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Retirement Benefits Planning Update
Retirement Benefits Planning Update Editor: Harvey B. Wallace II, Joslyn Keydel & Wallace, LLP, Albert Kahn Building, 9th Floor, 7430 Second Ave., Detroit, MI 48202-2717, email@example.com .
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.
Update on QDROs
Under the anti-alienation rule of Code § 401(a)(13), a tax-qualified pension or profit-sharing plan may generally benefit only an individual who is a plan participant, at least during the participant's lifetime. An exception is made in the case of QDROs (qualified domestic relations orders) that specifically provide for benefits to be distributed to a participant's former spouse. Code § 414(p) provides that a "domestic relations order" is any judgment, decree, or order (including approval of a property settlement agreement) that is made under 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 a qualified plan payment to an "alternate payee" (a spouse, former spouse, child, or other dependent of a participant). To be a "qualified" domestic relations order, the order must (1) specifically identify the alternate payees, the benefits payable to them, the period of payment, and the plan involved and (2) may not require any form or amount of benefit not otherwise provided by the plan.
The determination of whether or not a domestic relations order is a QDRO is made by the plan administrator within an 18-month period beginning with the date on which the first payment would be required under the domestic relations order. Code § 414(p)(6)(E). If the plan administrator identifies deficiencies in a domestic relations order that must be rectified to make the order a QDRO, such modifications are typically made during the 18-month period. Intervening events, however, such as the participant's death, retirement, or bankruptcy, may cut off a spouse's right to have a domestic relations order made into a QDRO. Among other recent developments discussed below, a number of recent judicial decisions have modified what had appeared to be a rigid set of rules preventing the qualification of domestic relations orders when such intervening events occur.
Participant's Retirement or Death
The right of a participant's current spouse to survivor benefits if the participant dies vests upon the participant's retirement or death under ERISA § 205. Accordingly, unless the participant's former spouse obtains a QDRO before the remarried participant's retirement date, the opportunity to obtain a QDRO is foreclosed. Rivers v. Central and South West Corp., 186 F.3d 681 (5th Cir. 1999), and Hopkins v. AT&T Global Info. Solutions Co., 105 F.3d 153 (4th Cir. 1997). A participant's death during the process of having a domestic relations order approved as a QDRO by the plan similarly cuts off the former spouse's rights if the participant has remarried and is survived by a current spouse. Stahl v. Exxon Corp., 212 F. Supp. 2d 657 (S.D. Tex. 2002). Conversely, in the case of unremarried participants, post-death QDROs have now been upheld in several fact situations.
In Trustees of the Directors Guild of America—Producer Pension Benefits Plans v. Suzanne R. Tise, 234 F.3d 415 (9th Cir. 2000), a participant died before a domestic relations order in favor of his children had been approved as a QDRO. Noting that there was no ERISA provision that required that a QDRO must be issued before benefits become payable on account of a participant's retirement or death to be valid, the court stated that, under the statutory scheme, whether an alternate payee has an interest in a participant's pension plan is a matter decided by a state court according to the state's domestic relations laws. Obtaining a QDRO allows the alternate payee's interest to be enforced against the plan. Because the QDRO was obtained within 18 months of the participant's death and was issued as a follow up to a pre-death domestic relations order that had been filed with the plan, it merely rendered enforceable an already existing interest and thus prevailed over the participant's designation of a different (nonspouse) beneficiary. A similar result was reached when a QDRO was obtained by a former spouse two days after the participant's death. Hogan v. Raytheon Co., 302 F.3d 854 (8th Cir. 2002).
A domestic relations order issued as a final judgment of divorce in 1990 was first presented to the plan in 1998, two months after the participant's death. The plan argued that the domestic relations order would have the effect of increasing the liability of the plan over plan provisions and therefore did not qualify as a QDRO. Distinguishing Samaroo (discussed below), the court held that, because the domestic relations order was executed before the participant's death, the plan's liabilities were ascertainable and remained unchanged. Barbara Smith v. Mark Smith Estate, 248 F. Supp. 2d 348 (D.N.J. 2003). The court noted that ERISA does not require that a domestic relations order be received by the plan administrator to meet the QDRO requirements.
Nunc Pro Tunc
A nunc pro tunc ("now for then") order is one having retroactive effect, often issued to correct a clerical error or inadvertent omission. When a nunc pro tunc domestic relations order was issued after a participant's death and modified the original divorce decree (which only awarded a former spouse an interest in the participant's pension benefits on the participant's retirement) to provide for survivorship rights, it was held that the order was not a QDRO because the order had the effect of increasing plan benefits after all survivorship rights had lapsed as of the participant's death. Samaroo v. Samaroo, 193 F.3d 185 (3d Cir. 1999), cert. denied sub nom . Samaroo v. AT&T Management Pension Plan, 529 U.S. 1062 (2000). The opinion notes that the attorney who drafted the settlement agreement had testified that the issue of survivor's benefits never arose at the time of the agreement's negotiation.
