Commence of Alternate Payee Benefit pursuant to Defined Benefit Plan

[fmsinc]

Husband in his mid 50s no longer working for his former employer.  He has a defined benefit plan with them but has not yet elected to commence his benefits although he is eligible to do so.  In the Judgment of Divorce, the trial court ordered that the wife will receive a fixed monthly payment from the Plan starting when the husband reaches age 65.  This is incorporated into a QDRO - shared interest allocation, and sent to the Plan Administrator for approval.  The is no option in the Plan to pay an Alternate Payee prior to the Participant being in pay status.    

Note that the husband may decide not to elect to commence his benefits at age 65.  There is nothing in the Judgment of Divorce or the QDRO requiring him to do so, and he refuses to say that he will do so, and may not.

Note that neither the Judge or the two attorneys (NOT ME) had a clue what they were doing.     

Note that survivor annuity benefits are not involved.   

Note that the parties are not amicable.  

The Plan Administrator, acting through its Third Party Administrator, Fidelity, says that the commencement of an Alternate Payee's benefits must coincide with the commencement of the Participants benefits and cannot be qualified if the conditioned is based on his age, or her age, or at a fixed date, because that makes the commencement date uncertain if he has not actually commenced his benefits.   

I have prepared QDRO where, for example, the husband is 65 and retired and the wife is 55 and still working, and both have DB retirement plans.  They agree on reciprocal if, as and when payments to the other, but such payments shall not commence until the wife reaches age 65.  QDROs accepted.    

Any thoughts, workarounds.  Don't suggest alimony since husband will say no, and because that TCJA of 2017 has made the payment of alimony non-deductible by the payor and non-taxable to the payee, so there would have to be a reduction in alimony to account for his lost tax benefit. 

Thanks, 

David 

[QDROphile]

Can you clarify what you mean by "workaround"?  You imply that a rewrite of the order is not feasible, but that seems to be what is called for.  Does anyone have any idea of what the parties, in their usual lack of understanding, expect?  

What is NRA and ERA for the plan?

You used the term "shared interest" and I am familiar only with "shared payment" (which is what you seem to describe) and "separate interest" (which has a generally understood meaning even though there is no such thing as a true separate interest).

Has the QDRO fiduciary determined the order is qualified?  Is the QDRO fiduciary Fidelity?

I assume you are aware that Fidelity has imperfect (to be generous) regard for compliance with QDRO law.

[fmsinc]

"Shared payment" and "separate interest" are defined at - 

 https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/appendixddraftingaqualifiedqdro

...and at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/qdro-overview.pdf   - see attached.

In my neck of the woods phrase "shared interest" and "shared payments" mean the same thing. 

We are not dealing with a separate interest situation.  The Judgment of Divorce does not award a separate interest and to do so would effectively create a survivor benefit for the Alternate Payee that would continue beyond the death of the Participant.  And a separate interest tot he Altenate Payee would not revert to the Participant is the Alternate Payee predeceases.  Survivor benefits were not awarded.  The Participant will not agree to a separate interest allocation so that is not an acceptable option/workaround.  

The whole point of my post was that Fidelity has NOT qualified the QDRO for the reasons stated.  And I am fully familiar with the problems created by Fidelity.  Fidelity is not the "Plan Administrator", it is the "Third Party Administrator".  

Normal retirement age is 65.  Early retirement age is 55.  Participant is about 56.  He no longer works for the sponsoring company but has no plans to "retire" and commence receipt of his benefits.  

The parties expect that when the Participant reaches age 65 the Alternate Payee will start to receive a fixed amount of $XXXX a month from the Participant's defined benefit plan retirement annuity benefit.  But there is no guarantee that the Participant will elect to commence benefits at or before age 65.  This expectation is based on the language of the Judgment of Divorce.  Fidelity says that the commencement date is therefore uncertain, that the Alternate Payee's benefit  can only commence at the same time the Participant's benefit commences.  The Participant is not in pay status and may not elect commencement prior to age 65...many years away. 

I have not encountered this situation like this in 31 years of preparing QDROs.  I cannot find any law or regs that addresses an uncertain retirement date, even though EVERY, "if, as and when" QDRO is an uncertain date.  In this case the Participant does not want to retire prior to  his age 65 and have the Alternate Payee start to get her share prior to his age 65.  

