Who is a "former spouse" for the purpose of QDRO?

[MHW]

Facts:

Divorce was final 20 years ago.  ALL marital assets including all retirement funds were properly divided at the time of divorce, and wife waived all rights to all post-divorce properties in Divorce Decree. Husband remarried 17 years ago, and established a new 401K account (and ERISA fund) with a new employer 5 years  ago. The new wife is the designated and statutory beneficiary to the 401K. ERISA does not allow husband to change beneficiary without the new wife's written consent.

Ex-wife now is suing husband for alimony owed to her and the court awarded her the entire balance of the new 401K. Ex-wife claims that she is the "former spouse" under the QDRO exception and is entitled to the entire balance of the new 401K, although the new 401K is a post-divorce asset and the new wife is the beneficiary. The new wife objects on the basis that this 401K is her marital asset and the Ex-wife has no right to take it. 

Is Ex-wife a "former spouse" to this 401K or simply a "creditor". What the "former spouse" mean in ERISA?

[fmsinc]

You are mixing apples and oranges.  The ex-wife is a "former spouse" for purposes of dividing the 401(k) as "property" and by using a QDRO.  But ERISA allows a QDRO to be used by a "former spouse" to collect child support and alimony arrears.  

26 U.S.C. §414(p) provides:

    “(p)  Qualified domestic relations order defined - For purposes of this subsection and section 401 (a)(13)—

        “(1) In general

            “(A) Qualified domestic relations order - The term “qualified domestic relations order” means a domestic relations order—

                (i) which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and

                (ii) with respect to which the requirements of paragraphs (2) and (3) are met.

            “(B) Domestic relations order - The term “domestic relations order” means any judgment, decree, or order (including approval of a property settlement agreement) which—

                “(i) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and

                (ii) is made pursuant to a State domestic relations law (including a community property law).

The new wife is not a "former spouse" and had no rights to the 401(k) unless she becomes wife #2 or if the husband dies and she is his named  beneficiary.  And even if she becomes former spouse #2, if former spouse #1 gets the QDRO to the Plan (and it's approved) before former spouse #2, then former spouse #1 gets the money. 

Here is a link to an old but still valid article from an ABA publication

http://www.americanbar.org/content/dam/aba/publishing/family_law_enewsletter/OrtizArticle.authcheckdam.pdf

He should have paid his alimony. 

But there is more.  Prior to 1-1-19, alimony was tax deductible by the payor and taxable to the payee.  The TCJA of 2017 changed all of that and the payor cannot deduct the alimony and the payee need not pay taxes on it.   Query:  If the judgment for alimony was entered after 1-1-19, will the husband be able to deduct the alimony?  Or will the payment be grandfathered under the old law?  While the original alimony arose under a pre-TCJA court order (or Agreement), the new judgment did not arise until post-TCJA.  There are no regs from the IRS available to answer this question.  

Another question is whether or not the ex-wife is entitled to interest on each and every payment not paid when due - that is, pre judgment interest.  Attached find a Memo I prepared for a matter in Maryland.    

David

Interest on Judgments for Unpaid Child Support and Alimony- 2017.pdf

[MHW]

Thank you for the answer. Wife #2 is the beneficiary. Shouldn’t she have equitable interest in the 401k? He owes but She doesnt owe alimony to wife# 1. Can her equitable interest in the 401k be ignored? How can her interest be protected?

[MHW]

Thank you for the answer. Wife #2 is the beneficiary. Shouldn’t she have equitable interest in the 401k? He owes but She doesnt owe alimony to wife# 1. Can her equitable interest in the 401k be ignored? How can her interest be protected? 

This 401k is clearly the community property for wife #2. It seems unfair to take wife #2’s property to pay ex wife.

[fmsinc]

Sorry.  Being the beneficiary means nothing in this context.  It's like me having a savings account and my current wife is named as the beneficiary if I die.  Creditors can attach the money in the account.  There is no "equitable" interest involved.  That's just not the way it works.  The former spouse is owed alimony arrears.  She can collect that amount by whatever means are available, including garnishing his salary, attaching his solely owned real estate or motor vehicles, or using a QDRO to grab the money in his 401(k) Plan.   We do this all the time.  Your assumption that wife #2 being named as a beneficiary of the 401(k) gives her some rights and  can shield the 401(k) from being taken with a QDRO to satisfy an alimony obligation is just simply wrong.  If it were true, how easy it would be for someone with an alimony obligation to protect his assets. 

Even if he transferred the 401(k) money to his new wife (paying the taxes and penalties if the distribution were prior to age 59 and 1/2) the ex-wife could go after the new wife on the theory that he fraudulently conveyed assets to the new wife to avoid the just claims of creditors.  

