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Termination of Alternate Payee's share of Participant's DB Plan benefit if he/she predeceases the Participant.


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      The IRS provides that, for estate tax purposes, “A terminable interest in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency. Life estates, terms for years, annuities, patents, and copyrights are therefore terminable interests. However, a bond, note, or similar contractual obligation, the discharge of which would not have the effect of an annuity or a term for years, is not a terminable interest.”  See 26 CFR § 20.2056(b)-1.

     In Belthius v. Belthius, No. B315673, Court of Appeals of California, Second District, Division Two, (January 4, 2023) -
https://scholar.google.com/scholar_case?case=12306033257629875954&hl=en&lr=lang_en&as_sdt=20006&as_vis=1&oi=scholaralrt&hist=bY5nDLcAAAAJ:14880692104701005079:AAGBfm2qi1_JaXLJvydb4f3quYTnTlLkbA&html=&pos=0&folt=kw
. . .. . the wife submitted a draft QDRO to the court seeking to allocate her interest in the husband’s Los Angeles Fire and Police Pension Plan.   The wife’s QDRO provided, inter alia, that: 

        "[I]f [Angela]'s death occurs, [Angela]'s separate property interest established under this Order shall pass under [Angela]'s beneficiary designation on file with the Board or, if none, shall pass under [Angela]'s will or should [Angela] leave no will, shall pass by intestate succession."

The trial court in Belthuis declined to enter the wife’s QDRO and instead entered the husband’s QDRO  omitting the above quoted and highlighted language.  The Court of Appeals held: 


            “Family Code section 2610 was enacted to abolish the terminable interest rule (Regents of University of California v. Benford (2005) 128 Cal.App.4th 867, 874), which had previously "governed disposition of community property interests in retirement benefits upon the death of either of the spouses in dissolution proceedings" (In re Marriage of Powers (1990) 218 Cal.App.3d 626, 634 (Powers)). Under the terminable interest rule, "a nonemployee spouse's interest in pension benefits terminated on that person's death, so that the nonemployee spouse could not bequeath benefits by will. [Citations.]" (In re Marriage of Nice (1991) 230 Cal.App.3d 444, 451 (Nice).)

            "[A]brogation of the terminable interest rule means that a nonemployee spouse's community property interest is now inheritable. [Citation.]" (Nice, supra, 230 Cal.App.3d at p. 452; see also Powers, supra, 218 Cal.App.3d at p. 639 ["if the nonemployee spouse dies before the employee spouse, his or her interest in the employee spouse's pension plan does not revert to the employee spouse by operation of the terminable interest rule but becomes part of the nonemployee spouse's estate"].)” (Emphasis supplied.)

 Query:   Does a Plan Administrator of an ERISA qualified plan have the authority to treat as a terminable interest what State law intended to be non-terminable, or what may be construed as implicitly terminable?  In California there is a specific statute addressing the issue.  In Maryland, my home state, the law authorizes the court to transfer an ownership interest in a pension or retirement plan,thereby evidencing an intention that the recipient Alternate Payee's ownership is not conditional, that is not terminable.  This is an issue that comes up in connection with CSRS and FERS retirement annuity benefits.  See my attached Memo. 

Thanks, 

David 

 

 

OWNERSHIP INTEREST 5 CFR 838.237(b)(3).pdf

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Hi David,  in CA the AP's award is their property and when dividing a non-ERISA plan (such as FERS/CSRS, CalPERS, etc) we always say if the AP predeceases P and before benefits have begun, AP's interest goes to their beneficiary or estate.  In ERISA plans we almost always have to have AP's interest revert back to P, but CA does not say that is a gift or AP's interest is terminated upon their death.  But this reversion of AP's award back to P in an ERISA plan has a value that can be calculated and to offset that reversionary value we award AP 100% of the community interest in the pre-retirement survivor annuity (QPSA).  Actuarially speaking these are usually pretty close in value when P/AP are of similar age and a 50% QPSA offered by the plan.  

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  • 2 weeks later...

fmsinc, as I'm sure you know, it is possible for ERISA plans, both DC and DB, to permit an AP's interest to pass on to a beneficiary if the AP dies. I think you may be asking whether, if a plan specifically addresses this in plan language and says it will not permit it, or if the plan language is not specific and the plan administrator interprets the plan as not permitting, that violates ERISA. I'm not sure, but I have wondered about this myself and am unaware of any case that addresses it. Probably based on the Supreme Court QDRO and beneficiary cases the plan can have either rule. Certainly, state property law would not compel a different answer, given ERISA preemption. On the other hand, if the QDRO says the plan must provide a benefit for the AP's beneficiary, arguably it violates the QDRO rules to not accept the QDRO. The plan, on the other hand, could argue that the death benefit for the AP's beneficiary requires it to provide a benefit it doesn't offer.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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