Articles

The “Unplanned” Retirement

by Darren J. Goodman

A Google search of “retirement” will turn up countless articles from travel destinations to savings calculators.   Narrow the search to focus only on those articles that address financial considerations and you will still be overwhelmed with statistics and opinions about what you must do today to ensure stability tomorrow.

Individuals in their late twenties are encouraged to “max out” their 401(k) plans—especially where their employers match employee deferrals.  For those lucky enough to have defined benefit plans, annual statements showing estimated monthly payments at retirement age provide a sense of security—but not without the dark shadow of “what ifs” in light of the recent financial meltdown and accompanying bankruptcies that left many defined benefit plans underfunded and caused many more to “freeze” contributions.  Leaving aside the other “buckets” (i.e., emergency savings, 529 accounts, medical savings accounts, long term care, life insurance, etc.) that add to our worries, it is no wonder that many of us are left with perpetual unease related to our finances in general, and retirement, in particular.

Even assuming, however, that you “have all of your ducks in a row” with regard to retirement planning, and are more or less worry free when it comes to retirement, consider the tremendous disruption caused by divorce.   Divorce can shake the foundation of the most thoughtfully planned retirement.  So, with divorce in mind, how does one prepare for retirement?  Here are some planning tools for this too common “unplanned” event.

  • Understanding Your Retirement Plans.  A good place to start is gaining a strong understanding of you and your spouse’s retirement benefits.   This includes Individual Retirement Accounts (IRAs), 401(k)s, profit sharing plans, traditional pension plans, Social Security, etc.  If you have never looked at your spouse’s benefit statements—take a look.  Too many individuals learn about their spouse’s benefits for the first time during the divorce process.  If your spouse is not inclined to share this information—or provides it in sound bites over dinner without documentation—it may be time for a marital “summit” with exhibits (i.e., account statements).
  • Buy a File Cabinet.   There is nothing suspicious or sneaky about being organized.  Retaining retirement account statements can make life easier in many instances such as applying for a new mortgage or loan, overall financial planning, and divorce.  If you wish to pare down, then keep only year-end summaries.  Extracting this type of information during the divorce proceeding is costly at best and impossible at worst.
  • Don’t Sign Nothin’!  The laws that govern retirement plans go out of their way to protect the spouses of the participant spouse.  Generally, plan participants cannot simply take distributions, designate a non-spouse beneficiary, or make distribution elections without the signed consent of the spouse.  If your spouse asks you to sign a document regarding his or her retirement benefits, you had better understand what you are signing.  If, for example, you sign a consent form allowing your spouse to receive his or her pension as a single life annuity, all payments will terminate upon your spouse’s death.  Once payments begin, the distribution election is generally irrevocable and cannot be changed by even the best divorce attorney or kindest judge.  This means that a distribution election that you may consent to while married—could have adverse consequences following your divorce.
  • You Could Be Next.   Suppose your spouse has been divorced before and is just now getting around to dividing his retirement benefits with his former spouse.  As much as your spouse may want you to stay out of that negotiation, any settlement concerning your spouse’s retirement benefits could significantly impact your future benefits—whether you divorce or not.  Assume, for example, that your spouse agrees (or was court ordered) to name his former spouse as beneficiary to receive monthly benefits following his death.  Depending on the retirement plan involved, such an election could result in payments terminating upon your death.  In dealing with a former spouse’s claim to your current spouse’s retirement—get involved.
  • Dueling Retirement Plans.  Today, more than ever before, both spouses have an interest in a retirement plans through their respective employment.  If you have a retirement plan or multiple plans of your own, be mindful of elections that are irrevocable.  Although retirement plans are often offset or equalized with the other spouse’s retirement plans or other marital assets, an irrevocable beneficiary designation may cause an unwanted result.   Consider a situation where you designate a spouse to receive 50% of your pension if you predecease him; and through mutual agreement he chooses a maximum lifetime benefit that terminates upon his death.  Without crafty legal maneuvering, you may be stuck with a portion of your spouse’s pension that terminates at his death; while he gets lifetime benefits following your death.

The motivation for this article is the numerous clients that I have represented who wish they had considered the foregoing during their marriage.

Transferring the Alternate Payee’s Retirement Benefits at Death: A look at Shelstead*

By Darren J. Goodman

Looking for ways to transfer an alternate payee‘s community property interest in undistributed retirement benefits at death? The Fourth Appellate District’s recent ruling In re the Marriage of Shelstead (1998) 66 Cal.App.4th 893, provides some guidance but not enough to close the door on this issue.

This article summarizes the Shelstead decision, which cautiously suggests that a Qualified Domestic Relations Order (QDRO) may provide an alternate payee spouse with testamentary-like rights. Keep in mind that the issue presented in Shelstead is one of many important considerations in drafting the death provisions of a QDRO. Other issues that deserve attention include the legal and actuarial effect of awarding the alternate payee a survivor annuity; whether to assign life insurance benefits under an employer plan to the alternate payee; and the extent to which the alternate payee is entitled to lump-sum death benefits.

