That a retirement plan required no spouse's consent for a distribution before the participant's death meant a surviving spouse gets no portion of a $2.7 million benefit.

[Peter Gulia]

That a retirement plan required no spouse's consent for a distribution before the participant's death meant a surviving spouse gets no portion of a $2.7 million benefit.

The participant's claim was processed on a Friday; he died on Sunday.

Wengert Eighth Circuit.pdf

[Lou S.]

Since he filed for divorce I'm guess she wouldn't have given spousal consent but I don't see where spousal consent was in question in this case.

As I understand it participant requested a distribution and a wire was sent on Friday, he died on Sunday, and the funds were credited to his account on Monday.

The spouse was claiming she was beneficiary and entitled to the $2.7M payment but the plan argued he had no accrued benefit as of Friday when the funds left.

The court sided with the Plan.

Could she have Joined the Plan that a (Q)DRO was coming  freezing his account from payment after he filed for divorce but before he took a distribution?

[RatherBeGolfing]

a bit of a misleading title as she was not a surviving spouse when the distribution was made...  She was simply a spouse with no claim to the assets.

What if it was a $10,000 account balance.  Anyone want to argue that the participant shouldn't be able to take a distribution even though no QDRO had been issued and they were still married?

[Peter Gulia]

RBG is right that on the day of the distribution the spouse was then a spouse rather than a survivor.  And yes, the bigger amount dramatizes the consequences about what the law and the plan provide.

This story caught my attention because a few days ago some of us on BenefitsLink were musing about how ERISA section 205's protection for a spouse might vary according to whether the plan has or lacks annuity provisions.

The Congress that in 1984 set rules to try to get spouses to jointly consider joint needs might not have fully considered how many participants would have a right to a distribution without a provision for one's spouse.

We recognize that the plan administrator's and the Federal courts' decisions are correct.  Rather, I suggest only that the story illustrates some consequences of Congress's legislative trade-offs and public-policy choices in the Retirement Equity Act of 1984.

 

[ERISAAPPLE]

The key finding here is that the money was in fact out of the trust at the time the participant died.  I wonder where the money was on Saturday and Sunday.  It could easily have been in the general assets of the plan's custodian or directed trustee.  It could just as easily been held in the trust.  The opinion does not dig down to that granular level, and it appears the administrative record may not have either.  Maybe it did.  

[david rigby]

Peter, just curious: are you suggesting/advocating a "solution", whether now or in the future?

[CuseFan]

When REA 1984 was passed to provide for spousal protection, defined benefit plans were still very prevalent. Now, with DCPs being the primary source of most people's retirement, it may be appropriate to revisit additional protections. I don't know if QJSA rules for DCPs is the answer, but in this instance - forget about the filed for divorce part - participant could have taken LS and jumped town with his mistress before his wife even knew he and his retirement funds were gone.

[jpod]

CuseFan:  How is that different than any other marital asset which an unfaithful spouse is in a position to run away with?

I don't know what the thinking was in 1984, but my guess was that the focus was on DB plans that already would have had the annuity structure built in.  What I never could understand is why they extended the requirement to DC pension plans, which, I think, rarely offered an annuity option. 

I don't know what the answer to the public policy question is, but an annuity requirement doesn't seem to be a practical answer as the additional burden on plan administrators is likely to be immense.    

 

[ERISAAPPLE]

1 hour ago, jpod said:

CuseFan:  How is that different than any other marital asset which an unfaithful spouse is in a position to run away with?

With any other marital asset, the family law judge can give the spouse a remedy.  

[Larry Starr]

Every one of our DC plans (EVERY ONE) provides the J&S as a normal form.  In 35 years, we have had 2 people actually purchase an annuity (with thousands of lump sum distributions with proper waivers). The bigger problem with DC plans that allow lump sums with no annuity is the requirement that he spouse be the beneficiary for 100% of the account. That means that the plan is being designed to specifically disinherit children of a prior marriage!

When we point that out to new clients where that is an issue, they are often quite angry at their prior plan designer who never discussed that issue with them.  Second marriages for high income business owners seem more often to be the rule today than the exception! Atleast the J^&S option allows for 50% to go to other beneficiaries than the third trophy wife! (politically incorrect statement acknowledged).

Just, FWIW.