David

QDROs Booklet from DOL.pdf

[Mike Preston]

13 hours ago, fmsinc said:

"He has a defined benefit plan with them but has not yet elected to commence his benefits although he is eligible to do so. " 

"The Participant is not in pay status and may not elect commencement prior to age 65...many years away. "

And then you also said:

"In this case the Participant does not want to retire prior to  his age 65 and have the Alternate Payee start to get her share prior to his age 65.  "

Which of the first two statements is accurate?

I have no sympathy for the Participant who wants to start receipt of a lifetime annuity and then arbitrarily decides that his ex-spouse should have to wait for hers.  Tough noogies.

Something makes no sense.  If it is a shared payment DRO then AP gets a share of each payment made to the P.  If the DRO says that AP can commence at P's age 65 even if P delays beyond 65 that is simple enough to deterine.   What could be simpler?

[fmsinc]

According to the Judgment of Divorce, the Alternate Payee does not get her payment from the Participant's defined benefit plan until the Participant reaches his 65th birthday.  But if the Participant is not in pay status at that time then there is no benefit to be paid to the Alternate Payee.  An Alternate Payee in a shared payment allocation cannot get her share before the Participant starts to receive his benefit.  In this case the Participant may choose never to commence his benefits and that will deprive the Alternate Payee of her share. If you want to be judgmental, go ahead, but it doesn't solve the problem.

The question is that the TPA will not accept this language in a QDRO :

"The Alternate Payee's shared interest benefit payments shall commence on the date on which the Participant reaches 65 or on the closest payment date to his age 65, and will take prospective effect from and after that date."

The TPA says that since the Participant is not in pay status, this creates an uncertain start date and that the QDRO must say that the Alternate Payee will get her share when the Participant starts to get his share.  But that is not the deal. 

If the Participant wants to commence receipt of his benefit at age 60, the Alternate Payee is not to start to receive her share until the Participant is 65.  So I cannot do what the TPA wants me to do.  

So the question is how to word the QDRO so that it expresses the intention of the parties and is acceptable to the TPA? 

DSG 

[Mike Preston]

I don't think you can.  What they want is not doable.  Imagine there was a similar participant who was single who wanted to start a portion of his benefit at age 65 and wanted the balance of his benefit to be deferred until some unspecified point in time.  Most plans wouldn't allow that.  If this plan doesn't allow it, then this plan is certainly justified in rejecting this DRO.

However, you can get where you want to be by re-crafting the DRO from a shared payment DRO into a separate interest DRO, can't you?  Easy peasy.

You haven't shared the language in the DRO that tells the plan administrator how to define the percentage of the P's benefit that is being re-directed to the AP. That language might need some tweaking.

If you weren't so hung up on using the "if, as and when" construct you would know by now (after 31 years!) that a separate interest construct frequently is used to establish just what you want in this case: P and AP go their separate ways and each can independently deal with the plan without concern as to what the other is doing.

[fmsinc]

Mike Preston: 

In my previous responses to messages posted by other members I stated:  

"We are not dealing with a separate interest situation.  The Judgment of Divorce does not award a separate interest and to do so would effectively create a survivor benefit for the Alternate Payee that would continue beyond the death of the Participant.  And a separate interest to the Alternate Payee would not revert to the Participant if the Alternate Payee predeceases.  Survivor benefits were not awarded. The Participant will not agree to a separate interest allocation so that is not an acceptable option/workaround."

And I set forth of the very simple language of  the relevant paragraph of the QDRO that:

"The Alternate Payee's shared interest benefit payments shall commence on the date on which the Participant reaches 65 or on the closest payment date to his age 65, and will take prospective effect from and after that date."

In have had many Plan Administrator qualify a QDRO where the  Participant is in pay status at the time the QDRO is submitted, and where commencement of the Alternate Payee's share is deferred until a certain date or the happening of an event.  In this case the Participant is not in pay status and may very well elect to commence his benefit until after age 65 or not at all.  To spite the Alternate Payee?  Maybe.  But you don't know all the facts and should not be judgmental.     