In Patton v. The Denver Post Corp., 326 F.3d 1148 (10th Cir. 2003), the court stated that it rejected the holdings of Samaroo that (1) the alternate payee's entitlement had to be established as of the day the participant died and that (2) a nunc pro tunc order entered after the date of the participant's death was necessarily an order that increased benefits and thus could not become a QDRO. In Patton, the participant, who was covered by two company pension plans, received information regarding only one of the company's pension plans from the company in response to his pre-divorce request for a description of his benefits. One plan's benefits were thus inadvertently omitted from the original 1988 domestic relations order. A nunc pro tunc order providing that the second pension plan's benefits be subject to the original order's provisions that applied to the included plan was entered 11 months after the participant's death in 1999 and was submitted to the plan. Because the participant had not remarried, no other person had a vested interest in the plan benefits. The court concluded that, if the nunc pro tunc order is given full faith and credit, there can be no increase in benefits because the order is considered to have been entered before the death of the participant. Because the state court and the parties inadvertently lacked full information as to the assets to be distributed in the divorce settlement, the court observed that the nunc pro tunc order is akin to the correction of a clerical error, which is an accepted use of nunc pro tunc orders.
Intervening Participant Bankruptcy
Once a bankruptcy petition is filed, a broad automatic stay against attempts to enforce or collect prepetition claims that would affect the property of the bankruptcy estate goes into effect under Section 362(a) of the Bankruptcy Act. In In re Carbaugh, 278 B.R. 512 (B.A.P. 10th Cir. 2002), the bankruptcy appellate panel of the Tenth Circuit affirmed the bankruptcy court's lifting of the automatic stay to allow the debtor plan participant's former spouse to continue state court proceedings to qualify a prepetition domestic relations order as a QDRO. In distinguishing the domestic relations order from any personal claim against the participant debtor that might be dischargeable in bankruptcy, the court held that the divorce decree (rather than a subsequently obtained QDRO) gives the spouse a property interest in the plan that correspondingly limits the debtor's interest. The fact that the provisions of ERISA prevented the spouse from enforcing her interest in the plan did not suggest that the wife had no interest until she obtained the QDRO. Citing Gendreau v. Gendreau, 122 F.3d 815 (9th Cir. 1997), the court stated that to permit a debtor to defeat a party's interest in a pension plan by filing bankruptcy at an opportune time would frustrate both ERISA and bankruptcy purposes.
Alternate Payee's Bankruptcy
Bankruptcy Code § 541(c)(2) excludes a debtor's interest in an ERISA-qualified plan from the debtor's bankruptcy estate as an interest in a trust subject to a restriction on transfer enforceable under applicable nonbankruptcy law. Patterson v. Shumate, 504 U.S. 753 (1992). ERISA § 206(d)(1) states that "each pension plan shall provide that benefits provided under the plan may not be assigned or alienated." In In re Hageman, 260 B.R. 852 (Bankr. S.D. Ohio 2001), discussed in the September/October 2001 Update, it was held that the rationale of Patterson did not apply to exclude a debtor spouse's interest in an ERISA plan because that interest did not emanate from the ERISA plan itself, but from the QDRO.
In Nelson v. Raimetta, 322 F.3d 541 (8th Cir. 2003), the alternate payee debtor filed for bankruptcy while the retirement plan was determining whether a domestic relations order was a QDRO and sought to exclude his interest in the plan from his bankruptcy estate. The court observed that Bankruptcy Code § 541(c)(2) specifically refers to the "beneficial interest of the debtor in a trust" and therefore applies to a beneficiary's interest in an ERISA plan as well as to a plan participant's interest in a plan. Citing Boggs v. Boggs, 520 U.S. 833 (1997), the court concluded that an alternate payee is to be considered a plan beneficiary and that all persons conferred beneficiary status via a QDRO are to be given the same protections that ERISA affords to plan participants, including the protections of ERISA's anti-alienation provisions. Finally, the court rejected the reasoning of Hageman as failing to address the plain language of ERISA, which provides that an alternate payee under a QDRO is considered a beneficiary under the plan. See also In re Hthiy, 283 B.R. 447 (Bankr. E.D. Mich. 2002), reaching the same result.
Use of QDRO as Security
In PLR 200252093, dated December 26, 2002, a plan participant proposed to secure nonplan obligations to the former spouse under a divorce decree with the balance of the participant's retirement plan account remaining after a portion of that account was transferred to the spouse under a traditional QDRO. The ruling notes that the term "assignment" (which is prohibited in the absence of a QDRO) is broadly defined to include any indirect arrangement whereby a spouse acquires from a participant a right enforceable against the plan in all or any part of a benefit payable to the participant. Treas. Reg. § 1.401(a)-13(c)(1)(ii). Accordingly, if such an assignment of a security interest in a plan benefit is made under a domestic relations order, which is determined to be a QDRO under Code§ 414(p), such an assignment as a lien is permissible. See PLR 9234014, which permitted cross-liens to secure each divorcing spouse's obligations under a judgment of divorce by placing liens on both the portion of the account assigned to the spouse by a traditional QDRO and the participant's remaining account balance.
Administrative Cost of QDROs
Revising its previous position that QDRO processing fees could not be allocated to the participant or alternate payee in a defined contribution plan because the expense was attributable to the exercise of a statutory right, the Department of Labor, in ERISA Opinion Letter No. 94-32A (2003), identifies QDRO expenses (along with expenses associated with hardship withdrawals, the computation of benefits payable under differing distribution options, benefit distributions, and the maintenance of the accounts of separated participants) as expenses that may be allocated directly to a specific participant's or alternate payee's account if the expense is reasonable.