New Jersey Law
Journal
August 6, 2001
Family Law
Former Spouse Can Receive Retirement Plan Benefits as a
Spouse
A QDRO may provide for treatment of a former spouse as
the participant's spouse with respect to survivor benefits
that must be provided under ERISA
By Joel R. Brandes
The author has offices in Garden City and New York City
and is counsel to the law firm of Ellen M. Seigerman of
Parsippany. He wrote Law and the Family New York,
second edition (West Group revised 2000) and co-authored
Law and the Family New York Forms, (West Group
revised 2000) and writes a regular monthly column in the
New York Law Journal.
If you've handled just one divorce case, doubtless you
know that all or part of your client's interest in a
retirement plan may be divided, without any tax
consequences to the transferor, by a transfer to a spouse
or a child that is authorized by a Qualified Domestic
Relations Order. But there are many nuances of the law
that are called for in the preparation of the order to
ensure it will be qualified by the plan administrator.
Most pension plans are governed by the Employees
Retirement Income Security Act, which applies to private,
employer-sponsored plans and limits the time, manner and
method of the distribution of the plan benefits. Both the
newly admitted attorney and the seasoned attorney must
become familiar with ERISA in order to make the division
of these assets upon divorce as stress and malpractice
free as possible.
Anti-alienation
ERISA's anti-alienation rule, USCA 1056(d), IRC
§401(a)(13), requires all pension, profit-sharing or stock
bonus plans of which the pension trust is a part to
provide that the plan benefits may not be anticipated,
assigned or alienated, or be subject to attachment,
garnishment, levy, execution or other legal or equitable
process. It was intended to ensure that the employee and
his beneficiaries would reap the ultimate benefits due on
retirement.
Assignment or alienation includes any arrangement
providing for the payment to the employer of plan benefits
that would otherwise be due the participant under the
plan. It also includes any direct or indirect arrangement,
whether revocable or irrevocable, whereby a party acquires
from a participant or beneficiary an enforceable right or
interest against the plan in, or to, all or any part of a
benefit payment which is, or may become payable to the
participant or beneficiary.
However, the anti-alienation rule does not apply to a
transfer of a participant's benefits to a spouse, former
spouse, child or dependent, pursuant to a qualified
domestic relations order. So, in order to transfer an
interest in a pension trust to a spouse without violating
the anti-alienation rule, there must be a QDRO.
Major problems may occur for a recipient spouse, and
her counsel, if the participant dies or retires before the
QDRO becomes effective. Counsel should consider holding
entry of the divorce or dissolution judgment in abeyance
pending the qualification of the domestic relations order
by the plan administrator. If the participant makes the
decision to retire, he is usually offered several payment
options by the plan administrator. If he elects a higher
paying life-only annuity payment, rather than a joint and
survivor annuity, he receives the payments for the rest of
his life. Once he dies all the payments end.
If the participant dies before the QDRO is approved,
having elected a life-only annuity payment prior to
marriage, the recipient spouse may receive nothing because
the deceased participant
=s
election of a form of a pension under an ERISA plan is
irrevocable. If the participant retires and receives
payments before the QDRO becomes effective, the recipient
spouse may not receive her share of those payments because
the plan administrator is not required to make retroactive
payments. Therefore, if the intention is to share the
payments, the qualified domestic relations order must be
approved before the participant retires.
Most of the benefits provided by qualified retirement
plans are retirement benefits that are paid during the
participant's life and survivor benefits that are paid to
beneficiaries after the participant's death. Usually, a
spouse can assign all or a portion of each of these types
of benefits to an alternate payee.
Plan Types
There are two basic types of qualified retirement
plans; a defined-benefit plan and a defined contribution
plan.
A defined-benefit plan is one that pays each
participant a specific benefit at retirement. It is
usually based on a formula that takes into account the
number of years the participant has been employed and the
participant's compensation. The basic retirement benefits
are usually periodic payments for the participant's life
beginning at the plan's normal retirement age. This is
known as an annuity. The plan may also provide that these
retirement benefits may be paid in other forms, such as a
lump-sum payment.
