DB Plan Reduced Participant's Benefit due to Pending QDRO at Annuity Starting Date. QDRO Entered by Court Nearly 11 Years Later, Retroactive to Annuity Starting Date. Is Alternate Payee Entitled to Interest between Annuity Starting Date and Date Payment u

[rocknrolls2]

A participant and his spouse become divorced prior to the participant's annuity starting date under a defined benefit plan. Unlike many plans, benefits are paid from current plan assets (instead of from annuity contracts purchased from an insurance company). The participant and his ex-spouse agreed upon a proposed division of his benefit, based upon the fraction of the months in which the couple was married over the participant's entire period of service with the employer. However, no formal QDRO was entered by a court until 11 years after the participant's annuity starting. Nevertheless, the participant commenced receiving reduced pension payments based upon the parties' agreed division as of his annuity starting date, in the form of a ten-year certain and life annuity. The QDRO reaffirms the division between the parties and entitles the ex-spouse to a portion of the participant's total retirement benefit (under the agreed-upon formula) retroactive to his annuity starting date.

Based on DOL Regulations at 29 C.F.R. Section 2530.206, the timing of the entry of the QDRO does not adversely impact its qualification. In addition, the QDRO provides for payment to the ex-spouse for the participant's lifetime (since the 10-year guarantee period has expired), which is a fomr of payment provided under the Plan document. Moreover, case law which is contolling in the circuit in which the Plan is administered and in which the participant and former spouse reside do not compel a different result. 

This is my question: given the eleven-year period that has elapsed since the annuity starting date, is the payment due to the spouse for the period beginning on the annuity starting date and ending on the date on which the first prospective payment begins under the QDRO, permitted to be increased by interest or some other manner of compensatiing the former spouse for the delay in commencing the benefit payments to her? If the benefit had been provided under an annuity contract, I would be inclined to say no. However, since the benefit is provided from the assets of the plan's trust, I am inclined to conclude that some measure of earnings is due to the former spouse. Also, as a corollary to my question, if you agree that the spouse should be entitled to interest or earnings for the period of the delay in commencing payments to her, how should the plan arrive at an appropriate level of interest or measure of earnings?

 

Thanks in advance!

[david rigby]

Has the DRO been qualified (ie, approved) by the plan sponsor?  I'm skeptical that the plan can provide some retroactive payment in this case.

BTW, your second sentence might be backwards:  most DB plans pay from plan assets rather than from annuity contracts.  

  

[Effen]

Agree with what David said.   

"No formal QDRO was entered by a court until 11 years after the participant's annuity starting... Nevertheless, the participant commenced receiving reduced pension payments based upon the parties' agreed division as of his annuity starting date, in the form of a ten-year certain and life annuity. "

Are you saying the PA withheld the AP's share for 11 years without a DRO? 

[rocknrolls2]

David,

I will agree with your statement that most DB plans pay annuities from the plan's assets. As for whether the DRO has been qualified, the plan sponsor has asked us for advice on whether to qualify it and how to pay it, if it is determined to be qualified. According to the DOL regulation I cited, the timing of the issuance of the order does not, by itself, adversely impact the qualification of the order. Since the alternate payee would be receiving payments during the participant's lifetime only, therre is no issue that the plan is being asked to provide for a form of payment not provided under the plan, which would disqualify the order for other reasons. As for the retroactivity of the payment, the order itself provides that it is effective as of the annuity starting and such orders are valid, per the DOL regulation and case law which is controlling in the plan's and parties' circuit.

 

Effen,

The plan withheld the alternate payee's share, which is the principal reason why I believe that the alternate payee should be compensated by some measure or interest or earnings to compensate her for the delay in commencing payments to her.

[Effen]

You should consult with the plan's ERISA attorney.  My personal non-lawyer opinion is that the inaction of the AP caused the delay and therefore the plan should not provide interest on missed payments.  I would also argue that the PA had no authority to withhold the P's payments for such an extended period of time.  Most QDRO procedures allow a 180 escrow period, after that, if no DRO is presented, the P gests the full payment until the AP provides a DRO.  Therefore, I might be inclined to argue that the majority of the 11 years of retro would go to the P - and maybe they should receive interest on those "lost" payments since PA had no authority to withhold them, but the AP would only potentially get 6 months of retro, and maybe none.

But you asked about qualifying the DRO.  Does this plan have established QDRO procedures?  I agree the timing is no a big problem and the DRO c/b qualified, but if it requires 11 years of retro payments, I would look very hard at those provisions.  

Short answer - you should consult with the ERISA attorney.

[Peter Gulia]

From the facts described above, it looks like a delay in beginning payments to the might-become alternate payee does not result from the plan administrator’s breach of its responsibility to administer the plan.

Unlike an individual-account (defined-contribution) plan that provides no assurance of the amount of a benefit, a defined-benefit plan promises a specified benefit. A participant (including alternate payees when one or more shares in the participant’s benefit) is entitled to no more than the benefit promised, applying the documents governing the plan.

The plan’s administrator might want its lawyer’s advice about whether the court order now submitted is a DRO and, if it is a DRO, whether it is a QDRO.

Prudence might suggest getting that advice from a lawyer who is independent of anyone involved in previous advice or decision-making.

Further, the plan’s administrator might, in some circumstances, want two distinct lawyers—one to advise the administrator about how to administer the plan now; another for advice about the administrator’s past conduct. Under a doctrine some label the “fiduciary exception”, communications about how a fiduciary administers the plan will lack a useful evidence-law privilege for lawyer-client communications. But confidential communications to advise the administrator personally about how one defends against claims grounded on the fiduciary’s past conduct might get the lawyer-client communications privilege. And even if the administrator wants no evidence-law privilege, it might be imprudent for a fiduciary to rely on advice from a lawyer who faces conflicting, or even potentially conflicting, interests.

Does the court order specify that its alternate payee gets interest on what would have been her payments had a QDRO been approved before the annuity starting date? If not, why would the pension plan’s administrator provide something beyond what the relevant court order calls for?

Does the plan provide interest or another time-value-of-money adjustment on a missed payment? If not, wouldn’t a DRO that specifies interest be not a QDRO because it attempts to specify a benefit the plan does not provide?

In what other ways might the court order be consistent with, or contrary to, the construct that a QDRO cannot specify a benefit not otherwise provided under the plan?

Consider, a QDRO specifies an alternate payee’s portion as an amount or as a percentage of the participant’s benefit. ERISA § 206(d)(3)(C)(ii).

Consider, ERISA § 206(d)(3)(H)(i) segregates amounts only during a period that begins when the plan’s administrator has received a DRO and ends when the administrator decides whether the DRO is (or is not) a QDRO. And § 206(d)(3)(H)(ii) provides interest on an alternate payee’s portion only to the extent of the amounts segregated during that period.

Congress specified a situation for which interest is provided. Does that mean interest is not provided for other situations? At least not if the plan doesn’t provide it?

ERISA § 206 (29 U.S.C. § 1056), https://www.govinfo.gov/content/pkg/USCODE-2024-title29/html/USCODE-2024-title29-chap18-subchapI-subtitleB-part2-sec1056.htm.

This is not advice to anyone.