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In Marriage QDROs


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This is the first time that I've seen this- a DC participant submitted a "DRO"  in which a six figure sum of his DC account will be transferred to his spouse.  Participant and spouse are married, not seeking a dissolution of marriage and as far as we know, it is not intended for spousal support.  A quick Google search shows that there are some practitioners promoting in marriage qdros as a means of gaining access to pension or DC funds (likely without those pesky plan terms getting in the way). 

I'm just scratching the surface of my review, but it's hard for me to imagine that this was never tried in the past 30 some years. I seem to recall that there might have been cases of fake divorces just so people could access their pension accounts- why bother going through a fake divorce if you could simply claim a marital property transfer???

I'm curious as to what other people have seen/think of these?

 

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You need to look at the definitions and conditions in the statute. A naked transfer funds is not going to qualify, and I doubt any state domestic relations law is going to provide for it, as such, outside of a divorce or separation proceeding.

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Use the Search feature, with search term "Continental" or "sham divorce".

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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A 1992 ERISA Advisory Opinion suggests a plan’s administrator need not review the correctness of a State court’s decision about whether a person is, under a State’s domestic-relations law, the participant’s spouse, former spouse, child, or “other dependent”. See ERISA Adv. Op. 92-17A (Aug. 21, 1992) (A plan’s administrator may treat as a participant’s former spouse for QDRO purposes a person the State court decided was never the participant’s spouse.) https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/1992-17a.pdf.

A 1999 ERISA Advisory Opinion suggests that, when faced with circumstances that strongly suggest the divorcing parties’ perjury, a plan administrator may inquire about a court order to evaluate whether it is a domestic-relations order. Even that opinion, however, is unclear about whether a plan’s administrator must do so. ERISA Adv. Op. 99-13A (Sept. 29, 1999) https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1999-13a.

In another situation some might describe as a contrived divorce, the courts held that, even assuming a 100% allocation to the nonparticipant, continued cohabitation of the former spouses, not informing family or friends about the divorce, other facts inconsistent with the break-up of a marriage, and remarriage promptly after the plan’s QDRO distribution, a retirement plan’s administrator may not consider the participant’s and alternate payee’s motive for, or good faith in, obtaining a divorce. Brown v. Continental Airlines, Inc., 647 F.3d 221, 223 (5th Cir. 2011) (“[ERISA § 206(d)(3)(D)(i)] does not authorize an administrator to consider or investigate the subjective intentions or good faith underlying a divorce.”) https://casetext.com/case/brown-v-continental-airlines-inc.

See also Blue v. UAL Corp., 160 F.3d 383, 385 (7th Cir. 1998) (“ERISA does not require, or even permit, a [retirement plan] to look beneath the surface of the order. Compliance with a QDRO is obligatory[.]”) https://casetext.com/case/blue-v-ual-corporation#p385.

As QDROphile mentions, it would be at least unusual and, depending on the State’s law, might be improper for a domestic-relations court to award alimony or marital property during an undissolved and unseparated marriage.

But if a court’s order recites that it “relates to the provision of . . . marital property rights to a spouse” (which might be a current, rather than former, spouse) and “is made pursuant to a State domestic relations law” (which might include a community-property law), a plan’s administrator might find that it need not consider whether the court correctly applied the State’s domestic-relations law.

An administrator might find that it need not instruct the payment or set-aside the order calls for until the order has become final and non-appealable.

Here’s my question for BenefitsLink neighbors:

Imagine a plan’s administrator suspects a domestic-relations order is a workaround against a plan’s conditions for a distribution. But the plan is an individual-account (defined-contribution) plan and the QDRO distribution will not meaningfully affect the account of any individual beyond the participant. Should the plan’s administrator care about whether the domestic-relations order seems contrived? Or should the administrator simply apply its procedure and decide, looking to the text of the court’s order, whether the order is a QDRO?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thank you everyone for your comments! Based on what I've found so far, it seems as though the practitioners advertising this possibility are stretching what may be considered "domestic relations law" and the orders may not necessarily be coming from a domestic law division court.    