[ERISAAPPLE]

Larry,

Why don't the owners just get a QDRO if they want a portion to go to the children of the prior marriage?  That seems easier than requiring spousal consent for every distribution.

[jpod]

ERISAAPPLE:  The judge can provide a remedy with respect to retirement plan assets too.

[ERISAAPPLE]

JPOD, I'm not sure that is always true.  This case here seems to illustrate one example.    

[RatherBeGolfing]

@ERISAAPPLE

This case did not seek a remedy against the spouse, it sought a remedy against the plan.

 

[Bird]

From a plan administration standpoint my reaction to this was "yeah, so?"  It's exactly what I would expect.

From a policy standpoint I guess it is interesting and has obviously generated much discussion.  The differences at this point really do seem random and not justified by any policy goals.

As far as J&S provisions when they are not required, we do not include them and have removed them where possible.  The hassle factor of the waivers at time of distribution is just too much for the very rare instance where you can't accomplish what is needed with a spousal benefit waiver, and even then, you could always add J&S provisions if it was that important. 

[jpod]

Yes, I don't understand at all the voluntary insertion of J&S as the normal form.  If you want people to have the opportunity to procure an annuity, they can do so via rollovers to an individual retirement annuity. 

[ERISAAPPLE]

2 hours ago, RatherBeGolfing said:

@ERISAAPPLE

This case did not seek a remedy against the spouse, it sought a remedy against the plan.

 

You may be right.  I do know the Kennedy case in a footnote said the court took no position on whether the spouse can bring a claim against the other spouse.  

[Luke Bailey]

I worked on a case somewhat similar to this years ago. In that case, the participant had dissipated the funds within a matter of 24 hours, so understandably the surviving spouse was looking to the plan and alleging breach of fiduciary duty, etc.

In this case, Wengert, it can be inferred that the family trust to which the ESOP wired the funds gives the surviving spouse a reduced or no benefit. My guess is that the funds in the family trust, once out of the ESOP, would come under the jurisdiction of state law to sort out. Arguably the ERISA result, here, is a good one. A state court may have authority to determine the surviving spouse's rights, if any, to all or a portion of the distribution and will be able to base its decision on a variety of factors (e.g., length of marriage, identities of beneficiaries of family trust) than would the federal court applying ERISA and the terms of the plan document.

[XTitan]

This is from a preliminary ruling in the case and shows the plaintiff's original position.  

The decedent died on September 14, 2014. At the time of the decedent's death, a divorce action between the plaintiff and the decedent was pending in state court. As part of the divorce action, the state court issued an injunction preventing the plaintiff or decedent from transferring or disposing of any property, including the decedent's interest in the Majors Plastics' 401(k).  The plaintiff alleges the decedent transferred $371,449.25 from the Majors Plastics' 401(k) to Rajendran in her capacity as personal representative or trustee on May 29, 2014, in violation of the injunction.  Additionally, the plaintiff alleges two days prior to the decedent's death, on September 12, 2014, the decedent "took steps" to transfer the full value of the ESOP, $2,721,739.37, into an account held by the Trust.  The plaintiff alleges the ESOP Committee improperly transferred the ESOP funds to Rajendran on September 15, 2014, subsequent to the decedent's death.  The plaintiff alleges she was the proper beneficiary of the ESOP as the decedent's surviving spouse and made a demand for payment on the ESOP Committee pursuant to the terms of the ESOP.  The plaintiff alleges her claim was denied and she has exhausted her administrative remedies.

[Luke Bailey]

Just guessing, but for some reason the plaintiff must not have had a good remedy under state law against the family trust. If that were the case, I don't see how the ESOP administrator would have been the appropriate person to help her.

[non deceased estate holder]

 

[Larry Starr]

On 4/4/2018 at 9:43 PM, ERISAAPPLE said:

Larry,

Why don't the owners just get a QDRO if they want a portion to go to the children of the prior marriage?  That seems easier than requiring spousal consent for every distribution.

You've got to be kidding! Allowing for a simple beneficiary designation that allows 50% (instead of 100%) to go to the current wife and the other 50% to go to anyone you want is way simpler than getting a QDRO, not to mention the expense and hassle. 

[Larry Starr]

On 4/5/2018 at 9:32 AM, jpod said:

Yes, I don't understand at all the voluntary insertion of J&S as the normal form.  If you want people to have the opportunity to procure an annuity, they can do so via rollovers to an individual retirement annuity. 

