Secure 2.0 - Traumatic Vel Non

I enjoy reading posts on this terrific blog,, however, I find that I cannot get answers to questions that are of vital concern to me and many of my lawyer colleagues, and that are destined to result in issues for Plan Administrators as well.  The topic - the allocation of pension and retirement plans between divorcing couples via a QDRO or similar Court Order. In 2022 there were 673,989 divorces in the United States.  There are about 163,000 ERISA qualified pension and retirement plans in the US plus another 12,000 plans governed by other sections of Federal law (FERS, CSRS, Military, to name a few), plus State, County, Municipal plans that operate pursuant to local laws and regulations, and International plans. 

I have been trying since Secure 1.0 to determine how Secure 1.0 and now 2.0 will interface with defined contribution plans where historically the Alternate Payee's share has paid in the form of an immediate lump sum either: (i) tax free to the Alternate Payee's IRA or other qualified retirement plan, or, (ii) in the form of a taxable distribution directly to the Alternate Payee, but no 10% early withdrawal penalty.

The main question is whether or not the election by a Participant in a defined contribution plan of an annuitized payout pursuant to Secure 2.0 during the marriage can be superseded by a subsequent QDRO entered by a Court pursuant to State law directing a lump sum payout, and how will that payment be computed and paid?    

It is not clear to me whether or not a Participant can make such an election prior to retirement.  And if it is possible for the Participant to purchase an annuity during prior to retirement and during the marriage without notice to or consent by the spouse.  Timing of events is critical to the rights and responsibilities of the parties. Federal preemption is an every present sword of Damocles.  Plan documents and options vary and usually rule.  

I participate in quite a few other QDRO oriented blogs and nobody seems to have any answers.  Am I the only one that is worried about this?  Or is it just the OCD required to afflict all members of the Bar.    

Since pension and retirement benefits represent one of the two highest value assets owned by the parties (the equity in their home being the other), that is an important matter. In my world the tide is rapidly receding exposing the ocean floor, reefs and fish, and the birds and animals are heading for high ground.  Watch the 2012 movie "The Impossible".  Spoiler alert - DO NOT watch the trailer. It is a great movie.     

David Goldberg  

In my two decades of working on primarily qualified DC plans (and a fair share of DB), I have NEVER had a participant in a regular qualified defined contribution plan elect an annuity. Thousands of plans, even more thousands of participants, not one. Most DC plans do not even allow annuity distributions, SECURE 1.0 and 2.0 does not override that. 

So I think your fear that a participant will elect an annuity from their DC (such as 401(k), 401(a), 403(b), money purchase etc), and then later a lump sum DRO is approved by the plan administrator as a QDRO - is unfounded. Keep in mind that the DRO is not Qualified until the plan says it is. Entering it into the court does not make it qualified. If the plan administrator receives a DRO that they cannot accept because the form of benefit or level of benefit is not available, perhaps because the participant already did something, the DRO will get rejected. 

Perhaps I misunderstood your concern, if so, I apologize. 
I hope others can chime in as well. 

1 hour ago, fmsinc said:

(ii) in the form of a taxable distribution directly to the Alternate Payee, but no 10% early withdrawal penalty.

I would like to point out that there absolutely is a 10% early withdrawal penalty to an alternate payee spouse if they are under age 59 1/2 and don't have some other exception. Being able to take a cash distribution payable to themselves pursuant to a benefit award in a DC plan QDRO does not change that. 

David Goldberg, if we limit your query to individual-account (defined-contribution) retirement plans governed by ERISA § 206(d) (unofficially compiled as 29 U.S.C. § 1056(d)), § 206(d)(3) shows us the boundary.

A QDRO may specify an alternate payee’s share as a specified amount, or as a specified percentage, within the participant’s rights.

Among the conditions:

A QDRO can’t direct a benefit the plan does not provide. For example, a QDRO can’t direct a single-sum payment if the plan does not provide that form of payout. (Some individual-account retirement plans do not provide a single-sum payout, and some that provide it limit the conditions under which a single-sum payout is available.)

A QDRO can’t direct shares that would add up to more than what the plan otherwise is obligated to pay or deliver to the participant (and others).

Let’s imagine a participant, before the participant’s death or divorce (or other end of the participant’s marriage), annuitized half the participant’s account as an annuity on the participant’s life, and left the other half as an account balance.

(Let’s leave aside that under many plans choosing a life annuity, rather than a qualified joint-and-survivor annuity, might require the participant’s qualified election with the spouse’s consent—see ERISA § 205.)