 

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Maybe. I guess being able to assign some or all of my QP assets to my spouse (essentially treating as a "household" retirement account rather than an individual account) makes sense conceptually.

Looking at the language of 414(p), can this strategy also be used to transfer assets to a child - i.e., here's your inheritance now, before I die, so you can avoid the recent stretch IRA and other SECURE prohibitions/restrictions? As 99% of plan participants are likely needing to take and use their assets to provide for their retirement, this just smells like a loophole for the other 1% to transfer wealth to future generations on a continuing tax deferred basis.

Yes, we design plans that skew large contributions to owners (many maybe 1%ers), but those are required to satisfy all sorts of requirements including gateway minimums for rank and file - probably the one area where "trickle down" theory actually works.

But if this type of QDRO becomes commonplace, ...... I'd be disappointed, to put it mildly.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I think a QDRO administrator should keep hands off a sham divorce and implement an order formally. If the state procedures are followed and a divorce or separation under state law is effected formally, so be it. Unfortunately, I cannot be comforted that state judges will exercise appropriate knowledge and understanding of ERISA to avoid orders that are what I called “naked” assignments of retirement assets without what we intuitively consider a domestic relations proceeding under domestic relations law, where division of marital assets has a presumed purpose and meaning that as far as I know has not been adequately adjudicated.

I had a client that did not allow immediate distribution to a spouse or former spouse pursuant to a QDRO under its defined contribution plan because of anecdotal evidence of sham divorces. That dampened the incentive to go through the formalities under domestic relations law for the sake of buying the fishing boat.

Although I am often a critic of the DOL when it comes to QDRO law, I am completely sympathetic to giving administrators a pass on the need to examine state law or state proceedings. Employers may care enough to design plans to hamper shenanigans, but the plan administrator should not have to care if participants are hell-bent to make irresponsible decisions about retirement savings. But damn the lawyers or other advisors who encourage it.

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Unfortunately, the sad state of economic affairs of most people puts them in a place where retirement plan assets are either necessary or too tempting for survival after divorce, especially for alternate payees. Witness the hijinks of lawyers who try to draft orders payable to them for the benefit of their clients to make sure they get paid for their work in the divorce.  Designing a plan or QDRO procedures to prevent immediate distribution can be a serious imposition on legitimate needs.  Many plan administrators are familiar with begging and hounding by would-be alternate payees because money can’t be distributed fast enough. Also, some providers, especially those who also offer QDRO administration (with improprieties), will not accommodate a plan design that does not fit its conceptual template, appropriate for many employers, to encourage alternate payees to take the award and clear out of the plan.

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My research found that the published court decisions are about situations in which the domestic-relations parties sought to evade a defined-benefit pension plan’s provisions. In particular, airlines’ pensions.

For an example of a case in which a State court denied a DRO, read Jago v. Jago, 2019 Pa. Super. 246 (Pa. Super. Ct. 2019) https://casetext.com/case/jago-v-jago?sort=relevance&resultsNav=false&q=.

The petition did not ask for a divorce, or for any relief other than entry of an order to be directed to a retirement plan.

The court “h[e]ld that absent a divorce or other domestic relations matter pending between spouses, they cannot obtain a QDRO for the sole purpose of moving funds in the participant/spouse's ERISA plan out of the plan to the non-participating spouse.”

The opinion reflects the court’s reasoning because only one attorney appeared, and he presented the argument for allowing the domestic-relations order.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I assume that a DC participant means "defined contribution" and not the District of Columbia just down the road from where I practice - when we say DC we mean the Nation's Capital.  I hate acronyms.  But since you said "DRO" I cannot conclude that you are talking about an ERISA qualified Plan, and am reluctant to respond.  You may be referring to IRC 408(d)(6) that inexplicably says that a transfer can be made a "spouse or former spouse".  Maybe not.   

