Pension Beneficiary Change After Divorce

My husband and I recently divorced.  We had chose to each keep our own pension plans and change beneficiaries to our children from previous marriages.

Our settlement agreement stated we would each retain 100% of our individual pensions and beneficiary was to be revoked including any designation of each as a recipient to survivor benefits.

The settlement agreement also stated the court reserves jurisdiction to issue a QDRO.  And if the plan did not permit a change to beneficiary then a constructive trust would be setup to ensure the children would receive the pension benefits.

i worked for HP and their plan is a defined benefit pension plan which is managed by Fidelity.

i worked through Fidelity and kept hitting a brick wall. No change to beneficiary after beginning to draw from the pension.  Then a Fidelity agent suggested I get a QDRO which would address the beneficiary rights.  However, the third party company I was referred to said there was no delegation for beneficiary in the company QDRO.  Beneficiary changes were not allowed.

i contacted the companies HR department and found an HR manager who gave me some guidance on getting the beneficiary changed.  I needed to provide a letter of instruction and my final divorce judgement outlining the terms of the pension.

i provided this documentation and was denied a beneficiary change.  I asked the HR manager who would receive the pension benefits upon my death. And he stated it would remain my ex-husband.

i am going to try and appeal this decision.  Meanwhile has anyone encountered this type of denial before?  If so, have they had any success on subsequent tries?

I didn’t provide an updated beneficiary statement as I understood from Fidelity the reluctance is the payment is calculated based on my husbands age and life expectancy.  To make that a non issue I stated to just restore my full pension.

i do have a beneficiary designation form which has a notarized signature from my ex-husband stating he will agree to having his beneficiary rights revoked.

The beneficiary form includes trust names and individual names under the trust. Or the beneficiary names.

I've been doing some reading about Retirement Trusts.  Would using a Retirement Trusts work around this problem if I submitted the beneficiary form with a trust named?

if that fails and my ex-husband passes away how do I setup a constructive trust that will pass along his pension to his kids but not have to pay taxes on funds I won’t receive?

Thanks for your patience reading this!  Any advice is much appreciated!

Carole

It might help to clarify the status of the benefits:

1. Are you asking with respect to one pension or both? You seem to be talking about your pension, and then switch at the end to talk about your ex spouse’s pension.

2. You state that you are the designated beneficiary under X’s pension. Is X is the designated beneficiary under your pension? Please confirm.

3. What is the form of benefit that has been elected under each relevant pension?

4. Do the pensions have a form of benefit for a non-spouse beneficiary? What are the forms of benefits available under the pensions?

5. Who has terminated or retired? Who has a pension in pay status? 

6. What would be the disposition of survivor benefits if the designated beneficiary at the time of payment disclaimed benefits? You would have to ask the plan administrator(s) about that because plans take different approaches.

Since both pensions are the same - joint with survivor benefit annuity both started to be drawn after retirement I think answers would apply to both pensions.  It’s a month pension amount we both receive from our respective pensions.

so yes, I am asking about both.  
 

There was a cash-out benefit or a monthly benefit amount available to choose from.  We both chose the monthly benefit amount at retirement in 2015.

The beneficiary can be someone other than the spouse or a trust. But permissions has to be written and notarized from spouse.

I asked the HR department what would happen to my pension if I died and they said it would go to my ex-husband.  

We are both in pay status

In general, most plans do not allow any form of payment to be changed after the commencement date.  Very likely, a joint and survivor benefit cannot be changed.  Therefore, the choice of beneficiary has already been made; you both choose the other spouse.  Important: this selection of spouse as beneficiary does not mean, "whoever is my spouse at my date of death", but instead it means "whoever is my spouse at the time my payments begin", so that subsequent divorce is not relevant.  Usually, so you should verify.

You state in original post, "...the beneficiary was to be revoked...".  Since each person's benefit is in pay status, any "revocation" would be an impermissible change under the plan.  The divorce decree has no authority to alter the plan.  Also, your children and/or trust will not be relevant, since no beneficiary change is permitted.  Also, it is unlikely a QDRO could change anything because a QDRO has no authority to require the plan to do something outside of existing plan provisions.

As far as I can tell from your description, there is nothing to be done.  Whichever of you (exes) outlives the other will receive the relevant survivor benefit from the deceased's benefit form, and no one else will get anything.