If we assume only one alternate payee—the participant’s soon-to-be former spouse—and no other person who could be treated as a current, former, or surviving spouse, the alternate payee’s QDRO share could be:

an amount or percentage of that part of the participant’s rights that remains an account balance (not to exceed all of it).
AND
an amount or percentage of each annuity payment as it becomes due (with the alternate payee’s share of each payment not exceeding the amount the annuity obligor is obligated to pay).

Even if an individual-account retirement plan includes among the plan’s payout options a single sum, a plan does not provide that payout to the extent of the portion of the participant’s rights that is no longer an account balance because the participant had exchanged an amount for a right to annuity payments.

But, if the annuity contract provides that the obligor MUST commute or adjust an annuity obligation on the holder’s request, a plan’s administrator might consider that contract provision in finding what a QDRO may direct be paid or delivered to an alternate payee without failing the § 206(d)(3)(D) conditions.

Remember a general principle: A QDRO divides rights the participant has.

David Goldberg, as you observe, a might-be alternate payee or one’s lawyer might seek to:

classify the employment-based retirement plan to which a domestic-relations order might be directed as governmental (Federal), governmental (State or local), church, ERISA-governed with § 206, ERISA-governed but not § 206, or something else;

classify the plan as defined-benefit or individual-account;

discern the plan’s provisions, including those designed to meet ERISA § 205 (if applicable), or those (if any) designed to provide a participant’s spouse some interest in the participant’s rights; and

discern the annuity obligor’s obligation, and the annuity holder’s rights.

As BenefitsLink neighbors remind us, RTFD—Read The Fabulous Documents.

This is not advice to anyone.

Although there might be only a slight increase in individual-account plans’ participants choosing annuities, consider adding these points to your CLE teaching.

On 2/21/2025 at 11:54 AM, fmsinc said:

The main question is whether or not the election by a Participant in a defined contribution plan of an annuitized payout pursuant to Secure 2.0 during the marriage can be superseded by a subsequent QDRO entered by a Court pursuant to State law directing a lump sum payout, and how will that payment be computed and paid?    

Which part of SECURE 2.0 are you referring to here? 

On 2/21/2025 at 2:54 PM, fmsinc said:

The main question is whether or not the election by a Participant in a defined contribution plan of an annuitized payout pursuant to Secure 2.0 during the marriage can be superseded by a subsequent QDRO entered by a Court pursuant to State law directing a lump sum payout, and how will that payment be computed and paid?    

It is not clear to me whether or not a Participant can make such an election prior to retirement.  And if it is possible for the Participant to purchase an annuity during prior to retirement and during the marriage without notice to or consent by the spouse. 

The only way that might happen is where a DC plan actually has an annuity product in the plan. Maybe those are coming but they are not commonplace. If a participant uses their account to purchase an annuity via a rollover while still married, the Plan is no longer holding the assets nor subject to a QDRO.

Participants taking periodic payments from DCP are getting installments, not an annuity, and such can be commuted to a lump sum partially or entirely. Any election or investment prior to retirement that involves purchasing annuity contracts must provide that the spouse be beneficiary of the death benefit unless the spouse consents to a waiver of such. Whether any such product has a lump sum option may vary from product to product. 

On 2/21/2025 at 12:56 PM, justanotheradmin said:

I would like to point out that there absolutely is a 10% early withdrawal penalty to an alternate payee spouse if they are under age 59 1/2 and don't have some other exception. Being able to take a cash distribution payable to themselves pursuant to a benefit award in a DC plan QDRO does not change that. 

I'm not sure I follow. Are you saying QDRO APs are subject to the 10% early distribution penalty? See Code Section 72(t)(2)(C) (10% early distribution tax doesn't apply to QDRO distributions). 

SECURE 2019 includes ERISA § 404(e)’s “safe harbor” for selecting an annuity insurer, and Internal Revenue Code § 401(a)(38)’s way to get rid of a no-longer-welcome annuity investment alternative.

I guessed that David Goldberg’s query considered some possibility of increased availability and selections of in-plan annuities.

Over the past five years, I’ve seen no demand for in-plan annuities. (That doesn’t mean there wasn’t any, only that I didn’t see it.) I have responded to plan sponsors’ and plan fiduciaries’ questions about getting rid of annuities.

Even if few participants choose an annuity and yet fewer have it in circumstances that might affect the negotiation of a domestic-relations order, a thought experiment in answering a what-if query helps me refresh my recollection of the QDRO statute’s fundamentals.