Unless there is some wrinkle in your state law to the contrary, the ex-wife will get the money in the ex-husband's 401(k).  You didn't say what state the court proceedings took place, but it pretty much doesn't matter since this issue is a matter of Federal law that preempts state law.  It's right there in the section I cited to you.  

You have used the terms "401(k)" and "QDRO" and I hope you are not just using those terms generically (like Kleenex when it's really Puffs or Scotties) and it is really some other type of plan that would not be covered by ERISA.  

Like I said before, he should have paid his alimony.   I don't see any court taking his side.  The equities are all on the ex-wife's side.  I don't even think the new wife even has what we call standing to set up in court to many any arguments at all.  She is not a party.  If the husband takes out his 401(k) and transfers it to another 401(k) or to an IRA the new wife has no say whatsoever.  It doesn't become the new wife's money until he dies. If the new wife and the husband remains married, she is not a "former spouse".  

Like I said...he should have paid his alimony.  

   

[QDROphile]

To focus solely on your "equitable interest" question, there is nothing resembling a spousal equitable interest under a 401(k) plan, as you may understand "equitable interest" under state law, such as spouses have an equitable interest in a 401(k) plan in a divorce proceeding (meaning that 401(k) assets can be awarded to a spouse as part of the division of marital assets).  Subject to some limited rights that may be, but are not required to be, provided pursuant to plan terms, as far as the 401(k) plan is concerned, the interest of a spouse under a 401(k) plan is limited to being the designated beneficiary in the event of death of the participant unless the spouse consents to having someone else named as designated beneficiary (and maybe a related right to consent to loans from the plan).  The question becomes more complex under pension plans; that is another discussion. As for equitable interests of spouses under state law, the federal law, including law relating to QDROs, preempts state law, subject to QDRO law expressly generally respecting the substance division of the 401(k) assets with respect to spouses (and former spouses) under state domestic relations law.  

[MHW]

The purpose of ERISA is to protect spouse’s marital property interest. It doesn’t allow change of beneficiary. It also allows a “spouse”, not a”former spouse” to transfer her share of interest without divorce. This is consistent with all state domestic relations laws, in fact, ERISA expressly says these rules are pursuant to state domestic relations law. Preemption occurs only if there is conflict. There cannot be preemption if there is no conflict. 

The 401k is wife #2’s marital assets. Allowing ex wife to take it as if the ex wife replaces wife #2 makes no sense. No one can remarry if wife #2’ marital assets are always subject to ex wife to grab and get a windfall after divorce.

the Supreme Court also ruled that beneficiary’s interest cannot be changed. Otherwise, ERISA defeats its purpose to protect spousal rights.

[MHW]

No one is arguing that Husband should take his share of the marital assets to pay for alimony. But should he be allowed to take her share as well? If so, ERISA law would become merely letters without any meaning, because there will be nothing left to the designated beneficiary if husband has right to empty the fund before he dies.

[fmsinc]

You are fighting a losing battle using concepts that have no application to how alimony arrears  are collected using QDROS.  Attached find a publication from the DOL.  You will find that when a Plan Administrator receives a QDRO and is making a determination of whether to approve ("qualify") the QDRO: 

"Based on the foregoing, when a pension plan receives an order requiring that all or a part of the benefits payable with respect to a participant be distributed to an alternate payee, the plan administrator must determine that the judgment, decree or order is a "domestic relations order" within the meaning of section 206(d)(3)(B)(ii) of ERISA -- i.e., that it relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of the participant, and that it is made pursuant to a State domestic relations law by a State authority with jurisdiction over such matters. Additionally, the plan administrator must determine that the order is qualified under the requirements of section 206(d)(3)(B)(i) of ERISA. It is the view of the Department that the plan administrator is not required by section 206(d)(3) or any other provision of Title I to review the correctness of a determination by a competent State authority that an individual is a "spouse," "former spouse," "child," "other dependent" or “surviving spouse” of the participant under state domestic relations law."

So the Plan Administrator is not required to consider any of your arguments...and they don't because they don't want to get drawn into a lawsuit.  

Your belief that the new wife has an "interest" in the husband's 401(k) plan just because she is named as a beneficiary is not correct.  At best she has a possible contingent future expectancy, and that does not rise to the level of an "interest".  There is lots of case law on this subject.  

Sorry the news is bad, but the new spouse has no interest in the 401(k), does not own it, cannot shield her husband's interest in his 401(k) by claiming that she is being victimized somehow.  It's his 401(k) money and is subject to being garnished by use of a QDRO. 