This is not something I have encountered in my 31 years or preparing QDROs.  I have researched the matter in Shulman's treatises and other texts dealing with QDROs, on the EBSA website, and on Westlaw, all without success.  

IRC 414(p)(2) sets forth what needs to be in an acceptable QDRO as follows: 

"(2) Order must clearly specify certain facts:  A domestic relations order meets the requirements of this paragraph only if such order clearly specifies—
(A) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order,
(B) the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,
(C) the number of payments or period to which such order applies, and
(D) each plan to which such order applies."

It would seem logical that the number of payments or periods to which such order applies could be defined by setting forth a starting date (in this case, the Participant's age 65), and an ending date (death of Participant or death of the Alternate Payee as set forth elsewhere in the QDRO).  But no luck in finding a case or regulation saying that.   

David  

[Mike Preston]

Some day you will wake up to the fact that what you are describing *IS* a separate interest DRO.  Until then you are doomed to run in circles. Do you really not see the difference between a DRO being implemented after a P is in pay status and a DRO being implemented not only before a P is in pay status but simultaneoously acknowledging that P may elect to defer commencement for many years?

BTW, P can't delay forever because 401a9 would force commencement at age 70 and 1/2.

[david rigby]

Yeah, what Mike said.

Quote

The Participant will not agree to a separate interest allocation so that is not an acceptable option/workaround.  

Ya know, the judge might be able to resolve that impasse.

[fmsinc]

The divorce was granted in another state 13+ years ago and did not reserve jurisdiction to modify the Judgment of Divorce with provided unequivocally for a shared allocation of benefits.  Even without the benefit of your vast wisdom on the subject, my first suggested solution was to implement a separate interest allocation of the Participant's benefits.  He said, "No" for the reasons set forth below.  End of discussion.  The first thing we learn in law school is "don't fight the facts".  

You cannot take a shared interest agreement and turn it into a separate interest without making major changes - (i) the fact that a shared allocation is based on the life of the Participant while a separate allocation is based on the life of the Alternate Payee; (ii) the fact that if the Alternate Payee predeceases the Participant, the amount she is receiving will not revert to the Participant; (iii) the fact that the Alternate Payee can commence receive of her benefit prior to instead of contemporaneously with the Participant when the age 50 rule is met;  (iv) the fact that in a separate interest allocation the Alternate payee will not benefit from the Participant's future promotions or increases in benefits (very much like the NDAA 2016 amendments applicable to divorces entered after December 23, 2016, with respect to a Military retirement that takes place after December 23, 2016 (frozen benefit treatment); (v) the fact that in my case, where there are no survivor annuity benefits, the Participant in a separate interest allocation will not have the ability to name a new spouse to receive a full survivor annuity, and more.

When I present CLE seminars under the auspices of my State and County Bar Association, suggest that my students follow a shared (one canoe) v. separate (two canoe) analysis: 

  (i)  Use shared (one canoe) when -
                > The participant is in pay status, or
                > It’s a government plan - CSRS, FERS, Military, MSRPS, where there is no option for a separate interest, or
                >The case is litigated and you failed to opt out of Family Law Article 8-204(b)(2), or
                >The Participant wants a reversion upon Alternate Payee’s death, or
                >The Post-retirement benefit survivor annuity benefit “cost” is not a factor, or
                >The Alternate Payee does not care about naming a survivor annuitant of his/her share, or
                >The Participant is not concerned that Alternate Payee will share in future increases, raises, supplemental benefits and subsidies (even though such increases in benefits will be offset by a reduction in the coverture fraction as post martial time increases the denominator), or
                >The Alternate Payee wants a share of future increases, raises, supplemental benefits and subsidies (even though such increases in benefits will be offset by a reduction in the coverture fraction as post marital time increases the denominator).
        (ii) Use separate (two canoes) when - 
                >The Participant is not in pay status, or
                >It’s a defined contribution plan, an individual account plan (or hybrid plan), or an employer sponsored defined benefit plan, or where the plan requires selection of a separate interest allocation; or
                >The Alternate Payee wants an early payout (see Age 50 Rule discussed elsewhere), or 
                >The Alternate Payee wants to name beneficiaries, or [Note that most defined contribution plan do not permit the Alternate Payee name a beneficiary to receive her share of the Participant’s benefit following her death.]
                >The post-retirement survivor benefit cost is more than the actuarial cost for payout over the Alternate Payee’s life expectancy; or
                >The Participant is concerned that Alternate Payee will share in future increases, raises, supplemental benefits and subsidies, (even though such increases in benefits will be offset by a reduction in the coverture fraction as post martial time increases the denominator), or 
                   >Alternate Payee does not want to share in future increases, raises, supplemental benefits and subsidies, (even though such increases in benefits will be offset by a reduction in the coverture fraction as post martial time increases the denominator). 