A defined-contribution plan is a plan that provides an
individual account for each participant. The benefits are
based solely on the amount contributed to the account, and
any income, expenses, gains and losses, as well as any
forfeitures of accounts of other participants that may be
allocated to the participant's account.
A profit-sharing plan, a 401(k)plan, an employee stock
ownership plan and a money-purchase pension plan are
defined contribution plans. These plans usually permit
retirement benefits to be paid in the form of a lump sum
payment of the participant's entire account balance.
Dividing Benefits
The "separate interest" method divides the
participant's benefits into two separate parts, one for
the participant and one for the alternate payee. The
treatment of subsidies provided by a plan, such as early
retirement benefits, and the treatment of future increases
in benefits due to increases in the participant's
compensation, additional years of service, changes in cost
of living, or as a result of other plan provisions, should
be considered when negotiating a property settlement based
on the separate-interest approach to allocate benefits
under a defined benefit plan. A QDRO may transfer to the
alternate payee all or part of the participant's basic
retirement benefits. It can also address the disposition
of any subsidy to which the participant may become
entitled after the QDRO has been entered.
If you are dividing an interest in a defined
contribution plan under the separate-interest method, the
participant's account may be invested in more than one
investment fund. If the plan provides for
participant-directed investment of the participant's
account, consideration should be given to how the
alternate payee's interest will be invested.
A participant's account balance may later increase due
to the allocation of contributions or forfeitures after
the QDRO has been entered. The property settlement should
provide that the amounts assigned to the alternate payee
will include a portion of such future allocations.
If the parties use the "shared payment" method, under
which benefit payments from the plan are split between the
participant and the alternate payee, the alternate payee
receives payments only when the participant receives
payments. You may provide that the alternate payee will
commence receiving benefit payments when the participant
begins receiving payments or at a later stated date, and
that the alternate payee will cease to share in the
benefit payments at a stated date, or upon a stated event,
provided that adequate notice is given to the plan.
In splitting the benefit payments, you may give the
alternate payee either a percentage or a dollar amount of
each of the participant's benefit payments. However, the
amount given cannot exceed the amount of each payment to
which the participant is entitled under the plan. If a
QDRO transfers a percentage of the participant's benefit
payments, rather than a dollar amount, then unless the
QDRO provides otherwise, the alternate payee generally
will automatically receive a share of any future subsidy
or other increase in the participant's benefits.
Transfer of Survivor Benefits
Survivor benefits include benefits payable to surviving
spouses and other benefits that are payable after the
participant's death. These benefits can be awarded to an
alternate payee.
A QDRO may provide for treatment of a former spouse of
a participant as the participant's spouse with respect to
all or a portion of the spousal survivor benefits that
must be provided under ERISA. 29 USCA 1056(d)(3)(B). Only
a spouse or former spouse of the participant can be
treated as a spouse under a QDRO.
Retirement plans do not need to provide the special
survivor benefits to the participant's surviving spouse
unless the participant is married for at least one year.
If the retirement plan to which the QDRO relates contains
such a one-year marriage requirement, then the QDRO cannot
require that the alternate payee be treated as the
participant's spouse if the marriage lasted for less than
one year.
Form of Payment
ERISA requires that defined benefit plans and certain
defined contribution plans pay retirement benefits to
participants who were married on the participant's annuity
starting date, which is the first day of the first period
for which an amount is payable to the participant, in a
qualified joint and survivor annuity. 29 USCA 1055(a).
Under a QJSA, retirement payments are made monthly, or at
other regular intervals, to the participant for his or her
lifetime.
After the participant dies, the plan pays the
participant's surviving spouse an amount each month, or
other regular interval, that is at least one half of the
retirement benefit that was paid to the participant. At
any time that benefits are permitted to commence under the
plan, a QJSA must be offered that commences at the same
time and that has an actuarial value that is at least as
great as any other form of benefit payable under the plan
at the same time. A married participant can choose to
receive retirement benefits in a form other than a QJSA if
the participant's spouse agrees in writing to that choice.