In Brown v. Continental Airlines, Inc., 647 F. 3d 221 (5th Cir., 2011) -
https://scholar.google.com/scholar_case?case=4019345202025914766&q=brown+v.+continental+airlines&hl=en&as_sdt=20000003, Continental alleged that a number of pilots and their spouses obtained "sham" divorces for the purpose of obtaining lump sum pension distributions from the Continental Pilots Retirement Plan that they otherwise could not have received without the pilots' separating from their employment with Continental. The pilots were allegedly acting out of concern about the financial stability of Continental and the fear that the Plan might be turned over to the PBGC and that their retirement benefits would be substantially reduced (exactly what did happen). 

 By getting divorced, the pilots were able to obtain QDROs from state courts that assigned 100% (or, in one instance, 90%) of the pilots' pension benefits to their respective former spouses.  The Plan provides that, upon divorce, if the pilot is at least 50 years old (as all the pilots in this case were), a former spouse to whom pension benefits are assigned can elect to receive those benefits even though the pilot continues to work at Continental.  (Think “separate interest” annuity allocation.)  The former spouses presented the QDROs to Continental and requested payment of lump-sum pension benefits.  After the former spouses received the benefits, the couples remarried.  

Continental sought to obtain restitution under ERISA Section 502(a)(3).  The Court of Appeals noted that ERISA § 206(d)(3) limits the QDRO qualification determination to whether the state court decree calls for benefit payments outside the terms of the Plan. It rejected Continental’s expanded reading of §206, concluding that plan administrators may not question the good faith intent of Participants submitting QDROs for qualification. 

Before you go further, read DoL EBSA Advisory Opinion 1999 13A dealing with sham divorces at -

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1999-13a

...and note that Advisory Opinion 1999 13A was not cited in Continental for the reason I suspect is because there is nothing in the law of most states that prevents the parties from obtaining a divorce if they have the grounds for divorce set forth in the Code, even though there may be an ulterior motive that may involve, for example, estate or tax planning, or, as in the Continental case, dealing with pension benefits that may be negatively impacted by the impending Bankruptcy of the Plan Sponsor.  The reciprocal is also true.  Many people remain married for a period of time in order to, for example, give the non-Military party the time necessary to obtain access to lifetime Military based health insurance under the 20/20/20 rule, or give the non-employee's spouse who is in the US pursuant to the employee's spouse's G-4 visa time to obtain a green card (especially important if they have children).

In Continental the parties actually divorced so it bears no relationship to a the situation posted by ebjmls21.  

Jago v. Jago, 2019 PA Super 246 (2019) involved a situation where a happily married parties filed a petition for the entry of a QDRO transferring $400,000 from the husband’s ERISA qualified plan to the wife’s IRA.  No divorce action was pending and they admitted had they had no intentions of divorcing.  The court analyzed ERISA and the REA and some of the major Federal court decisions and concluded that:

        “Here, Husband is a participant in an ERISA-governed plan. The parties initiated this case by filing a joint petition for entry of a QDRO for the sole purpose of transferring to Wife's IRA an amount of the Plan benefits, because Wife has a marital property interest in the Plan. See Brown v. Brown, 669 A.2d 969, 972 (Pa.Super. 1995), aff'd, 544 Pa. 360, 690 A.2d 700 (1997) (providing retirement pension benefits, vested and non-vested, are marital property rights subject to equitable distribution upon divorce). But see Boggs, supra. Without the entry of a valid QDRO, the parties' proposed transfer violates ERISA's anti-alienation prohibition. See id.; 29 U.S.C.A. § 1056(d)(1), (3)(A). In their joint petitions and throughout the life of this case, however, Husband and Wife have expressly acknowledged they are married with no pending divorce or other family law matter between them; the parties at no time stated or implied they intended to initiate a support action. Instead, the parties stated in their petitions they wished the Plan benefits to remain marital property upon entry of the proposed QDRO. Thus, the record makes clear there is no current, foreseeable, or desired divorce or domestic relations matter of any kind between Husband and Wife, which is required for the entry of a QDRO under ERISA. See Boggs, supra; Mackey, supra. Under these circumstances, the parties' joint petitions are attempts to circumvent ERISA's anti-alienation proscription. See Boggs, supra; Mackey, supra.  The cited persuasive authority leads us to conclude a QDRO is a procedural right derivative of or adjunct to a domestic relations matter, but outside the context of a domestic relations matter, a QDRO is not a distinct, discrete legal claim.  See Dorko, supra; Johnston, supra; Ryan, supra; Denaro, supra; Jordan, supra. Accordingly, Wife's claim that a domestic relations action is not a prerequisite to entry of a QDRO fails.