If this were as easy as you seem to suggest, I would not be on this blog looking for somebody who has a good solution.  I haven't heard that yes and suspect that there is not solution.  It may be that the Alternate Payee will just have to wait until the Participant retires and, after he has failed to make payments of her share (the underlying obligation is HIS - it is implemented by the Plan) sue, get a judgment and try to collect it.  And she will have to do this periodically since the court is not going to grant a judgment for payment not yet due and with respect to which there is not a default.   

[QDROphile]

The QDRO fiduciary has determined that the order is not qualified, so a new order will have to be prepared.  Everybody has to accept that if they want to execute a property division.  It is the job of some lawyer who is competent to convince everybody else that the order has to reflect an amended award (however that may be accomplished under local law and procedure) that is capable of being qualified. In that quest, the lawyer is aided by IRC section 414(p)(3)(A).  The lawyer may also make use of "actuarial equivalence" and that may be a difficult concept for the others to follow, but we have assumed a competent lawyer for the circumstances.  Or maybe an actuary needs to be engaged to power the concept through despite the inability of others to comprehend/believe.  I am in no way suggesting that fmsinc is incompetent; fmsinc is trying to rectify the accomplished exercise of incompetence.

I think the answer is a separate interest QDRO and screw whatever crazy, vindictive, emotional stuff is going on with not wanting to have survivor benefits in the picture  The pension is property.  It has a value.  That value is divided in the divorce is some way (maybe not 50/50).  Once the value is divided, get over it.  You don't get any last stab at the ex-spouse by dying. * Another tool is that if this solution is not accepted, other alternatives are going to be more expensive and uncertain.  That tool only works with whoever is paying to effect the property settlement, but I bet both parties are paying in some way to some degree no matter what.

If the participant does not like that, then start the pension payments and craft a shared payment QDRO that splits only the lifetime payments (form of benefit could ordered by the court, but it would have to be enforced by contempt because the plan administrator will not be bound to accept an election by other than the participant).

An actuary might tell you otherwise, but there are some things you cannot do with a domestic relations order.   See IRC section 414(p)(3).  And the Rolling Stones would confirm that you can't always get what you want.

I might recommend something else if someone know he or she is dying, but that comes with a lot of other complications.

[QDROphile]

My post was entered without seeing the fmsinc post immediately preceding it.  Upon cursory review, I think you have to fight the facts, if the facts are what people want or do not want.  I have not enough experience with state domestic relations law to address the potential box of an unamendable property award and binding the terms of the domestic relations order strictly to the terms of the award.  It seems wrong that an impossible outcome is locked in despite agreement by the parties to change it in order to achieve some resolution rather than suffer a completely ineffective judgment. 

[fmsinc]

If you knew the full back story you might side with the Participant's desire not to give his ex-wife a dime and to take full advantage of the trial judge's lack of understanding of how pension law works and the incompetence of the ex-wife's attorney.   So those of you are judgmental and who fight the facts are doing so with a total lack of appreciation for what motivates the parties in hotly contested divorce case.  Wishing that the parties would be reasonable is not a solution.  You cannot look at QDRO issues in isolation.   

It is often the case that the parties will agree, for example, that the Alternate Payee will pay for the cost of the survivor annuity, only to find out that the Plan will not allocate that cost but will merely  take it "off the top".  What do you do then?

