Divorce, QDRO, Retirement, Death: Not Necessarily in That Order
Tax Notes, Vol.163, No. 5, 2019
8 Pages Posted: 6 Jun 2019
Date Written: April 29, 2019
Property to be divided as part of a divorce or legal separation will often include an interest in a qualified retirement plan. A state court will generally approve or impose an appropriate allocation of the available retirement benefits between the divorcing parties in the form of a domestic relations order (a DRO). However, the DRO will generally not be enforceable unless it is also a “qualified” DRO, more commonly known as a QDRO. The primary purpose of a QDRO is to specify the timing and amount of plan payments to the participant’ spouse (or former spouse) and the participant’s children or other dependents.
Generally, the retirement benefits assigned to a former spouse under a QDRO will override the claims of a current spouse if the QDRO is filed with the plan before the retirement or death of the participant. However, the law is less certain if a QDRO attempts to assign survivor benefits to a former spouse, and the QDRO is filed after the retirement or death of the participant. Those situations must deal with the tension between the former spouse’s rights under the QDRO and the current spouse’s normal right to receive survivor benefits.
Before analyzing those situations, it will be helpful to understand the requirement imposed on most plans to provide annuities for surviving spouses. When spousal survivor annuity requirements apply, a plan must make provision for two different types of annuities: (1) a qualified joint and survivor annuity (QJSA), and (2) a qualified preretirement survivor annuity (QPSA). A QJSA is the applicable form if an annuity starts before a participant’s death (e.g., at retirement). A QPSA is the applicable form if the annuity starts after the participant’s death (e.g., at death before retirement).
A QJSA is an annuity payable to a participant for the participant’s lifetime and, after the participant’s death, to his or her spouse for the spouse’s lifetime. The amount of the annuity payments to a surviving spouse may range from 50 percent to 100 percent of the amount of the payments to the participant during his lifetime. The exact percentage is determined by the terms of the plan.
On the other hand, if a plan participant dies before his or her annuity starting date (i.e., generally before retirement) and the spousal annuity rules apply, a qualified retirement plan must provide the surviving spouse with a qualified preretirement survivor annuity (QPSA). A QPSA is an annuity payable to the surviving spouse for his or her lifetime.
Seeking a QDRO after Retirement and After the Start of a QJSA. Notwithstanding the QJSA requirements described above, a former spouse of the participant (or a child or other dependent) may be able to obtain a QDRO that requires payment of benefits to the former spouse or other payee that would otherwise have been paid to the participant during his or her lifetime. In addition, the QDRO can give to the former spouse the plan’s survivor benefits that would otherwise have been paid to the current spouse, provided the former spouse obtains the QDRO before the start of QJSA payments to the participant.
On the other hand, it is highly unlikely a former spouse would be able to obtain survivor benefits under a QDRO filed with the plan after the start of QJSA payments to the participant. The Fourth and Fifth Circuits and the Minnesota Supreme Court have all held that such a QDRO cannot give a former spouse any interest in the QJSA survivor benefits held by the current spouse of the participant. The courts have reasoned that the QJSA survivor benefits vest in the participant’s current spouse as of the date of the participant’s retirement, leaving nothing for the former spouse.
However, a post-retirement QDRO granting survivor benefits should be valid if the DRO was filed with the plan before the participant’s retirement, even though the plan could not or did not determine whether the DRO was “qualified” until after retirement. To facilitate the qualification process for a DRO filed before retirement, the tax law requires the plan to separately account for and segregate benefits for an 18-month period beginning with the date annuity payments would otherwise start. Thus, in the case of survivor benefits under a QSJA, the 18-month “hold” period generally could not begin before the start of payments to the participant (i.e., generally beginning at his or her retirement). Thus, Congress appears to have anticipated that the qualification process for a DRO filed with a plan before retirement may extend well beyond retirement.
Seeking a QDRO after the Pre-Retirement Death of a Participant. If a QDRO is sought after the death of a participant before his or her retirement, the residence or domicile of the plan participant and his or her former spouse may be significant factors in determining whether the former spouse can obtain a QDRO granting survivor benefits. That is, the federal circuit courts are split on the issue. In Samaroo v. Samaroo, the Third Circuit held that a posthumous QDRO granting survivor benefits was not valid because it would violate the statutory prohibition of benefits that are in excess of those permitted by the plan.
Subsequently, in Files v. ExxonMobil Pension Plan, the Third Circuit held that its Samaroo case would not apply if the benefits sought were adequately described in a pre-death DRO. The court’s holding was based in part on the theory that a pre-death DRO may grant a former spouse an “interest” in a retirement plan that the former spouse may then refine, even after the participant’s death, until the DRO qualifies as a QDRO. But the court concluded that the plan interest (and thus the QDRO) will include survivor benefits only if those benefits are adequately described in the DRO before the participant’s death.
On the other hand, appellate courts in four other federal circuits have enforced the grant of survivor benefits in QDROs obtained after the pre-retirement deaths of participants, even though there were no pre-death DROs granting survivor benefits. The Tenth Circuit expressly declined to follow Samaroo. The other three circuit court cases did not even discuss the issue. It was enough that the posthumous QDROs met all the usual statutory requirements.
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