Boggs as Background

The Supreme Court’s ruling in Boggs v. Boggs 117 S.Ct. 1754 (1997) sets the tone for whether ERISA tolerates testamentary-like transfers of a non-participant spouse’s share of undistributed retirement benefits. Boggs held that ERISA preempts Louisiana’s community property law, thereby preventing a deceased non-participant spouse from transferring her community property share of undistributed retirement benefits to her children. In short, the Court reasoned that ERISA’s primary purpose is to guarantee a stream of income to plan participants and their beneficiaries. Beyond this, ERISA protects surviving and former spouses under the survivor annuity and QDRO provisions, respectively. The attempted transfer in Boggs fails because it would allow a third party to assert a claim to benefits reserved for a limited class of individuals.

Shelstead Addresses the Issue

Since Boggs did not involve a dissolution, it did not answer the question whether a non-participant spouse may transfer his or her community property share of undistributed retirement benefits to a third party pursuant to a QDRO. Shelstead addresses this issue.

The focus in Shelstead is on a domestic relations order that awarded Janet Shelstead, the non-participant spouse (the “alternate payee”), 50% of the community property interest in Gene Shelstead’s pension plan. The domestic relations order also provided that “[t]he share payable to [Janet] shall commence to be paid to [Janet], or her designated successor in interest should [Janet] predecease Gene, until terminated by Gene’s death.”

The issue in Shelstead is whether the domestic relations order providing that Janet can name a successor-in-interest to receive her share of community property retirement benefits upon her death, constitutes a QDRO. For the reasons stated below, the court concluded the order was not a QDRO, thereby invalidating the attempted transfer.

The court’s analysis is straightforward. ERISA § 206(d)(1) and (d)(3) provides that the transfer of pension benefits between spouses in the context of a dissolution is prohibited unless made pursuant to a QDRO. ERISA § 206(d)(3)(B) states that a domestic relations order is “qualified” if it “creates or recognizes the existence of an alternate payee’s rights to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to the participant under a plan…”. For purposes of this rule, an “alternate payee” is any spouse, former spouse, child, or other dependent of the participant who is recognized by the domestic relations order as having a right to receive plan benefits. Since the order allows Janet to name anyone as successor to her share of plan benefits, it could require the plan to pay benefits to someone other than an alternate payee (e.g., a friend, neighbor, or creditor). Accordingly, the court found the domestic relations order invalid.

We Have Some Answers

1. Contingent Alternate Payee

As Shelstead points out, its decision does not address the validity of a domestic relations order that attempts to transfer an alternate payee’s share of undistributed retirement benefits upon death to other individuals who qualify as “alternate payees.” This type of transfer is consistent with ERISA, which contemplates that a QDRO may provide for payments to more than one alternate payee. In practice, this allows an alternate payee to transfer his or her share of retirement benefits at death to a child or children of both the alternate payee and participant. To accomplish this, the QDRO should specifically identify the “qualifying” individual as the alternate payee’s successor or name the individual as a “contingent alternate payee” entitled to receive the alternate payee’s share of undistributed benefits at his or her death.

2. The Method of Division

Shelstead provides that dividing retirement benefits under a “separate interest” approach may give the alternate payee more options with respect to transferring retirement benefits at death under a QDRO.

There are significant differences concerning an alternate payee’s rights to plan benefits based on the method of apportionment used in the QDRO. Generally speaking, the method of apportionment determines whether a plan administrator treats the alternate payee like a beneficiary, or elevates the alternate payee to a quasi-participant status. Although ERISA provides that an alternate payee under a QDRO is considered a beneficiary under the plan, nothing in ERISA prevents a plan from granting an alternate payee the same or similar rights as a participant.

The “shared payment” method of apportionment must be used when the participant is already in pay status. If, for example, a participant is receiving benefit payments as a single life annuity, whereby payments terminate at the participant’s death, the alternate payee’s share of benefitswill revert to the participant (or the plan) if he or she predeceases the participant. In this sense, the alternate payee is merely a beneficiary of the plan, because he or she lacks control over the timing and manner of distribution of his or her share of benefits. When the “shared payment” method is used, it appears that the alternate payee’s rights to dispose of benefits at death are limited to naming a “contingent alternate payee” in the QDRO.

The “separate interest” method of apportionment assigns the alternate payee a separate ownership interest in the plan. This method is typically used when the QDRO is in place before the participant’s benefits are in pay status. Since the participant has not elected a form of benefit payment, the alternate payee has control over the timing and manner in which benefits are distributed. For example, if a plan offers a participant the option of receiving a “period certain annuity” which consists of monthly payments for a guaranteed period of time (e.g., 10-years), the alternate payee may also elect a “period certain annuity” with respect to his or her share of benefits. If the annuitant dies before the expiration of the guaranteed period, the plan will continue making payments to the annuitant’s designated beneficiary. In this sense, the alternate payee is elevated to a quasi-participant status and will enjoy rights afforded to a participant namely, the right to designate a third party to receive unpaid benefits at death.