He is the bad guy in this story.  He violated a court order and justice has now prevailed as it should.  I would hope the judge would have assessed prejudgment interest against him and ordered him to pay the former spouse's (ex wife) legal fees as well.  He deserves to be slammed and his ex-wife deserves to be made whole. 

Let this be a lesson - don't mess with the courts and disobey their orders.  The consequences can be very unpleasant.  

QDROs by DOL.pdf

[MHW]

Thanks for the comments.

For the argument sake, wife 2 also has obtained a QDRO to split the asset. But plan administrator refuse to approve. Nothing in ERISA says QDRO cannot be done while still married. Instead, it expressly says a spouse could have a QDRO. I don’t see any reason why she should give up her right. In addition, the property right came from marriage, not from QDRO, which merely a mechanism to split marital assets or pre-existing right to the property.

Also, preparation of QDRO requires a basis. And one of the limitation is QDRO cannot ask for more than husband deserves. Thus, husband has no right to his wife’s property and ex cannot have more that what husband has. Therefore, protection of wife 2’s interest fully comply with ERISA.

Further, if you argue wife 2 has no right to the 401k, then we are getting into the area of constitutional prroperty rights and equal protection. After all ERISA never says that wife 2 has only survivorship rights, but quite the opposite.

mart

[MHW]

I haven’t seen any case law directly on the point, appreciate if you can give me some cites on the issue.?

[fmsinc]

SEE MY RESPONSES IN ALL CAPS BOLDED.

For the argument sake, IF "IFS AND BUTS" WERE CANDY AND NUTS WHAT A MERRY CHRISTMAS WE WOULD HAVE wife 2 also has obtained a QDRO to split the asset. But plan administrator refuse to approve. Nothing in ERISA says QDRO cannot be done while still married. THAT IS TRUE, BUT: (I) A QDRO DISTRIBUTION TO A SPOUSE CAN PRODUCE ENORMOUS ADVERSE TAX CONSEQUENCES - FULL TAXES PLUS 10% EARLY DISTRIBUTION PENALTY IF THE PARTICIPANT IS UNDER AGE 59 AND 1/2; AND,   (II) THE ENDEAVOR TO MAKE A TRANSFER TO A CURRENT SPOUSE UNDER THESE CIRCUMSTANCES WOULD BE VIEWED AS A FRAUDULENT CONVEYANCE TO AVOID THE CLAIMS OF CREDITORS (THE  FORMER SPOUSE) AND WOULD BE SET ASIDE; AND, (III) IN MANY STATES, INCLUDING MY HOME STATE, THE COURT HAS NO AUTHORITY/JURISDICTION TO ISSUE A QDRO EXCEPT IN CONNECTION WITH THE ENTRY OF A JUDGMENT OF ABSOLUTE DIVORCE, THE ENTRY OF A QDRO FOR A CURRENT SPOUSE THAT IS NOT INCIDENT TO THEIR DIVORCE IS NOT POSSIBLE EVEN THOUGH THEORETICALLY POSSIBLE UNDER  ERISA.  Instead, it expressly says a spouse could have a QDRO. I don’t see any reason why she should give up her right.  In addition, the property right came from marriage, not from QDRO, which merely a mechanism to split marital assets or pre-existing right to the property.  THE CONCEPT OF MARITAL PROPERTY DOES NOT EXIST IN THE ABSTRACT.  IT COMES TO LIFE AND EXISTS ONLY IN CONNECTION WITH A DIVORCE AND AT THAT POINT EVERYTHING THE PARTIES HAVE ACQUIRED DURING THE MARRIAGE IS ON THE TABLE TO BE DIVIDED INCLUDING PENSION AND RETIREMENT BENEFITS.  IF THE HUSBAND AND NEW WIFE DIVORCE, THEN THE NEW WIFE WILL HAVE A CLAIM TO A SHARE OF MARITAL PROPERTY (OR COMMUNITY PROPERTY AS IT IS KNOWN IN  8 STATES).  Also, preparation of QDRO requires a basis. And one of the limitation is QDRO cannot ask for more than husband deserves. I DON'T KNOW WHERE YOU GET THIS.  THE COURT ISSUING THE QDRO DECIDED WHAT THE FORMER SPOUSE WAS ENTITLED TO.  IF YOU WANT TO CHALLENGE IT GO BACK TO THAT COURT. IF THE HUSBAND'S THEORY IS THAT YOUR NEW WIFE HAS SOME INTEREST IN THE 401(K) PLAN, YOU ARE GOING TO LOSE. Thus, husband has no right to his wife’s property and ex cannot have more that what husband has. NICE THEORY, BUT UNTRUE.  Therefore, protection of wife 2’s interest fully comply with ERISA.  WRONG. NEW WIFE HAS NO INTEREST, ONLY AN EXPECTANCY AS A BENEFICIARY IF THE HUSBAND DIES, AND IN MOST STATES THERE IS NO PRESUMPTION THAT IN THE EVENT OF A DIVORCE THE INTEREST OF THE HUSBAND WILL BE HALF OR ANY PARTICULAR PERCENTAGE.  AND IN MOST STATES THE COURT IS NOT EVEN REQUIRED TO RECOGNIZE OR AWARD A MARITAL INTEREST OR RECOGNIZE A NON MARITAL INTEREST.     