You miss the point; we would be happy to do away with the J&S requirements IF such an action did not also require that the spouse be the beneficiary for 100% of the death benefit.  THAT is the problem, and we see it as a bigger problem than the J&S waiver.  Having done this for over 30 years (and all the year since REA when this was imposed), I can only say that getting the spousal consent on the waiver has been a non-issue.  Try talking to your multi-married clients and informing them that they have disinherited their children from 50% of their retirement benefit (when they could have avoided that) and see the reaction. It has been (as expected) startling over the years.

[Larry Starr]

On 4/5/2018 at 9:27 AM, Bird said:

From a plan administration standpoint my reaction to this was "yeah, so?"  It's exactly what I would expect.

From a policy standpoint I guess it is interesting and has obviously generated much discussion.  The differences at this point really do seem random and not justified by any policy goals.

As far as J&S provisions when they are not required, we do not include them and have removed them where possible.  The hassle factor of the waivers at time of distribution is just too much for the very rare instance where you can't accomplish what is needed with a spousal benefit waiver, and even then, you could always add J&S provisions if it was that important. 

Again, it is NOT the J&S provisions that we want (we would prefer they go away); it is the MANDATORY 100% death benefit to the current spouse rather than only 50% that is the problem. See my other response on this issue.

[Peter Gulia]

David Rigby, I don't advocate or even suggest any legislative choice.

For me what's interesting is that while all plans governed by ERISA's Part 2 give a spouse at least some control over a plan's death benefit, a vast many plans give a spouse (of an undivorced, unseparated marriage) almost no control regarding a retirement benefit.

Whatever society considers the appropriate degree of control to provide a spouse regarding the participant's retirement plan benefits, it seems perhaps odd to provide more control about the fortuity of death than is provided for a retirement plan's primary benefit.

 

[Bird]

23 hours ago, Larry Starr said:

On 4/5/2018 at 9:27 AM, Bird said:

As far as J&S provisions when they are not required, we do not include them and have removed them where possible.  The hassle factor of the waivers at time of distribution is just too much for the very rare instance where you can't accomplish what is needed with a spousal benefit waiver, and even then, you could always add J&S provisions if it was that important. 

Again, it is NOT the J&S provisions that we want (we would prefer they go away); it is the MANDATORY 100% death benefit to the current spouse rather than only 50% that is the problem. See my other response on this issue.

Well, I get that but "again" my point was that waiving the J&S provisions 100s or even 1000s of times to get what you want for a handful of people is an awful hassle, and if you "need" it for an instance or two you could always just add J&S provisions to a PS/401k plan when necessary.

[Larry Starr]

4 hours ago, Bird said:

Well, I get that but "again" my point was that waiving the J&S provisions 100s or even 1000s of times to get what you want for a handful of people is an awful hassle, and if you "need" it for an instance or two you could always just add J&S provisions to a PS/401k plan when necessary.

I"ll try just one last time. 1) The "hassle" is a non-issue. It is just one more piece of paper in the distribution forms that requires signature.  No one seems to have a problem getting a notary (and in fact, I do it for free if they want to come into the office). 2) Ask your business owner multi-married client how he feels about his plan being set up to disinherit his children from his prior marriage.  If you don't think that bothers lots of folks in that situation who happen to be the boss, you are just missing the boat.

[jpod]

So, Larry, do I have this right:  the owner is willing to take the risk that his spouse will force him to take a joint and survivor annuity at retirement in exchange for the certainty that if he croaks first his kids from the prior marriage will get at least 50%?  That sounds like a lousy trade-off to me.

[ERISAAPPLE]

I would add that if the owner is concerned about the subsequent spouse automatically disinheriting the children from the prior marriage, why would the owner be satisfied giving those kids only 50%?  I still say the QDRO is the way to go.  They are just not that expensive or difficult to obtain if the owner is doing it for his or her kids.  The ex doesn't even have to be involved in that QDRO.    

[Larry Starr]

37 minutes ago, jpod said:

So, Larry, do I have this right:  the owner is willing to take the risk that his spouse will force him to take a joint and survivor annuity at retirement in exchange for the certainty that if he croaks first his kids from the prior marriage will get at least 50%?  That sounds like a lousy trade-off to me.