ERISA requires that defined benefit plans and certain
defined contribution plans pay a monthly survivor benefit
to a surviving spouse for the spouse's life when a married
participant dies prior to the participant's annuity
starting date, to the extent the participant's benefit is
nonforfeitable under the terms of the plan at the time of
his or her death. This benefit is called a qualified
preretirement survivor annuity.
An individual loses the right to the QPSA survivor
benefits when she is divorced from the participant.
However, if a former spouse is treated as the
participant's surviving spouse under a QDRO, the former
spouse is eligible to receive the QPSA unless she consents
to the waiver of the QPSA. 29 USCA 1055(c)(1)(A)(i). If
the spouse does not waive the QPSA, the plan may allow the
spouse to receive the value of the QPSA in a form other
than an annuity.
Alternate Payee Treated as Spouse
A QDRO may provide that an alternate payee who is a
former spouse of the participant will be treated as the
participant's spouse for some or all of the benefits
payable upon the participant's death, so that the
alternate payee will receive benefits provided to a spouse
under the plan. To the extent that a former spouse is to
be treated under the plan as the participant's spouse
pursuant to a QDRO, any subsequent spouse of the
participant cannot be treated as the participant's
surviving spouse.
Under a defined-benefit plan, or a defined-contribution
plan that is subject to the QJSA and QPSA requirements, to
the extent the former spouse is treated as the current
spouse, the former spouse must consent to payment of
retirement benefits in a form other than a QJSA or to the
participant's waiver of the QPSA.
For example, in a defined-benefit plan, the participant
would not be able to elect to receive a lump-sum payment
of the retirement benefits for which the alternate payee
is treated as the participant's spouse unless the
alternate payee consents.
Similarly, the former spouse's consent might be
required for any loan to the participant from the plan
that is secured by his retirement benefits. In a
defined-contribution plan that is not subject to the QJSA
and QPSA requirements, to the extent the QDRO treats the
former spouse as the participant's spouse under the plan,
the survivor benefits under the plan must be paid to the
former spouse unless she consents to have those benefits
paid to someone else.
ERISA requires the plan to allow the participant to
elect at any time, during the applicable election period,
to waive the "qualified joint and survivor annuity" form
of benefit or the "qualified preretirement survivor
annuity" form of benefit, or both. However, the
participant cannot make the election or revoke it without
the written consent of his spouse.
"Spouse" has been construed to mean the spouse of the
participant at the time he makes the election. Thus, a
waiver in a pre-nuptial agreement of a surviving spouse's
rights in a participant spouse
=s
ERISA governed retirement plan is ineffective because the
waiver is not made by a person who is a spouse of the
participant, just a spouse to be.
If the participant retires and has elected a joint and
survivor annuity, the spouse will receive the survivor
annuity on the death of the participant. If a participant
dies, and has selected a life-only pension, it is too late
to provide the spouse with survivorship rights. If a
participant retires and starts to collect payments before
a QDRO is approved, the plan may not make retroactive
pension payments to the former spouse.
These rules are based on the requirement of ERISA that
a pension plan may not be required to (1) provide any type
or form of benefit, or any option, not otherwise provided
by the plan, (2) provide increased benefits (determined on
the basis of actuarial value) and (3) make payment of
benefits to an alternate payee that are required to be
paid to another alternate payee under another order
previously qualified as a qualified domestic relations
order.
Case law developments in this area demonstrate that
these rules are unbending, and although counsel may obtain
a QDRO in a state court, it does not mean that it will be
recognized or enforced by the federal courts.
Preemption
ERISA
=s
preemption of state law in this area was emphasized by the
U.S. Supreme Court in Egelhoff v. Egelhoff, 121 S.
Ct. 1322, (2001). While David A. Egelhoff was married to
petitioner, he designated her as the beneficiary of a life
insurance policy and pension plan provided by his employer
and governed by ERISA. Shortly after petitioner and Mr.
