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June 2008 Newsletter - QDRO Update
June
19, 2008
To: Family Law Practitioners
From: Marc S. Schechter, Esq.
As you are aware,
issues relating to the division of retirement and
other employee benefits are among the most
complicated facing family law practitioners. Since
the creation of the “QDRO” concept as part of the
Retirement Equity Act of 1984, there has been an
evolving body of regulatory pronouncements and
judicial decisions impacting the division of
retirement plan benefits.
We hope the following
commentaries related to recent developments with
QDROs will assist you in advising your clients on
these matters.
Supreme Court to Hear Issue of Ex-Spouse Waiver of
Benefits in a Divorce
Have you ever drafted
a Marital Settlement Agreement and included a
provision allowing the nonemployee spouse of a
retirement plan participant to waive his or her
rights to their interest in the plan? Did you ever
wonder whether that provision was in compliance with
the Employee Retirement Income Security Act of 1974,
as amended (“ERISA”)? The Supreme Court is about to
answer that question.
The Supreme Court
decided in February 2008, that it will hear a case
from the Fifth Circuit, Kennedy v. Plan
Administrator for Dupont Savings and Investment
Plan, regarding an ex-spouse’s waiver of retirement
benefits in divorce. Limiting the grant of
certiorari to the third question presented, the
Court will hear whether the Fifth Circuit was
correct in concluding that ERISA’s Qualified
Domestic Relations Order provision, 29 U.S.C.
§1056(d)(3)(B)(i), is the only valid way a divorced
spouse can waive her right to receive her
ex-husband’s pension benefits under ERISA.
Petitioner, the estate of the ex-husband, argues
that the divorce decree validly waived the ex-wife’s
right.
During the divorce,
the parties negotiated that the participant would
receive his entire Savings and Investment Plan (SIP)
and his ex-wife would waive her interest to any and
all benefits from such plan. The parties entered a
provision into the judgment stating that Ms. Kennedy
agreed to be divested of “all right, title,
interest, and claim in and to . . . the proceeds
therefrom, and any other rights related to any . . .
retirement plan, pension plan, or like benefit
program existing by reason of [Mr. Kennedy’s]
employment.” No Qualified Domestic Relations Order
was prepared or submitted to the SIP. In 2001, Mr.
Kennedy died, without ever having replaced Ms.
Kennedy as the beneficiary of his SIP. The estate
sued, claiming that Ms. Kennedy waived her rights to
the SIP benefits through the divorce decree.
ERISA’s
anti-alienation provisions provide that “[e]ach
pension plan shall provide that benefits provided
under the plan may not be assigned or alienated.” 29
U.S.C. § 1056(d)(1). A QDRO is the only exception to
the anti-alienation provisions. The Fifth Circuit,
based thereon, ruled that the divorce decree was not
enough to be considered a valid waiver of the
benefits under the SIP.
In the event the
Supreme Court agrees with the Fifth Circuit, family
law attorneys should review their past MSAs for
provisions allowing for waiver of retirement
benefits and then should have a QDRO drafted to
remedy the problem.
QDRO Now Required To Be Filed at the Time the Court
Dissolves the Marriage
No longer are the
days when the family law attorneys are off the hook
with regard to the QDRO. Effective January 1, 2008,
the California Family Code § 2337 was amended to
require the entry of a QDRO simultaneously with the
judgment of dissolution. Under the same amendment,
joinder documents may no longer be required,
depending on whether it is precluded or made
unnecessary by ERISA.
In drafting the
amendment, it was recognized that oftentimes the
parties are no longer represented by family law
attorneys at the stage of drafting the QDROs and
pertinent information was missing from the judgment,
including the method of distribution and whether the
alternate payee had a right to survivor benefits.
The legislature, therefore, decided that upon entry
of dissolution, and as a condition to entry of the
judgment, the court must do one of three things
(1) enter a QDRO; (2) enter an interim QDRO; or
(3) create an attachment to the judgment as follows:
Each party
(insert names and addresses) is provisionally
awarded without prejudice and subject to
adjustment by a subsequent domestic relations
order, a separate interest equal to one-half of
all benefits accrued or to be accrued under the
plan (name each plan individually) as a result
of employment of the other party during the
marriage or domestic partnership and prior to
the date of separation. In addition, pending
further notice, the plan shall, as allowed by
law, or in the case of a governmental plan, as
allowed by the terms of the plan, continue to
treat the parties as married or domestic
partners for purposes of any survivor rights or
benefits available under the plan to the extent
necessary to provide for payment of an amount
equal to that separate interest or for all of
the survivor benefit if, at the time of the
death of the participant, there is no other
eligible recipient of the survivor benefit.
So far, we have seen
very few attorneys or judges requiring the QDRO be
entered simultaneously with the entry of judgment;
however, that may soon change. In addition, we have
still been filing joinder documents as a standard
practice for all qualified retirement plans,
including governmental plans such as CalPERS and
CalSTRS. We have not yet had any joinder documents
rejected by the court. It, therefore, appears that
the superior court may not yet be enforcing the new
sections of Family Code § 2337.
Divorce of Same Sex Partners and ERISA Benefits
As you may know, on
May 15, 2008, the California Supreme Court
overturned the state’s ban on same-sex marriage and,
although family law attorneys have probably yet to
begin to see any same-sex partners file for divorce,
it’s probably only a matter of time before it
occurs, and when it does, family law practitioners
should pay close attention to the differences
between California law and federal law with regard
to the division of community property that is
governed by federal law, such as ERISA. Although
California recognizes same-sex couples as spouses,
the federal Defense of Marriage Act, passed in 1996,
states that a marriage is between a man and a woman.