In literally thousands of distributions over the years, we have had exactly TWO distributions where annuities were requested and in neither case was it a recalcitrant spouse that caused the problem.  I think that's the equivalent of worrying about getting hit by a meteorite; it just does not happen. HOWEVER, clients do die and they would be very unhappy to find that they CAN'T leave 50% of their account to their children (and it is usually from a prior marriage that is the issue).  The "trade off" is trivial; the result is far from it.

[Larry Starr]

36 minutes ago, ERISAAPPLE said:

I would add that if the owner is concerned about the subsequent spouse automatically disinheriting the children from the prior marriage, why would the owner be satisfied giving those kids only 50%?  I still say the QDRO is the way to go.  They are just not that expensive or difficult to obtain if the owner is doing it for his or her kids.  The ex doesn't even have to be involved in that QDRO.    

The owner is REQUIRED BY LAW to give his new spouse 50%; that is ALL the law requires.  By designing the plan to eliminate the annuity, you are now MANDATING that 100% goes to the current wife.  It's not an issue if he's satisfied with only 50%; it's an issue that you are taking the 50% he is allowed to give them by law and eliminating that possibility.  I don't know why some people are having such problems understanding this.  In 100% of the situations where this has come up (and it's a number of time a year that we see this situation), the owner is always happy to be able to name the kids from the prior marriage as beneficiaries.  And we've NEVER had an annuity forced on a participant; NEVER.

[ERISAAPPLE]

3 minutes ago, Larry Starr said:

The owner is REQUIRED BY LAW to give his new spouse 50%; that is ALL the law requires.  By designing the plan to eliminate the annuity, you are now MANDATING that 100% goes to the current wife.  It's not an issue if he's satisfied with only 50%; it's an issue that you are taking the 50% he is allowed to give them by law and eliminating that possibility.  I don't know why some people are having such problems understanding this.  In 100% of the situations where this has come up (and it's a number of time a year that we see this situation), the owner is always happy to be able to name the kids from the prior marriage as beneficiaries.  And we've NEVER had an annuity forced on a participant; NEVER.

The owner is not required by law to give the new spouse 50% if a QDRO already awards it to an AP.  

[jpod]

But, Larry, I am confused.  If in 99.9% or more of the cases the spouse will consent to waive the QJSA, which I think is what you said, then why wouldn't the spouse consent to the designation of other death beneficiaries for 100% of the account balance?    

[ERISAAPPLE]

JPOD, waiving the J&S is different from giving all or a portion to somebody else.  

[jpod]

ERISAAPPLE:  I am not following you.  Obviously Larry is referring to the fact that a 50% QPSA leaves the other 50% up for grabs at death prior to the ASD.  My point is simply this:  If the owner has enough faith in his/her spouse that she/he will consent to waive the QJSA, then why isn't there the same degree of faith that the spouse will consent to the designation of some other death beneficiary(ies)?    

[ERISAAPPLE]

jpod, if the non-participant spouse consents to the QJSA waiver, the money goes to the participant spouse: the same household.  If the spouse consents to a different beneficiary, the money goes to a different household.  

[Bird]

18 hours ago, Larry Starr said:

I"ll try just one last time. 1) The "hassle" is a non-issue. It is just one more piece of paper in the distribution forms that requires signature.  No one seems to have a problem getting a notary (and in fact, I do it for free if they want to come into the office). 2) Ask your business owner multi-married client how he feels about his plan being set up to disinherit his children from his prior marriage.  If you don't think that bothers lots of folks in that situation who happen to be the boss, you are just missing the boat.

We'll have to disagree about the hassle factor, I think it is very real.  But I take offense that you say I am not serving my clients well.  I fully understand all of the implications and I said, twice, that if anyone needed J&S provisions we could just add them.

[Larry Starr]

5 hours ago, Bird said:

We'll have to disagree about the hassle factor, I think it is very real.  But I take offense that you say I am not serving my clients well.  I fully understand all of the implications and I said, twice, that if anyone needed J&S provisions we could just add them.