In the case of defined contribution plans (i.e., 401(k) plans, profit sharing plans, etc.) an alternate payee is awarded a “separate interest” often payable as a single lump-sum. Clearly, if the distribution is made before the alternate payee’s death, he or she can dispose of benefits to anyone. A question arises whether an alternate payee has testamentary-like rights if he or she dies after the QDRO is entered by the court (and approved by the plan administrator), but before the plan makes a lump-sum distribution. Even in this case, most plan administrators will treat the alternate payee as a quasi-participant and permit a transfer of unpaid benefits to a third party, including the alternate payee’s estate if the QDRO so provides.

3. Type of Plan Involved

Keep in mind that Boggs and Shelstead involved tax-qualified retirement plans governed by ERISA. If you are dealing with a plan that is not covered by the anti-alienation rules of the Internal Revenue Code or ERISA (e.g., governmental plans such as military pensions, FERS, CSRS, PERS, STRS, etc.) your client is not bound by these rulings. Although the QDRO rules will not apply, a similar type of court order is required to divide benefits under these plans. In drafting such court orders, pay close attention to the applicable statutes and regulations dealing with the rights of a former spouse to determine if he or she has the ability to transfer their share of benefits at death.

Need for Additional Guidance

Our understanding of an alternate payee’s rights to transfer his or her share of retirement benefits at death is clearer than before. There is still, however, potential for inconsistent results because ERISA and the Internal Revenue Code are silent with respect to an alternate payee’s testamentary rights over retirement benefits. As a result, the determination of an alternate payee’s rights arguably relates to the fictitious characterization of an alternate payee as a beneficiary versus a quasi-participant. Until the Department of Labor and/or Internal Revenue Service provide additional guidance concerning this issue, we will have to rely on plan administrators for direction and case law for answers.

*This Article appeared in the Family Law News, Winter 1998. The Family Law News is the official publication of the State Bar of California Family Law Section


Pension Plan Ordered to Restore Full Benefits to Participant at Alternate Payee’s Death Another Lesson in QDROs

By Darren J. Goodman

A recent ruling involving a QDRO serves as a reminder of the important difference between the “shared payment” and “separate interest” methods of dividing retirement benefits.

In Walter Rich v. Southern California IBEW-NECA Pension Plan, 1999 Daily Journal D.A.R. 6965, the Second Appellate District held that upon the death of an alternate payee under a QDRO, the Plan was required to restore the full monthly pension to the participant.

In Rich, the participant (husband) earned a monthly retirement benefit through his union of $962.00. Pursuant to a dissolution, the parties entered into a QDRO that stated “the [Plan] shall, at such time as Retirement Benefits are properly vested and payable under [the Plan], and are properly subject to division, forward such Retirement Benefits payable as follows:
(a) [omitted]
(b) Second, the remaining community property portion of the monthly Retirement Benefit available for division shall be paid as follows:
(i) A check payable to [alternate payee] in an amount equal to 50% of the remaining Community Retirement Benefits to be divided; and
(ii) A check payable to [participant] in an amount equal to 50% of the remaining Community Retirement Benefit to be divided.”

The QDRO also provided that such payments will continue until the earlier of the participant‘s death or the death of the Alternate Payee.

Following the alternate payee‘s death in 1997, the participant asked the Plan to pay him the amount that had been paid to the alternate payee. When the Plan refused, the participant brought a motion to modify the QDRO to reflect his entitlement to the full monthly benefit. The trial court denied the motion stating that the QDRO awarded the alternate payee a “separate interest” and therefore there was no reversion to the participant upon her death.

In reversing the trial court’s decision, the appellate Court noted that the terms of the Plan and the QDRO required the Plan to pay the participant the entire monthly benefit for his life a portion of which would be paid to the alternate payee while living. Accordingly, the Court concluded that when the assignment under the QDRO expired, the Plan was obligated to restore the full pension to the participant.

More important than its holding, the Rich case reminds practitioners to give careful consideration to the wording of a QDRO in general, and the method division in particular. With respect to a defined benefit plan, there are two methods of dividing benefits the “shared payment” method and the “separate interest” method. The “shared payment” method requires the plan to pay the alternate payee a portion of every payment made to the participant typically over the participant‘s lifetime. Under this approach, payments to the alternate payee will terminate upon the earlier of either party’s death but if the alternate payee dies first the amounts assigned to the alternate payee will revert to the participant. Unlike the “shared payment” approach, an alternate payee with a “separate interest” may elect the time and manner in which he or she will receive benefits. Under this method, payments to the alternate payee will terminate according to the distribution option elected by the alternate payee and benefits payable to the alternate payee will not revert to the participant (or plan) when the alternate payee dies.

Factors to consider in choosing the method of division include the alternate payee’s desire to transfer his or her interest at death, the terms of the plan, the plan’s QDRO procedures, as well as the parties’ age and health. Also, once a participant is in pay status under a defined benefit plan, the QDRO may only use the “shared payment” approach. This is yet another reason why it is so important to obtain a QDRO as early as possible.