Further, if you argue wife 2 has no right to the 401k, then we are getting into the area of constitutional property rights and equal protection. After all ERISA never says that wife 2 has only survivorship rights, but quite the opposite.  EVEN IF WHAT YOU SAID HAS MERIT, WHICH IT DOES NOT, FIRST IN TIME IS FIRST IN RIGHT.  THE FIRST LENDER WHO FILES A DEED OF TRUST/MORTGAGE AT THE COURTHOUSE HAS A FIRST CLAIM ON THE PROCEEDS OF THE SALE OF THE UNDERLYING PROPERTY.  THE SECOND LENDER WHO FILES A SECOND DEED OF TRUST/HELOC STANDS BEHIND THE FIRST PARTY.  IN YOUR CASE IT LOOKS LIKE THE EX-WIFE GOT TO THE COURTHOUSE FIRST SO THERE IS NOTHING LEFT FOR THE 2ND WIFE NO MATTER THAT THEORY YOU WISH TO PUT FORTH. 

 

[fmsinc]

What legal research have you done?   Let me know the state in which the QDRO was issued, and the state in which you now live.   

[MHW]

Actually, the facts are the wife 1 never had a QDRO but a court order to prepare a QDRO. But the QDRO cannot be prepared because it would conflict with Divorce Decreer or the post judgement order. The post judgement order does not require husband to transfer the 401k but only “cash in” to pay the support. Now wife 2 wants transfer the entire balance to her by a QDRO, which has no been prepared for years because there simply is no basis for it.

[MHW]

Correction above: wife 1 wants transfer the entire 401k to her......

[fmsinc]

You have wasted my time by failing to state the fact clearly and correctly.  I have no idea what you are talking about. And it's pretty clear that you did not read the materials I sent to you. 

https://youtu.be/dFaG8sKS3eg

[MHW]

Correction above: wife 1 wants transfer the entire 401k to her......

NY or N.J. I have done extensive research on the situation where the 401k is created and accumulated during wife 2 marriage, and wife 1 wants to transfer the entire balance of the fund leaving nothing to the second family. I could not find any legal support. Even in the cases that the 401k is post divorce asset, which is not subject to equitable distribution but was ordered to pay alimony, none of them involves wife 2.

[MHW]

@fmsinc

Sorry about wasting your time. Your materials does not address the scenario involving a current beneficiary rights under ERISA. I disagree that ERISA beneficiary rights are limited to survivorship. The 401k is not a life insurance, which is not covered by ERISA. Thank you.

[fmsinc]

In fact my dear friend, a company provide life insurance policy IS covered by ERISA.  A little knowledge is a dangerous thing.  

[MHW]

If covered by ERISA, then it must be different from those commercial life insurances that are not covered. What are the differences?

I have limited knowledge about ERISA and am only interested in the spousal/beneficiary rights.

[fmsinc]

Employer provided life insurance is subject to ERISA.  I only know of a few states that have laws permitting a trial court to order a Participant to continue to carry life insurance for the benefit of an Alternate Payee.  See:

Rollins v. Metropolitan Life Insurance Company, 863 F.2d 1346 (7th Cir., 1988) - Indiana

 Head v. Metropolitan Life Insurance Company, 449 N.W.2d 449 (Minn., 1990)

Perkins v. Stuemke, 223 Ill.App.3d 839, 585 N.E.2d 1125, 166 Ill.Dec. 103 (1992) 

Life insurance in generally agreed to by the parties to guarantee that the obligations of the agreement are fulfilled, e.g. payment of alimony and child support, college for the children, and also as a potentially cheaper substitute for a defined benefit plan.  (Premiums are usually less than the actuarial cost of a defined benefit plan and the proceeds are tax free.)

I have spent 32 years involved in preparing QDROs and studying ERISA as well as the laws and regulations governing all of the other Federal, State, County, City, and International agency Plans.  

There are over 980,000 pension and retirement plans in the USA.  About 960,000 are covered by ERISA.  

You would do well to advise your client to work out a settlement.