Courd the parties in this case sue the Plan Administrator or Fidelity as TPA?  In Federal Court or in the local State Circuit Court?  Incur enormous legal fees and years of delay?  With an uncertain outcome?  Note that I don't represent either party.  I am just the poor slob asked to prepare a QDRO.  I had no involvement anything that preceded the request that I get invoved.  

The question is whether or not the trial judge who ordered the Participant to pay $XXX from his defined contribution plan intended to limit the source of the payment to the Plan benefits, or intended to impose the obligation to pay on the Participant with the Plan benefit being merely the source of the payment.  I suspect the latter.  In this case decided before Howell v. Howell, Dexter v. Dexter, 105 Md.App. 678, 661 A.2d 171 (1995) [DOA after Howell], the husband signed an Agreement giving his ex-wife a portion of his military retired pay. Thereafter he waived a portion of that retired pay in order to receive tax free VA disability benefits.  The CSA held that the husband had breached the Agreement and that the measure of damages was what the ex-wife would have received but for the breach.  Not addressed was the need for the ex-wife to file multiple suits from time to time in order to obtain judgments on which she could execute, and the difficulty of collecting such judgments.  The CSA accepted the fact that the wife could not receive a portion of the husband’s VA disability payment and decided the case solely on a breach of contract basis. 

Maybe the solution is the Gilmore approach.  See attached Memo.  

There are many cases where people contract for an outcome that is impossible to accomplish by reason a mutual mistake of law or fact.  There are cases in my jurisdiction where both parties agree that the court made a mistake and the court could not fix it.  See Leadroot v. Leadroot, 147 Md. App. 672, 810 A.2d 526 (2002). 

 So lighten up.  You have all concerned by belief that while I should be able to prepare a shared interest QDRO that complies with ERISA, the folks at Fidelity are the problem.  The Alternate Payee is going to have the wait until the husband reaches age 65 and then sue the Participant for the payment sue regardless of the source of the payments - from the Participant's pension benefit if he is in pay status, or from the Participant's pocket.  

David

Gillmore Approach - 5-23-19.pdf

[RatherBeGolfing]

15 minutes ago, fmsinc said:

If you knew the full back story you might side with the Participant's desire not to give his ex-wife a dime and to take full advantage of the trial judge's lack of understanding of how pension law works and the incompetence of the ex-wife's attorney.   So those of you are judgmental and who fight the facts are doing so with a total lack of appreciation for what motivates the parties in hotly contested divorce case. 

No one is being judgmental here.  If anything, people in this forum (and this thread) tend to look at these things without judgment or emotion.  Most of the regulars in here are professionals who work on the plan side of things.  We could care less what the reasoning is or motives are, because they do not matter.  The only thing that matters is whether you have a DRO that can be qualified.  If you do, the AP can get paid from the plan.  If you don't, AP can't get paid plan.  

 

22 minutes ago, fmsinc said:

It is often the case that the parties will agree, for example, that the Alternate Payee will pay for the cost of the survivor annuity, only to find out that the Plan will not allocate that cost but will merely  take it "off the top".  What do you do then?

It doesn't matter what the parties agree to if they didn't verify that the plan can actually execute the agreement.  For purposes of the plan fiduciary, the only thing that matters is that the plan act according to its rules and procedures.

26 minutes ago, fmsinc said:

Courd the parties in this case sue the Plan Administrator or Fidelity as TPA?  In Federal Court or in the local State Circuit Court?  Incur enormous legal fees and years of delay?  With an uncertain outcome? 

If Fidelity is making the determination that the DRO is not qualified, they must have more authority than just being the TPA.  That aside, are you 100% certain that they are wrong in not qualifying the DRO?  If you are asking them to do something they cannot do, the problem is not with Fidelity or the Plan Admin, it is with the limitations put on the DRO by the Judgment of Divorce.

45 minutes ago, fmsinc said:

 So lighten up.  You have all concerned by belief that while I should be able to prepare a shared interest QDRO that complies with ERISA, the folks at Fidelity are the problem.  The Alternate Payee is going to have the wait until the husband reaches age 65 and then sue the Participant for the payment sue regardless of the source of the payments - from the Participant's pension benefit if he is in pay status, or from the Participant's pocket.  

