Retirement Benefits Planning Update provides information on developments in the field of retirement benefits law. The editors of Probate & Property welcome information and suggestions from readers.
Plan Benefits and Divorce
Under the anti-alienation rule of Code § 401(a)(13), a tax qualified pension or profit sharing plan generally may benefit only the plan participant during the participant's lifetime. An exception is made for a qualified domestic relations order (QDRO), which specifically directs that benefits be distributed to a participant's former spouse. A "domestic relations order" is any judgment, decree or order (including approval of a property settlement agreement) that is made under to a state domestic relations law (including, for this purpose, a community property law) and provides for child support, alimony payments or marital property rights by payment to an "alternate payee" (a spouse, former spouse, child or other dependent of a participant). To be "qualified," the order must specifically identify the alternate payees, the benefits payable to them, the period of payment and the plan involved and may not require any form or amount of benefit not otherwise provided by the plan.
Death Benefits After Divorce
On divorce, the surviving spouse benefits in Code §§ 401(a)(11) and 417 cease to apply to the former spouse. The participant's spouse, if any, at the time of death will be the surviving spouse for purposes of the spousal protection provisions. A QDRO may direct that all or a portion of these survivor benefits be paid to a participant's former spouse. To control benefits at death, a QDRO must be in effect at the participant's death and cannot be modified thereafter. See Samaroo v. Samaroo, No. 98-5245, 1999 WL 744019 (3d Cir. Sept. 24, 1999). Similarly, a current spouse's right to benefits becomes fixed on a participant's retirement unless a QDRO creating rights in a former spouse is then in effect. Rivers v. Central and South West Corp., 186 F.3d 681 (5th Cir. 1999).
The spousal survivor benefits required by ERISA vary according to the kind of plan involved (pension or profit sharing), the terms of the plan (which may provide spousal benefits greater than those statutorily required) and the elections made by the participant with spousal consent (to waive all or part of the survivor benefits). As a result, a remarried participant's beneficiary designation in favor of nonspouse beneficiaries may apply to one-half, all or none of the plan benefits. Absent a QDRO, death benefits that are not required to be paid to the participant's surviving spouse generally are payable to the beneficiaries named by the participant. If the former spouse is the designated beneficiary at the participant's death, however, there are two incompatible federal court positions as to whether the ex-spouse is entitled to plan benefits.
Former Spouse May Benefit
In Hendon v. E. I. Dupont De Nemours and Co., No. 96-6233, 1998 WL 199824 (6th Cir. Apr. 13, 1998), the Sixth Circuit held that the designation of a former spouse as beneficiary made in accordance with the plan procedures controlled, notwithstanding the contrary divorce decree provision under which no pension benefits were to pass to the former spouse. The decision was based on a determination that ERISA preempts state law in the case of the designation of beneficiaries of an ERISA plan and on the pragmatic administrative view that plan provisions should control. The Second Circuit appears to hold a similar view in favor of the uniform, uncomplicated administration of ERISA plans. Krishna v. Colgate Palmolive Co., 7 F.3d 11 (2d Cir. 1993).
Former Spouse May Not Benefit
In the Fourth, Fifth, Seventh and Eighth Circuits, the designation of a former spouse has been disregarded if the former spouse has waived rights to plan benefits under a divorce agreement (even though the "waiver" does not meet QDRO requirements or surviving spouse benefit waiver rules). See Fox Valley & Vicinity Construction Workers Pension Fund v. Brown, 897 F.2d 275(7th Cir. 1990); Altobelli v. IBM Int'l Business Machines Corp., 849 F. Supp. 1079 (D. Md. 1994), aff'd, 77 F.2d 78 (4th Cir. 1996). This result is based on the premise that, because the anti-alienation rule does not apply to nonparticipants, a nonparticipant beneficiary (such as a former spouse) may assign benefit rights and there is no ERISA provision that imposes formalities on the waiver of benefits by a nonparticipant spouse.
By looking beyond the beneficiary designation, the federal courts are creating an evolving federal common law to determine the parties' intent as to the intended recipient of plan benefits based on the factual circumstances of the divorce. Often the intent not to benefit the former spouse despite the continuing designation is found, but in Mohamed v. Kerr, 53 F.3d 911 (8th Cir. 1995), the court concluded that the participant intended to benefit the former spouse named as beneficiary. In Brandon v. The Travelers Insurance Co., 18 F.3d 1321 (5th Cir. 1994), the Fifth Circuit applied the Texas statutory rule that creates a presumption of waiver of benefits by a former spouse named as beneficiary to deny the former spouse benefits absent a redesignation following divorce. The Washington State Court of Appeals reached the same result by direct application of a state statute, ruling that ERISA did not preempt the statute. In re the Estate of David A. Engelhoff, Nos. 22293-1-II & 22562-0-II (Wash. Ct. App. Dec. 23, 1998).
Changing the Designation
A change of beneficiary designation must occur after the divorce. An attempted change of beneficiary before a divorce was final was held to be void because of the failure to obtain spousal consent for the changed designation and, accordingly, the former spouse was entitled to plan benefits. Merchant v. Corder, No. 98-2128, 1999 WL 486590 (4th Cir. July 12, 1999).
The diverse and unpredictable results in these cases demonstrate the importance of proper planning and execution. An appropriate post-divorce beneficiary designation should be executed and filed with the plan administrator in conformity with the divorcing parties' intent. If the intent is to benefit the former nonparticipant spouse, a QDRO is recommended. If the intent is not to benefit the former nonparticipant spouse, a new beneficiary designation may be the only alternative to post-death litigation.
Retirement Benefits Planning Update Editor: Harvey B. Wallace II, Joslyn Keydel & Wallace, 211 West Fort St., Suite 2211, Detroit, MI 48226-3270.