        “Based upon the foregoing, we hold that absent a divorce or other domestic relations matter pending between spouses, they cannot obtain a QDRO for the sole purpose of moving funds in the participant/spouse's ERISA plan out of the plan to the non-participating spouse.”

US v. Brazile, Case No. 4:18-cv-00056 SEP.,  United States District Court, E.D. Missouri, Eastern Division.(2020), -
-https://scholar.google.com/scholar_case?case=17860472826493880578&hl=en&lr=lang_en&as_sdt=6,33&as_vis=1&oi=scholaralrt&hist=bY5nDLcAAAAJ:12484640753426065479:AAGBfm1agvHLwT5aWZ_N6PDZrK7iWFqV8A&html=&eexpid=320022102
...involved a case where on July 30, 2013, Steven Brazile ("Steven") pleaded guilty to one count of transportation of securities obtained by fraud, in violation of 18 U.S.C. § 2314. As a part of his plea agreement with the Government, Steven acknowledged that he owed restitution in the amount of $3,902,880.85. The Government has a lien against Steven's property and rights to property under 18 U.S.C. § 3613(c) as a result of the judgment entered against him on November 13, 2013, in the Northern District of Illinois.

    Before the entry of Steven's sentence and judgment, Lorraine Brazile ("Lorraine"), Steven's then-wife, filed a suit for dissolution of marriage in the Circuit Court of St. Louis County, Missouri, on July 25, 2013. Id. On August 29, 2013, Defendants entered into a voluntary Property Settlement and Separation Agreement ("Agreement"), and the circuit court entered a final judgment of dissolution awarding Lorraine child support and a portion of Steven's pension benefits. On August 24, 2016, Defendants submitted a qualified domestic relations order ("QDRO") to the divorce court, which assigned Lorraine 100% of Steven's lump sum benefit amount and monthly annuity benefits.  The QDRO similarly awarded Lorraine 100% of the Braziles' marital home on Vienna Avenue (the "Vienna property").

   In September of 2017—four years after their marital dissolution and 13 months after they submitted their QDRO assigning the disputed assets to Lorraine—probation officers conducted a home visit and discovered that Steven and Lorraine were living together with their children and were raising their kids together as a "family." Id. ¶ 28. The Government contends that this demonstrates the Defendants entered into a "sham divorce" to transfer assets to Lorraine that could otherwise have been used to pay victim restitution. The Government alleges fraudulent transfer in violation of 28 U.S.C. § 3304(a)(2) (Count I); fraudulent transfer in violation of 28 U.S.C. § 3304(b)(1)(A) (Count II); and fraudulent transfer in violation of 28 U.S.C. § 3304(b)(1)(B) (Count III).

    The Government alleges that Steven has violated three provisions of the Federal Debt Collection Procedures Act ("FDCPA"). As a remedy, it asks the Court to void the final judgment and dissolution of property in Defendants' divorce case, enter judgment for the United States for the full value of the property transferred from Steven to Lorraine, and grant the United States a lien against all fraudulently transferred property such that it can seize that property immediately to pay Steven's restitution. By seeking dissolution of agreements to which he is a party, reversal of his transfer of assets to Lorraine, and seizure of the house he lives in as well as other assets that allegedly support him and his family—all in satisfaction of Steven's own debt.

    The court goes on to consider several evidentiary issues, expert witness qualifications, res judicata, collateral estoppel, waiver, equitable estoppel, and more.  The Court then held:

        "Count III alleges constructive fraud in violation of 28 U.S.C. § 3304(b)(1)(B). Doc. [1] at 11. To prove constructive fraud under that section, the Government must show that Steven transferred assets to Lorraine "without receiving a reasonably equivalent value in exchange for the transfer" at a time when he "intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due." 28 U.S.C. § 3304(b)(1)(B)(ii).