Bird: No offense intended and I'm looking for where I said that and can't find it.  But if you are NOT reviewing this issue with every one of your clients (and it doesn't sound like you are), I do believe you will be missing situations where your clients would be extremely unhappy that they are forced into disinheriting their children from a prior marriage.  Yes, it's good in those circumstances that you can add back the J&S; I'm suggesting it is a significant issue for many small business owners where the incidence of multiple marriages (and divorces!) are common. 

We can disagree about the hassle factor; we just don't see it and we're the ones that have it in every plan.  Take care.

[Larry Starr]

20 hours ago, jpod said:

ERISAAPPLE:  I am not following you.  Obviously Larry is referring to the fact that a 50% QPSA leaves the other 50% up for grabs at death prior to the ASD.  My point is simply this:  If the owner has enough faith in his/her spouse that she/he will consent to waive the QJSA, then why isn't there the same degree of faith that the spouse will consent to the designation of some other death beneficiary(ies)?    

I missed this earlier:

.... because the waiver of the J&S still leaves the assets as marital assets subject to division in a divorce if that comes up.  We are talking about a DEATH situation, not a living situation (which is what a waiver of J&S involves).  

[ERISAAPPLE]

1 minute ago, Larry Starr said:

I missed this earlier:

.... because the waiver of the J&S still leaves the assets as marital assets subject to division in a divorce if that comes up.  We are talking about a DEATH situation, not a living situation (which is what a waiver of J&S involves).  

The participant would be alive whether the spouse is consenting to a waiver of the J&S or designating a different beneficiary.  I just think a non-participant spouse would more likely consent to a waiver of the J&S than the designation of a different beneficiary.  It is just my gut telling me that; I have no demonstrable evidence to verify my opinion.   

[Larry Starr]

It is in the spouse's interest to allow the lump sum distribution at the time of distribution during the life of the participant versus mandating a J&S annuity.  Again, with over 30 years, it has NEVER (yes NEVER) been an issue in over many thousands of distributions.  The only two annuity purchases over the years have been for other reasons.

It is not something that a new husband wants to ask a new wife to waive their legally mandated death benefit in favor of children of a prior marriage (or, for that matter, a prior spouse - EVEN BETTER EXAMPLE). That is where the problem arises.  You really think that non-participant spouse will "gladly" sign such a form?  Can't you see the fireworks that will raise? Don't you really think the participant would prefer to just name a beneficiary for the 50% of the proceeds that he is allowed to do in an annuity plan?

Do you see the issue?

[jpod]

Larry, I see your point, but only in a case where the client has been consulted and thought it through.  However, when this discussion started you said, or at least I think you said, that you do this automatically in all your plans.  Am I misremembering? 

[Larry Starr]

22 hours ago, jpod said:

Larry, I see your point, but only in a case where the client has been consulted and thought it through.  However, when this discussion started you said, or at least I think you said, that you do this automatically in all your plans.  Am I misremembering? 

No, you have it right.  Because..... there are also employees in the same situation who we have no idea about and we don't keep the beneficiary designations (the employer does).  So, the J&S inclusion allows them to name a beneficiary other than their current spouise for 50% of the death benefit; but a non J&S plan does not.    I will say it again: we find the annuity waiver a trivial issue in 99.999% of the cases.  FWIW

[John Feldt ERPA CPC QPA]

Or, perhaps it could be better to ask that new 'spouse' to waive their rights in favor of the prior children. Could it be better for the business owner to find out now if fireworks will be the result, than to find out later on other perhaps much more important issues than just the money in the plan?

Boy, this sure would be a fun/memorable topic to consult with sponsors each time you take over a plan or start up a new plan!

[ESOP Guy]

On 4/9/2018 at 1:40 PM, Larry Starr said:

I"ll try just one last time. 1) The "hassle" is a non-issue. It is just one more piece of paper in the distribution forms that requires signature.  No one seems to have a problem getting a notary (and in fact, I do it for free if they want to come into the office). 2) Ask your business owner multi-married client how he feels about his plan being set up to disinherit his children from his prior marriage.  If you don't think that bothers lots of folks in that situation who happen to be the boss, you are just missing the boat.

It has been a long time since I had to prepare a DC plan's distribution forms with J&S provisions but I seem to recall the hassle was more then just one piece of paper.  I seem to recall the forms had to be a lot longer.  There had to be examples of how much the various annuity amounts were.  Which meant we had to take the person's balance at the time and find a good annuity factor to get the monthly amount.  That had to be merged on to the form.  It seemed like we had to have all kinds of warnings about how those amounts were just estimates just in case the actual annuity bought was different- which seem certain. 