Take the emotions out of your argument. Im sure Fidelity would be thrilled to have a QDRO so that they could be done with this as well.  

[Mike Preston]

If there is no mechanism to change the settlement (which I don't really believe, but I'm humouring you) then a DRO that is prepared consistent with that settlement can't be submitted to the Plan Administrator until it becomes approvable.  That will happen as soon as the P applies for benefits or, if earlier, when the AP is age 65. At that point, the plan administrator has nothing to object to.  Wait for then and submit the DRO at that point.  Or get the settlement changed.  Only choices I see.

[fmsinc]

Thank you for "humouring" me.  I take it you are originally from the UK.  

In your world as an actuary you live or die by the numbers.  One plus one must always equal two.  I am here to tell you from 52 years of practicing every aspect of family law that one plus one often equals 3.25.  In most cases the outcome is inexplicable, illogical, unreasonable, and unfair.  But it's just the way the law developed.  We have an expression that trying to figure out what might happen in family court is like nailing Jello to the wall.  

Family lawyers know that their clients are going through a period of temporary insanity.  The first topic we cover in mediation training are the emotions they experience and how to deal with them.  The class makes a list - fear, deprivation, anger, pessimism, denial, defenselessness, disbelief, naivety, depression, weakness, dejection, abandonment, despair, powerlessness, isolation, rejection, ambivalence, dishonored, indecisive, guilty, gloomy, melancholy, despondent, frustrated, sadness, isolation, anxiety, seclusion, shame, spitefulness, relief, disillusionment, failure, grief, hurt, wounded, resentment, loss, insecurity, hopelessness, vulnerability, inadequacy, embarrassed, helplessness, humiliation, insulted, loneliness, tormented, vengefulness, misunderstood, disappointed, disgusted, exhausted, shocked, foolish, apprehensive, outraged, indignant, exasperated, rejected, discouraged, downhearted, disgraced, anguished, indignant, hostile, and just plain hateful.     

Add to that is the fact, for example, that 19 of the 26 Circuit Court Judges in my County here in Maryland (population 1 million+) did not practice family law, before becoming a judge, know almost nothing about pension and retirement issues or QDRO, and are for the most part unwilling to take the time to learn.  They were prosecutors, criminal defense lawyers, insurance defense lawyers, lawyers who specialized in real estate, corporate, tax or administrative law.      

Whatever your qualifications as an actuary, your suggestion that the parties or a court can just work it out 13 years after the divorce shows a lack of experience with the real world of divorce law and litigation.  I am reminded of a professor in college who pointed out that statisticians believe that if you put your left foot in ice water and your right foot in boiling water, on the average you're comfortable. 

You prepare present value computations that are speculative in every parameter - COLAS, discount rates, expected date of retirement, and life expectancies of the Participant and the Alternate Payee.  In a case many years ago an actuary on the stand in court suggested that my client, age 55 with a history of 3 heart attacks, had a Government pension with a present value of approximately $500,000.  This was based on the assumption that he would retire at age 65 and had life expectancy of whatever was indicated by the mortality tables he was using. 

I asked him if his mortality tables had a column for a 55 year old man with a history of 3 heart attacks.  He laughed and admitted that he did not, that his tables were for the "generic man" and really did not apply to my client.  The judge handed down the first "if, and an when" shared interest awards in our County, and the Legislature changed the law to make "if, as and when" the default.

In all events your bottom line analysis is probably correct - wait until the Participant is 65 address the matter then.  

 

[Mike Preston]

<<YAWN>> You have told your stories before. Look up my prior responses to your drivel.  

<<plonk>>

[fmsinc]

I was willing to afford you the benefit of the doubt and assume that you were not as big a schmuck as you appeared to be from reading your responses to my messages.  But I was wrong.  I wonder why the moderator of this message board has not removed you given your rude and unprofessional conduct.   

I am the founder and moderator of a listserv with over 1,460 family law attorneys here in Maryland.  Nobody in the 8 years of our existence has ever posted the sort of offensive attacks you have made on me....someone you don't even know. 

Why would you be a member of this message board if your goal is not to help people who ask for assistance?  To insult them?  You are sorely lacking in people skills, a basic smart ass.