        "As noted already, the Government alleges the Braziles' divorce settlement gave Lorraine all of the couple's viable assets in order to insulate those assets from Steven's criminal restitution liabilities. The Government thus contends that all the elements of § 3304(b)(1)(B) have been met. Doc. [66] at 5-12."

        * * * * 

        "By contrast, the Government has produced substantial, undisputed evidence that Steven was aware of his impending restitution liabilities when he signed the divorce settlement. See, e.g., Doc. [85] ¶¶ 15, 17-18, 32. The restitution debt totaled roughly four times what Steven received in the divorce, even if the assets allocated to him are assigned their full value. See Doc. [87] at 31 (explaining that the "grand total" of Steven's share of the divorce settlement amounted to $800,490.0).[7]  Steven has neither contradicted this evidence nor produced other evidence that would support a finding in his favor, so the Government is entitled to summary judgment."

But cf:  See also Cf: United States of American v. Wolas, 520 F.Supp.3d 114 (D. Mass 2021),  -
https://scholar.google.com/scholar_case?case=9503464558169105254&q=United+States+of+American+v.+Wolas,&hl=en&scisbd=2&as_sdt=20000006

For more cases dealing with sham divorces see - https://scholar.google.com/scholar?start=0&q="sham+divorce"++divorce+"marital+property"+retirement+pension&hl=en&lr=lang_en&as_sdt=20000006&as_vis=1

But there are 7,000 to 10,000 Federal, State, County, City and other municipal plans that may permit such a transfer without a divorce.  But the parties will have to deal with the IRS.

David

 

 

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  • 3 weeks later...

We have discussed this issue at length in CA and we have a family law statute which allows a court to make an order dividing marital property in an intact marriage:

PART 4. MANAGEMENT AND CONTROL OF MARITAL PROPERTY [1100 - 1103] ( Part 4 enacted by Stats. 1992, Ch. 162, Sec. 10. )

(b) A court may order an accounting of the property and obligations of the parties to a marriage and may determine the rights of ownership in, the beneficial enjoyment of, or access to, community property, and the classification of all property of the parties to a marriage.

We believe it may be possible to get a QDRO entered with a state court of competent jurisdiction and served on the plan.  I do not believe a plan administrator is allowed to look behind the intent of a court order so if it otherwise qualifies as a QDRO then it must be approved.   Whether the IRS will take issue with this new approach to financial planning we do not know, but all of our QDRO attorneys in CA have thus far decided to decline any request for an In Marriage QDRO.

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JM, thank you for pointing us to California’s Family Code § 1101. https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=FAM&sectionNum=1101

That California or another of the States with a community-property regime (or a State with provisions for dispositions of community property acquired under another State’s regime) has such a statute, or even that the statute is classified under California’s Family Code or another State’s title for domestic-relations law, might support, but does not control, whether such an order always is a domestic-relations order within the meaning of ERISA § 206(d)(3)(B)(ii).

That question involves interpreting Federal law.

For those who don’t disdain legislative history as sometimes a possible indicator of what a legislature meant, one might consider Congress’s purposes for the Retirement Equity Act of 1984, including its portions that amended ERISA sections 205 and 206.

And even an interpreter who considers only an enacted statute would interpret the whole statute, including (at least) ERISA sections 2, 3, 205, 206, 404, and 514.

Even ignoring the intent of the participant, the nonparticipant spouse, and the court that issued the order, and without failing to accept the State court’s factual findings and application of State law, a plan’s administrator could decide that a reordering of the spouses’ property unrelated to a divorce or separation action is not a domestic-relations order.

Or an administrator could decide that it is a DRO and, if other conditions are met, a QDRO.

Either way, a court reviewing an administrator’s decision should defer to the administrator’s discretionary decision-making unless it was so lacking in reasoning that it was not an exercise of the plan-granted discretion.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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