A few plans might allow some type of change, but it is extremely rare; you should verify within the paperwork you received at the time of your election.   For what it's worth, in my 40+ years as a pension actuary, I saw exactly zero plans that permitted a change of joint and survivor form or beneficiary after the payment commencement date.

I reach the same conclusion and for the same reasons as david rigby.

I hope you both have the same good faith and resolve because the best I can envision for what you want to achieve is that when the participant dies, the beneficiary will give the participant’s children as gifts what is received by the beneficiary from the plan — after retaining the amount necessary to pay the beneficiary’s income taxes on the distributions. That will be a royal pain to (self) administer, but probably the payment amounts and the number of children will mean no gift tax/lifetime exemption issues. Unfortunately, artificial inflation of income may have other complications, such as the effect on calculation of Medicare premiums.

Estate planning trickery in connection with pension plans is not in my wheelhouse. Maybe someone else can come up with something better.

Fidelity acts as the Third Party Administrator ("TPA") of 2 HP defined contribution plans. They are -

HP Inc. 401(k) Plan

HP Inc. Deferred Profit-Sharing Plan

...and 3 defined benefit plans - 

EDS Retirement Plan 

HP Inc. Cash Account Pension Plan 

HP Inc. Retirement Plan 

We can ignore the 2 defined contribution plans and assume that you are likely dealing with the HP Inc, Retirement Plan. 

Attached is a copy of the instructions that Fidelity will provide to those of us who prepare QDROs. I you look at page 16 you will see: 

"1. If the Participant has commenced benefits prior to the qualification of the Order, the Alternate Payee will receive survivor benefits from the Plan following the death of the Participant ONLY IF the Participant elected a benefit form that provides for survivor benefits and named the Alternate Payee as beneficiary at commencement. The Order cannot alter a previously elected benefit form or beneficiary designation."

What this means is that timing is everything.  If your husband retired before the divorce  and elected you as the recipient of his Qualified Joint and Survivor Annuity following his death (and assuming that you survive his death), that election is locked in when he commences receipt of his benefits (goes into pay status).  It might have been subject to change by a QDRO if he was not yet in pay status, but that ship has sailed. 

Note that the language quoted above also appears in the "Cash Account Pension Plan" instructions and in the "EDS Plan" instructions as well.  

Federal and most State laws require that a spouse will receive a survivor annuity automatically unless waived.  See, e.g., ERISA § 205(a)-(d), 29 U.S.C. § 1055(a)-(d), and see REA 26 CFR § 1.401(a)-20, Answer 25(b)(3) that provides: 

"(3) Divorce. If a participant divorces his spouse prior to the annuity starting date, any elections made while the participant was married to his former spouse remain valid, unless otherwise provided in a QDRO, or unless the participant changes them or is remarried. If a participant dies after the annuity starting date, the spouse to whom the participant was married on the annuity starting date is entitled to the QJSA protection under the plan. The spouse is entitled to this protection (unless waived and consented to by such spouse) even if the participant and spouse are not married on the date of the participant's death, except as provided in a QDRO."

What this mean is that if  an employee retires while still married, the spouse will receive a survivor annuity (unless waived by the spouse in advance) and no subsequent divorce will undo that mandatory election regardless of whether or not the parties or the judge have addressed it in the divorce proceeding.  You would not know this, and most attorneys do not understand this.

The rule is different with respect to non-ERISA Plans.  For example,Federal retirement Plans under FERS, CSRS, FSPS or the Military, a survivor annuity elected by the employee at retirement and while still married will not survive the divorce (unless the employee/Member was retired and in pay status or died prior to divorce) and must be reinstated with an appropriate court order, a Court Order Acceptable for Processing (“COAP”) or a Military Retired Pay Division Order (“MRPDO”). 

What you two have waived is the receipt of any share of each other's retirement annuity (paid from and after the Participant goes into pay status and terminating on the Participant's death).  But when the Participant dies, the survivor annuity will pass to whoever was elected at the time of retirement.  You are getting it whether you wanted it or not. 

lFidelity is not the easiest TPA to deal with, but if the Plan Documents do not address your issue and allow something that ERISA does not provide, you are likely not going to succeed.  There may be some wrinkle in your state law that may help, but you are going to have to find an attorney experienced in QDRO preparation to help you. 

