say the ex is due money from the plan, however, the order cannot be qualified. Therefore, I would think, the ex is NOT entitled to anything from the plan, and taking a loan from the plan to pay the ex would be a side deal between the two, not addressed in the DRO.

[Guest Sieve]

I assume participant is not entitled to a distribution based on age 59-1/2.

[pmacduff]

Thanks Sieve but the Plan doesn't allow in-service until NRA which is 65 (participant isn't 59 1/2 yet anyway). The client was trying to find a way that the participant would not have to pay taxes (since the order stated that the AP was responsible for that). Therefore the loan option was raised.

After my own research and the helpful answers posted here - I know this is not a qualified order I'm just trying to help my client & the participant find a workable solution.

[K2retire]

After my own research and the helpful answers posted here - I know this is not a qualified order I'm just trying to help my client & the participant find a workable solution.

The best solution is probably to start over with the property settlement. Since this asset cannot be transferred, what can the ex get of similar value instead? Many couples get hung up on each getting half of every asset rather than each getting half of the total.

[Peter Gulia]

pmacduff, if your client is the plan's administrator (the employer), does it have a special reason to care that administering the plan according to its terms and ERISA might mean that the nonparticipant gets nothing from the retirement plan?

Yes, failing to treat a State-law spouse as a Federal-law spouse might seem unfair, or at least inconvenient, but the United States' Congress chose that policy. Why should it become one employer's duty to resolve the law's incongruity?

If an administrator decides that a court order is not a QDRO (because it is not a DRO) and sends appropriate writings to the participant, the nonparticipant, and each's attorney, a claimant would be on notice that he or she must pursue further reviews under the plan's procedures, and, after exhausting the plan's procedures, pursuing court proceedings.

[pmacduff]

FiduciaryGC...very cynical I must say...(i.e. "reason to care")

Our clients are all in the small plan market. Some feel an obligation toward their employees to be helpful if they can. This Sponsor (who is also the Plan Administrator) does not intend to do anything that would jeopardize the Plan. They simply want to try and do right by assisting the employee if possible.

I agree with K2retire, we often see divorcing participants (and their attorneys) get all hung up on dividing up the retirement plan assets. On the other hand I have had a few of those clients/attorneys who say hey - you take the house, you take the cars, etc. and you each keep your retirement plans... I like those!

[masteff]

(On a side note, what would be the taxation on the money paid to the ex? There are no tax forms generated for a loan.)

At first I was going to say it'd be a non-taxable transfer to the ex as part of the property settlement... but I've now confused myself since I doubt DOMA would recognize the settlement for Federal purposes which might make it a gift and therefore subject to gift tax limitations (but that's entirely on the payor and not the recipient). (but I confess I've not read up on the subject as my state was one of those that passed a state equivalent of DOMA)

[Peter Gulia]

I apologize for anything that suggested cynicism about the employers or people involved in trying to seek a fair conclusion to what should be a straightforward divorce division.

I too have observed that many people of employers, small and big, will extend themselves very far (within the law) to seek a fair result in the face of unfair law. My observation is that those well-intentioned efforts are unfair burdens for the employers and their people involved. At least sometimes, it ought to be okay for an employer not to feel burdened with finding a solution to an unfair law.

For those who are seeking a creative solution, one possibility is in my earlier post's point that the text of a court order might support an administrator's finding that the same-sex alternate payee is the participant's dependent.

[pmacduff]

I did not mean to throw stones about the cynicism and I thank you Peter for your comments - the client's attorney has also indicated that the participant/ex & lawyers for both may want to explore the "dependent" AP route as well for resolution.

The problem may tie back to the taxation issue, though, as I don't think the dependent pays the taxes (by the nature of being a dependent?).

Thank you all for your insight on this issue and thoughtful replies!

[BG5150]

It might be time to get an ERISA attorney involved.

[pmacduff]

Well, we already know that the current order is invalid with regard to DOMA, so I don't really see where the client would pay for an ERISA attorney to reinforce that notion. As Plan Adminsitrator the client plans to notify all applicable parties that the order is not a valid order and include all of the information regarding "why".

Perhaps the participant and/or ex-spouse can be referred to an ERISA attorney. The participant's account, however, is not that large (less than 30K) and the $$ going to the ex is not much (less than 1/2).

[mbozek]

Well, we already know that the current order is invalid with regard to DOMA, so I don't really see where the client would pay for an ERISA attorney to reinforce that notion. As Plan Adminsitrator the client plans to notify all applicable parties that the order is not a valid order and include all of the information regarding "why".

Perhaps the participant and/or ex-spouse can be referred to an ERISA attorney. The participant's account, however, is not that large (less than 30K) and the $$ going to the ex is not much (less than 1/2).

if the ex's share is much less than 15k the employee should be able to find a way to transfer other assets under MA law which will avoid the need to expend $thousands in legal fees, e.g., transfer a non taxable asset at the after tax value of the plan benefits.

[Peter Gulia]

There is a Ninth Circuit opinion that treated as both a DRO and a QDRO a court order that provided quasi-marital property to a person who never was the participant's spouse and could not be the participant's dependent within the meaning of IRC 152.

Owens v. Automotive Machinists Pension Trust, 551 F.3d 1138 (9th Cir. 2009), aff’g 40 Employee Benefits Cas. (BNA) 2382, 2385–2386, 2007 U.S. Dist. LEXIS 7797 (W.D. Wash. Jan. 19, 2007).

At least the second prong of the court's analysis (about the meaning of the word "dependent") was, if not wrongly decided, at least wrongly or incompletely reasoned. Nonetheless, a lawyer could develop an argument based on some statutory construction and interpretation ideas that the opinion did not consider.

If the plan's administrator denies the nonparticipant's claim, perhaps the potential alternate payee can find a lawyer who would (without a fee) help pursue courts' reviews.

The nonparticipant's action might pursue at least two arguments:

(1) the proposed alternate payee is the participant's dependent under State law and ERISA 206(d)(3)(B)(ii)(I), even if he or she is not a dependent under IRC 152;

(2) 1 U.S.C. 7 is unconstitutional.

Matt Bozek's suggestion is practical if there are sufficient assets that can be so divided. Some couples lack $15,000 in savings outside of retirement plans. Again, how much a retirement plan's administrator should or shouldn't get involved in helping divorcing parties redo their divorce negotiation is a question for the administrator.

[Guest ERISAisFUN]

First time poster; long time reader, here.

Has there been any movement on this issue since the Obama administration's decision to stop defending DOMA? I apologize if I missed a different thread on this topic. Thanks!

[mbozek]

First time poster; long time reader, here.

Has there been any movement on this issue since the Obama administration's decision to stop defending DOMA? I apologize if I missed a different thread on this topic. Thanks!

Dispite the Obama administration's announcement that it will not defend DOMA in court DOMA is still enforced under federal laws, including the tax law, social security and immigration laws to limit benefit eligibility only to spouses of the opposite sex regardless of whether the same sex partners are legally married under the laws of 6 states- NY,MA,VT,NH, CT, IA and DC.

All that has transpired is that the federal government will not defend DOMA in courts where a federal employee who is legally married in a state that allows same sex couples to marry claims benefits rights for the same sex spouse. My understanding is that DOMA will still be enforced against a federal employee whose relationship is recognized under state law as a civil union or domestic partnership such as NJ.

The interesting Q is what if a federal employee who lives in NJ is married to a partner in NY. Will NJ recognize the marriage?

Also employers are free to ignore DOMA. Many large corps provide health benefits to same sex partners and some provide pension benefits although the benefits are taxed to the employee.