Therefore, for purposes of dividing federally
governed retirement plans pursuant to a QDRO,
same-sex partners are not recognized as alternate
payees and would not be entitled to a direct
distribution of a “community property interest” from
a qualified retirement plan. In addition, the
Internal Revenue Code does not recognize same-sex
partners and, therefore, there could be other
potential issues with regard to any community
property distribution that involves federal taxes.
When the time strikes, Butterfield Schechter♦LLP
can assist in advising clients with regard to
same-sex community property distribution that is
subject to federal law governing employee benefit
plans.
Divorce, Financial Difficulties, and Your 401(k)
With couples getting
divorced during a downward trend in the economy, we
are seeing more and more people tapping into their
401(k) plans to pay mortgages and prevent
foreclosures, as well as to pay credit card debt
through the use of QDROs. Before or even during the
divorce though, one of the parties may have already
tapped into his or her 401(k) assets through the use
of a loan or a hardship withdrawal. When evaluating
the worth of the 401(k), make sure you know the
current value.
Although taking a
loan or a hardship withdrawal is a viable option
when attempting to avoid foreclosure or other
hardship circumstances, borrowing or withdrawing
from the 401(k) plan can lead to problems for the
nonparticipant spouse. Although some plans require
spousal consent to take a withdrawal or a loan from
a 401(k), most do not. It depends on the employer
and the plan document governing the 401(k). As soon
as the divorce is pending, the participant’s
spouse’s attorney should send a notice of adverse
interest to the 401(k) plan to put a flag on the
account so that the employee spouse cannot take any
withdrawals or loans during the pendency of the
divorce, since typically the amount accumulated in
the 401(k) during the marriage is community property
subject to division.
ERISA Trumps State Probate Law
A Pennsylvania state
appellate court ruled that ERISA trumps a
Pennsylvania Probate statute that calls for the
revocation of a beneficiary designation in the case
of a divorce. An ex-wife brought a suit for life
insurance proceeds against the decedent’s estate.
The Pennsylvania Superior Court, following the U.S.
Supreme Court, found that ERISA preempted the state
law where the life insurance policy was governed by
ERISA. The court found that the ERISA plan document
governed the determination of the beneficiary, not
the state probate statute. In so ruling, the court
stated that the statute “runs counter to ERISA’s
command . . . that the fiduciary shall administer
the plan in accordance with the documents and
instruments governing the plan.”
This would likely be
the case in California, since the ruling was based
on a U.S. Supreme Court case. Therefore, its not
enough to simply rely on state law with regard to
beneficiary designations on insurance policies, the
attorneys should look into whether the insurance
policy is issued pursuant to an ERISA plan and, if
so, what the plan document states about beneficiary
designation in the event of death of the insured
spouse. Prudence dictates advising your client to
change their beneficiary designation upon divorce.
The
Fifth Circuit Decides Competing Post-Marital Claims
Make sure to get your
client’s QDRO in first! Although not very common,
there are times when two ex-spouses are competing
for the same benefits in their ex-husband’s
retirement plan. In Taliaferro v. Goodyear Tire &
Rubber Co., 2008 WL 345532, the Fifth Circuit held
that the plan did not have to pay the husband’s
retirement benefits to his second wife and to the
first wife for child support in absence of showing
that payments were required pursuant to a QDRO. In
the case, the husband was married twice. The first
wife sued the husband for child support, and the
second wife sued Goodyear for payments in another
state court in a divorce proceeding. Goodyear
stopped making payments until it received a QDRO
from the U.S. District Court stating how payments
were to be made. The first wife argued that pension
benefits are subject to domestic support obligations
under Texas state law. The Fifth Circuit decided
that ERISA preempts state law with regard to
assignment and alienation of benefits under an ERISA
plan. The court concluded that if the ERISA
requirement to present a QDRO is not satisfied, the
plan cannot be compelled to pay support obligations
out of the pension benefits. The case was remanded
back to the District Court for further adjudication
to determine whether QDROs were presented to
Goodyear for each spouse and, if so, whether one had
priority over the other.
Butterfield Schechter♦LLP
is San Diego County’s largest law firm focusing its
practice primarily on employee benefit plan matters.
As part of our overall Employee Benefits/ERISA
practice, our firm has significantly enjoyed working
with a large number of local family law attorneys
and their clients on QDRO, employee benefits plan,
and ERISA related issues. We have extensive
experience in:
● Analyzing
and valuing the community property in retirement
plans, including, but not limited to:
○ 401(k) Plans, Profit Sharing
Plans
○ IRAs
○ traditional pension plans
○ stock option plans and other
executive compensation plans
○ disability pensions and
severance benefits
● Drafting
QDROs to divide these benefits.
If you have any
questions regarding any of the items addressed
herein, or any employee benefits plan or QDRO issue,
please do not hesitate to call, write or e-mail us.
We appreciate the opportunity to be of service to
your clients in these areas.
Marc
S. Schechter
Butterfield Schechter♦LLP
10616 Scripps Summit Court, Suite 200
♦
San Diego, CA 92131
(858) 444-2300 ♦
Fax (858) 444-2345
www.bsllp.com
♦
mschechter@bsllp.com
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