And, BTW, you have no appeal from your divorce case.  Neither party or the judge made any mistakes reviewable by an appellate court.  You find yourself in this predicament as a result of your own actions and the refusal of Fidelity to do what you want.  If you sue anybody it will be Fidelity and you will wind up in Federal Court and spend tens of thousands of dollars fighting this battle. 

And just so you know, the survivor annuity benefit is not free.  It is paid for by an actuarial deduction from the retirement annuity computed by an actuary hired by Fidelity for that purpose. And that cost is coming "off the top" so both of you are contributing to the cost of each other's survivor annuity. That should make this outcome more palatable. 

Workaround:  You two can make a deal to pay whatever you receive in QJSA benefits back to the deceased party's estate (less the state and Federal taxes you were required to pay on the survivor annuity income) for distribution to you desired beneficiary(ies). 

Or you can hire an actuary to determine the present value of the QJSA to be received by the survivor, estimate and deduct taxes, have the potential survivors make  lump sum payments to other party, and just keep the survivor annuity.  This is not very accurate since you don't know the exact amount of the survivor annuity or when payments will start or the life expectancy of the Participant and of the survivor.  So the actuary will use life expectancy tables and historical interest rates to discount the value of a stream of payments.  But it's better than nothing. 

David 

HP DP Instructions.pdf

Follow up.  

See these appellate decisions that support my comments above: 

152 A.D.3d 765 (2017)
59 N.Y.S.3d 421
2017 NY Slip Op 05818
In the Matter of ANTHONY J. CHRISTIE, Deceased.
DIANE D. EDWARDS-McMAHON, Respondent;
SANDRA L. CHRISTIE, Appellant.

BOARD OF TRUSTEES OF THE INDIANA STATE COUNCIL OF PLASTERERS & CEMENT MASONS PENSION FUND, Plaintiff(s),
v.
ASHLEE STEFFENS, KENDRA D. STEFFENS, and BRIAN KINKADE in his capacity as Interim Director of the MISSOURI DEPARTMENT OF SOCIAL SERVICES, Defendant(s).
Case No. 4:12CV513 JCH.
United States District Court, E.D. Missouri, Eastern Division.  (October 22, 2012)

963 F.3d 1197 (2020)
Wanda CROWDER, Plaintiff-Appellant,
v.
DELTA AIR LINES, INC., et al., Defendants,
The Delta Air Lines, Inc. Family-Care Savings Plan, the Administrative Committee of Delta Air Lines, Inc., Fidelity Workplace Services, LLC, Defendants-Appellees.
No. 19-12342.
United States Court of Appeals, Eleventh Circuit.  (June 26, 2020)

and

943 F.Supp.2d 130 (2013)
John VANDERKAM and Gaylyn Dieringer, Plaintiffs,
v.
PENSION BENEFIT GUARANTY CORPORATION and Melissa VanderKam, Defendants.
Civil Action No. 09-cv-1907 (RLW).
United States District Court, District of Columbia. (May 7, 2013).

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It seems to me that your settlement already states what is to occur—"And if the plan did not permit a change to beneficiary then a constructive trust would be setup to ensure the children would receive the pension benefits.”  Since the plan is not permitting a change to the beneficiary, a constructive trust is to be put in place.

Constructive trust rules will be set forth below but initially note that a constructive trust arrangement under your facts is inherently unfair to one set of the kids because of the joint and survivor annuities (JSAs).  Since the JSAs cannot be changed and each spouse is a beneficiary of the survivor benefit of the other’s JSA, when the first spouse dies, the surviving spouse will start receiving survivor benefits and that surviving spouse should then pay the deceased spouse’s kids the survivor benefit.  However, when the surviving spouse dies, there will be no benefits for the kids of the spouse that died first because that spouse will already be dead and will not be eligible for a survivor’s benefit (i.e., there is no surviving spouse of the second to die spouse to pay).  Whether a constructive trust is used or not, there is no benefit for the beneficiary of the spouse who dies last (again, since there is no surviving spouse).

In case you still care…. The constructive trust merely means that a spouse who receives the survivor benefit is obligated to pay the other spouse’s kids that benefit.  A constructive trust is not a true trust but merely a legal fiction that is set up by court order to prevent unjust enrichment or, here, to prevent one party from receiving benefits that have been ordered to be provided to other parties.  The constructive trust requires the party who has “wrongfully” obtained the survivor benefits to return or forward the benefits to the rightful parties.