Egelhoff divorced, he died intestate.
Respondents, Mr. Egelhoff's children by a previous
marriage, filed separate suits against petitioner in state
court to recover the insurance proceeds and pension plan
benefits. They relied on a Washington statute that
provides that the designation of a spouse as the
beneficiary of a nonprobate asset -- defined to include a
life insurance policy or employee benefit plan -- is
revoked automatically upon divorce. Respondents argued
that in the absence of a qualified named beneficiary, the
proceeds would pass to them as Mr. Egelhoff's statutory
heirs under state law.
The trial courts concluded that both the insurance
policy and the pension plan should be administered in
accordance with ERISA, and granted petitioner summary
judgment in both cases.
The Washington Court of Appeals consolidated the cases
and reversed, concluding that the statute was not
pre-empted by ERISA. The state Supreme Court affirmed,
holding that the statute, although applicable to employee
benefit plans, does not "refe[r] to" or have a "connection
with" an ERISA plan that would compel preemption under
that statute.
The U.S. Supreme Court, however, held that the state
statute had a connection with ERISA plans and was
expressly preempted. It noted that ERISA's preemption
section, 29 U.S.C. §1144(a), states that ERISA "shall
supersede any and all State laws insofar as they may now
or hereafter relate to any employee benefit plan" covered
by ERISA. A state law relates to an ERISA plan "if it has
a connection with or reference to such a plan."
The Court stated that requiring administrators to
master the relevant laws of 50 states and to contend with
litigation would undermine the congressional goal of
minimizing their administrative and financial burdens. It
also noted that differing state regulations affecting an
ERISA plan's system for processing claims and paying
benefits impose precisely the burden that ERISA preemption
was intended to avoid.
ERISA
=s
unbending nature was emphasized in Samaroo v. Samaroo;
AT&T Management Pension Plan v. Robichaud, 193 F.3d
185 (3d Cir, 1999), where Robichaud and Samaroo were
divorced on October 25, 1984, by the New Jersey Superior
Court, Chancery Division.
The divorce decree incorporated a property settlement
reached by the parties which had the following language
concerning Robichaud's rights in Samaroo's pension
benefits: "(d) Pensions, Profit Sharing and Bell System
Savings Plan Savings Plan -- (1) Husband has a vested
pension having a present value, if husband were to retire
at this time, of $1,358.59 per month. At the time of
husband's retirement and receipt of his pension he agrees
to pay to wife one half of said monthly amount."
Neither the decree nor the property settlement
mentioned any rights to Samaroo's survivor's annuity.
Samaroo died at the age of 53 on September 20, 1987, about
three years after the divorce, while still actively
employed by AT&T. He was covered under the AT&T Management
Pension Plan, a defined-benefit plan that provided
pensions and survivors' annuities in amounts based on a
percentage of the employee's average salary times years of
service.
Based on Samaroo's age and years of service, he had a
vested right to a deferred vested pension, which would
have begun, at the earliest, at age 55. Because Samaroo
did not live to the age to qualify to receive pension
payments, there were no pension benefits that ever became
payable in respect of Samaroo. Therefore, the benefit
expressly mentioned in the divorce settlement agreement
never came to fruition.
However, the plan provided a pre-retirement survivor
annuity available to the surviving spouse of any plan
participant who died after vesting but before retiring. If
there is no surviving spouse, there is no annuity.
The plan denied Robichaud's claim for a preretirement
survivor's annuity because the divorce decree did not
mention any entitlement to such rights, and in the absence
of a surviving spouse or a QDRO designating a former
spouse as such, there was no pre-retirement survivor's
annuity payable in respect of Samaroo.
Robichaud filed a motion in the New Jersey Superior
Court, to amend the final judgment of divorce nunc pro
tunc to convey to her a right to 50 percent of the
preretirement survivor's annuity payable in respect of
Samaroo. She joined the plan as a defendant in the divorce
case. The plan removed the action to federal court and
also filed a complaint for declaratory relief in the same
court. The two cases were consolidated. The district court
remanded that portion of the removed case that involved
the terms of the divorce, but retained jurisdiction of
Robichaud's claim against the plan for the retirement
benefits.