Let me expand by inquiry my directing you to an article about Secure 2.0 and QLACs and QDRO's.  

https://www.businessofbenefits.com/2023/01/articles/secure-2-0/secure-2-0s-new-qdro-rules-the-mainstreaming-of-the-qlac/

Section 202(a)(2) and (b) of Secure 2.0 provides:

"(2) FACILITATE JOINT AND SURVIVOR BENEFITS.—The Secretary shall amend Q&A–17(c) of Treasury Regulation section 1.401(a)(9)–6, [I cannot confirm that these amendments have been made unless they did away with the Q&A format and addressed it at paragraph "(q)" at https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-6#p-1.401(a)(9)-6(q)]  and make such corresponding changes to the regulations and related forms as are necessary, to provide that, in the case of a qualifying longevity annuity contract which was purchased with joint and survivor annuity benefits for the individual and the individual's spouse which were permissible under the regulations at the time the contract was originally purchased, a divorce occurring after the original purchase and before the annuity payments commence under the contract will not affect the permissibility of the joint and survivor annuity benefits or other benefits under the contract, or require any adjustment to the amount or duration of benefits payable under the contract, provided that any qualified domestic relations order (within the meaning of section 414(p) of the Internal Revenue Code of 1986) or, in the case of an arrangement not subject to section 414(p) of such Code or section 206(d) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1056(d)), any divorce or separation instrument (as defined in subsection (b))—

(A) provides that the former spouse is entitled to the survivor benefits under the contract;

(B) does not modify the treatment of the former spouse as the beneficiary under the contract who is entitled to the survivor benefits; or

(C) does not modify the treatment of the former spouse as the measuring life for the survivor benefits under the contract.

(b) Divorce Or Separation Instrument.—For purposes of subsection (a)(2), the term “divorce or separation instrument” means—

(1) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(2) a written separation agreement, or

(3) a decree (not described in paragraph (1)) requiring a spouse to make payments for the support or maintenance of the other spouse."

These sections presuppose that the parties will agree to the purchase of a QLAC in their "divorce or separation instrument".  But what if that is not the case? 

Can the participant purchase a QLAC during the marriage without notice to or consent by the spouse? 

When can the participant purchase the QLAC?  (i) prior to retirement during the marriage; (ii) at retirement and during the marriage; (iii) not during the marriage without the consent of the spouse; (iv)only in connection with a proceeding for and incident to a divorce?

If the participant has purchased a QLAC prior to the time the matter reaches the divorce court (assuming that spousal consent was not required and the spouse in fact did not consented), will a QDRO awarding the spouse a lump sum distribution of a DC plan supersede the participant's purchase of the QLAC?   

Are Alternate Payees of D/C plans now treated the same as a spouse of a Participant in a D/B plan pursuant to 26 CFR § 1.401(a)-20?    

It's now 2026.  A new client walks into my office and says that her husband works for Lockheed Martin and participates in the Lockheed Martin Capital Accumulation Plan, a defined contribution plan. He is planning to retire next month before the divorce hearing, and she believes that he is going to elect a QLAC with a "life only" option. I don't know of any provision of law that requires notice to her or her consent. [Does IRS Manual Sections 4.72.9.3.5 (Spousal Consent Rules) and 4.72.9.3.5.1 (Exceptions to Spousal Consent Rules) apply?] 
Based on her age and his age and their relative ages and their life expectancies, she thinks it would be better to have a lump sum distribution of 50% of the vested balance in his CAP and roll it into her IRA.  My client is very knowledgeable and understands that pursuant to 29 U.S.C. § 1055(d) a single life annuity and a QJSA are actuarially equivalent to each other (and that the same is true of a QPSA pursuant to 1055(e)). What do I tell her? 

In my world of divorce and QDRO this threatens to become a BFD.  

Thanks. 

David

Bob Toth is a dear friend. He often has observations about points of law others overlook.

Beyond some explanation about whatever SECURE 2022 § 202 might do (or might have caused to have been done, or to be done), Bob’s wider point is that professionals, including the three As—accountants, actuaries, attorneys, who have worked somewhat easily with retirement plans that provide account balances only might need to invoke some different thinking IF an individual-account retirement plan allows annuities, whether QLACs or other kinds.

David Goldberg, whether a participant may during a marriage purchase a QLAC or another life-contingent annuity without the spouse’s consent turns on the particular retirement plan’s provisions.

An ERISA-governed plan might be designed to meet ERISA § 205.
A State or local governmental plan’s provisions might fit the State’s law.
A church plan’s provisions might meet the church’s internal law and church doctrine.

If ERISA § 205 [29 U.S.C. § 1055] governs: http://uscode.house.gov/view.xhtml?req=(title:29 section:1055 edition:prelim) OR (granuleid:USC-prelim-title29-section1055)&f=treesort&edition=prelim&num=0&jumpTo=true.

Read particularly ERISA § 205(b)(1)(c)(ii). Even if other conditions for not requiring a qualified joint and survivor annuity are met, a participant can’t elect a life annuity other than a QJSA without a qualified election with the spouse’s consent.

The Retirement Equity Act of 1984 lives.