Maybe with better computers now then back then we would find an easy enough automated way but my memory was it was a pain to create complaint forms to send to people. 

I would add the few times someone actually asked fro annuity.  Then you had to do a bunch of fiduciary work to make sure the insurance company picked was a good one.   Not being a lawyer it was never clear to me how much liability the plan had if the company went bankrupt and the annuity became worthless.  But that risk seem to hang in the air when talking about those purchases. 

I for one see nothing but hassle. 

[Larry Starr]

2 minutes ago, ESOP Guy said:

It has been a long time since I had to prepare a DC plan's distribution forms with J&S provisions but I seem to recall the hassle was more then just one piece of paper.  I seem to recall the forms had to be a lot longer.  There had to be examples of how much the various annuity amounts were.  Which meant we had to take the person's balance at the time and find a good annuity factor to get the monthly amount.  That had to be merged on to the form.  It seemed like we had to have all kinds of warnings about how those amounts were just estimates just in case the actual annuity bought was different- which seem certain. 

Maybe with better computers now then back then we would find an easy enough automated way but my memory was it was a pain to create complaint forms to send to people. 

I would add the few times someone actually asked fro annuity.  Then you had to do a bunch of fiduciary work to make sure the insurance company picked was a good one.   Not being a lawyer it was never clear to me how much liability the plan had if the company went bankrupt and the annuity became worthless.  But that risk seem to hang in the air when talking about those purchases. 

I for one see nothing but hassle. 

You are somewhat correct; we include 8 pages of boilerplate explaining annuities which no one reads and just throws out.  There is only a one page additional form that needs to be completed; all the rest is boilerplate disclosure.  it does NOT have to be exact and you can use examples of how different annuity amounts would work.  You only have to have the exact numbers if someone asks for annuity quotes.  Again, we have had exactly two of those in over 30 years, and there are a couple of very good firms that provide quotes for that kind of thing if you need it.  One phone call or email gets you what you need.  Typically we are looking for top rated  life insurance firms, and no more than the first two levels are ever considered.  Not much of a  liability issue frankly.

None of that boilerplate is merged onto the waiver form.

Any better?

Larry.

[Larry Starr]

21 hours ago, John Feldt ERPA CPC QPA said:

Or, perhaps it could be better to ask that new 'spouse' to waive their rights in favor of the prior children. Could it be better for the business owner to find out now if fireworks will be the result, than to find out later on other perhaps much more important issues than just the money in the plan?

Boy, this sure would be a fun/memorable topic to consult with sponsors each time you take over a plan or start up a new plan!

In new plans, we don't talk about the issue, we just do the J&S.  In take over plans where they have no J&S, when I'm walking them through my document checklist, I say we're going to change to having an annuity form and explain the 100% death benefit to the spouse versus 50% and having one additional form to sign.  If any employee ever gets into a difficult situation with a spouse, at least they can leave 50% of their account to their kids (current or prior) or their sibling or their parents or anyone else.  It really has NEVER been an issue; maybe a 2 -3 minute conversation at most and then we are onto talking about why we are not going to have loans in the plan!

[John Feldt ERPA CPC QPA]

Okay, perhaps hoping to stoke up those fireworks each time would be having too much fun at work. I really enjoy fireworks though.

[ESOP Guy]

1 hour ago, Larry Starr said:

You are somewhat correct; we include 8 pages of boilerplate explaining annuities which no one reads and just throws out.  There is only a one page additional form that needs to be completed; all the rest is boilerplate disclosure.  it does NOT have to be exact and you can use examples of how different annuity amounts would work.  You only have to have the exact numbers if someone asks for annuity quotes.  Again, we have had exactly two of those in over 30 years, and there are a couple of very good firms that provide quotes for that kind of thing if you need it.  One phone call or email gets you what you need.  Typically we are looking for top rated  life insurance firms, and no more than the first two levels are ever considered.  Not much of a  liability issue frankly.

None of that boilerplate is merged onto the waiver form.

Any better?

Larry.

Like I said I was commenting from memory.  Maybe the firm I worked for made it harder then it needed as I don't think we ever used generic examples.  That would have made it easier.