Constructive trusts will not be created by you or your ex-spouse but are merely implied by the order of the court. They lack any legal framework and they also do not have a true trustee.  In a constructive trust, when the first spouse dies, the surviving spouse who receives the survivor benefits of the deceased spouse will be treated as if they were a trustee (having fiduciary duties and) acting on behalf of the deceased spouse’s kids from the date upon which they start receiving the survivor benefits. The surviving spouse must therefore hand over any benefits (plus interest or earnings) they obtain to the rightful recipients (i.e., the deceased spouse’s kids).  As noted above, this does not work for the second to die’s kids.

If you do this, you will need to consult your accountant or a tax attorney to determine the taxation of these amounts.  It seems that if this is construed as a constructive trust as ordered by the court, as the “trustee” of any amounts of survivor benefits, the “trustee” would not be taxed on the amounts received, assuming they transfer the amounts to the kids, and that the kids would be taxed as the beneficiaries of these amounts.  However, there will be an issue because the distributing plan will issue 1099Rs to the surviving spouse and not to the kids.  Your tax advisors will have to determine how to handle this.  Like others noted above, at worse, the surviving spouse should be able to net the amounts out if taxes are imposed on them.

Thank you for framing the arrangement in terms of the “constructive trusts that were mentioned in the original post. Do you think the constructive trust is enforceable if the trustees so not voluntarily administer as described? ERISA preempts and has been held to favor the spouse (now former spouse) who has been designated as the contingent annuitant in accordance with the ERISA mandate.

Right, ERISA would require payment to the surviving spouse under the prior election of the JSA.  Once the surviving spouse is paid, ERISA has been satisfied.  State law would then kick in because under the order the constructive trust is to kick in by order of the court.  Once the benefit is paid to the surviving spouse, if that surviving spouse does not fulfill its obligation as a constructive trustee, the children of the deceased spouse will have a State law claim against the surviving spouse for the amount of the benefit received (plus interest).  This is not a claim against the plan for a benefit but a claim against the surviving spouse based on the divorce settlement and also due to a breach of fiduciary duty.  Other than the breach of fiduciary duty, this would be similar to a creditor (other than perhaps the IRS) having a claim against a qualified plan participant.  The creditor cannot be assigned any portion of the participant's qualified plan benefit.  However, once the benefit payment hits the participant's hands or bank account, it is fair game to the creditor. 

Thank you for all the replies to my post.  My ex-husband and I had no idea how complicated the beneficiary issue really is.  It seemed like a simple request.  For purposes of using the constructive trust to distribute the funds to the survivor's children would a "qualified disclaimer" made by the survivor be acceptable to the IRS mitigate the tax issue?

Apologies if this question falls outside of the group's pervue.

I don't think so.  While it is true that a qualified disclaimer means that the person who would have otherwise received the payment would not have any tax consequences because they did not receive any of the benefit under the qualified disclaimer, the disclaimer may cause an unintended consequence.  Quick note...not only must the disclaimer meet 2518 of the Internal Revenue Code but it also must meet state law. I am only looking at federal law... many states use a rule that treats the disclaimer as predeceasing the dead participant, which might actually make it easier to see the issue I am bring up but--state law--I am not going there.

If a qualified disclaimer is provided to the Plan (and assuming the Plan accepts a qualified disclaimer (some plans don't)), it will affect to whom the Plan pays the survivor benefit, and it might actually cause no survivor benefit to be paid.  Under a qualified disclaimer, the disclaiming surviving spouse will not be paid any of the funds by the Plan and under IRC 2518 he or she cannot have any say on to whom the benefit, if any, will be paid.

Under the joint and survivor annuity (JSA) form of benefit that was elected in your case the survivor benefit can only be paid to the surviving spouse.  If the surviving spouse that is to be paid files a disqualified disclaimer, then under 2518 the Plan will not pay the survivor annuity to the surviving spouse.... and there cannot be another surviving spouse (as noted previously, the surviving spouse is the spouse on the day the JSA benefits commenced... no one else).  Under the qualified disclaimer, the surviving spouse will have set things up where under they can't be paid and no one else is eligible to receive the benefit.  So, it appears to me that under the terms of the Plan and the JSA election, the Plan w/could not pay anyone else the survivor benefit and the Plan might be able to just keep these funds. 

Don't rely on my thoughts here...but be very careful If considering a qualified disclaimer and go to your own attorney or other qualified advisor before doing so.