After a hearing, the New Jersey state court held that
the plan did not have standing to object to alteration of
the divorce decree. Samaroo's estate did not oppose
Robichaud's request to amend the decree nunc pro tunc,
since conveying the survivorship rights once Samaroo was
dead did not cost the estate anything, but undid the
effect of Samaroo dying without a survivor. The attorney
who drafted the agreement testified that the issue of
survivors
=
benefits never came up at the time of the agreement.
Robichaud herself testified that "neither Winston [nor his
attorney] or I thought about the survivor rights to this
pension."
Based on the evidence that the divorce was amicable,
the state court amended the divorce decree retroactively
to give Robichaud "rights of survivorship to 50 percent of
[Samaroo's] vested pension benefits."
The court noted, however, that whether or not the state
court order resulted in any benefits becoming payable to
Robichaud under the plan was a question of federal law
over which the federal court had retained jurisdiction and
which would have to be resolved by the federal court.
After the state court's ruling, Robichaud and the plan
filed cross motions for summary judgment in the pending
federal district court action. The district court examined
the statutory requirements for a QDRO under 29 U.S.C.
§1056(d)(3)(C) and (D). The district court held that a
domestic relations order is not a QDRO if it requires the
plan either to provide any type of benefits not otherwise
provided by the plan or to provide increased benefits.
The court relied on the reasoning of Hopkins v. AT&T
Global Information Solutions Co., 105 F.3d 153 (4th
Cir. 1997), to conclude that entitlement to a survivor's
annuity in respect of Samaroo had to be determined as of
the day Samaroo died, and that the amended divorce decree
represented an attempt to obtain increased benefits from
the plan. The court therefore entered summary judgment for
the plan and against Robichaud.
On appeal the Third Circuit affirmed. It noted that the
lower court relied on the statutory language defining
QDROs. The court held that a domestic decree that would
have the effect of increasing the liability of the plan
over what has been provided in the plan (read in light of
federal law) is not a QDRO, no matter what the decree's
status under state law.
The District Court held that a decree conferring
survivor's benefits on Robichaud after those benefits have
lapsed would provide increased benefits and therefore
cannot be a QDRO. The district court relied on the Fourth
Circuit's decision in Hopkins, which recognized
that defined benefit plans are based on actuarial
calculations that would be rendered invalid if
participants were allowed to change the operative facts
retroactively.
The Third Circuit held that because the disbursement of
plan benefits is based on actuarial computations, the plan
administrator must know the life expectancy of the person
receiving the surviving spouse benefits to determine the
participant's monthly pension benefits. As a result, the
plan administrator needs to know, on the day the
participant retires, to whom the surviving spouse benefit
is payable.
Robichaud argued that by determining the right to
benefits as of the day of Samaroo's death, the plan has
cheated Samaroo out of receiving any benefit from
participating in the plan. The court rejected this
argument because successful operation of a defined benefit
plan requires that the plan's liabilities be ascertainable
as of particular dates. The annuity provisions of a
defined benefit plan are a sort of insurance, based on
actuarial calculations predicting the future demands on
the plan.
The fact that some participants die without a surviving
spouse to qualify for benefits is not an unfair
forfeiture, as Robichaud contended, but rather part of the
ordinary workings of an insurance plan. Allowing the
insured to change the operative facts after he has lost
the gamble would wreak actuarial havoc on administration
of the plan.
When Samaroo died without remarrying or naming
Robichaud as alternate payee of the survivor's rights, the
right to dispose of the benefits lapsed. Allowing Samaroo
or his estate to preserve the right to confer the benefits
on a new wife as long as he was alive and had the
possibility of remarrying, and then to designate Robichaud
as the surviving spouse after his death, is allowing him
to have his cake and eat it, too.
"Reprinted with permission from the August 6, 2001 New
Jersey Law Journal. Copyright 2001 NLP IP
Company."
