In a recently issued opinion, the United States Court of Appeals for the Second Circuit held that: (1) a domestic relations order that substantially complied with the QDRO rules was not a QDRO; and (2) two posthumously entered domestic relations orders were valid qualified domestic relations orders (“QDROs”) under ERISA that properly assigned funds in four retirement plans to the ex-wife of a deceased participant, despite the claims of the participant’s surviving spouse to survivor benefits under the plans.
The plan participant, Harold, divorced his first wife in 2008. Under his divorce settlement, Harold promised his wife, Claire one-half of his pension and retirement accounts that accrued during their marriage. At the time of the settlement agreement (which was incorporated into the judgment of divorce), Harold was a participant in four plans sponsored by his employer, Yale-New Haven Hospital. The plans were a pension plan, two section 403(b) accounts and a section 457(b) account. The settlement agreement further provided that the court maintained jurisdiction for purposes of establishing or maintaining a QDRO acceptable to plan administrators to carry out the division of these assets. No QDRO was entered into and no pension or retirement funds were transferred to Claire during Harold’s lifetime. Harold then married Barbara who was named the beneficiary of all four retirement benefits. Harold died in 2012.
After Harold’s death, Claire caused two QDROs to be prepared and filed with the state court. The orders retroactively assigned the portion of Harold’s pension benefit and two 403(b) accounts consistent with the terms of the settlement agreement. [i] The court signed the orders directing the plan’s administrator to distribute to Claire her assigned portion of these benefits.
Faced with competing claims to Harold’s retirement benefits, Yale-New Haven Hospital filed an action in federal court. The trial court found in favor of Claire holding that the settlement agreement incorporated into the judgment of divorce was a QDRO, even though it did not contain Harold’s or Claire’s mailing addresses which the statute requires to have a valid QDRO. The court held the settlement agreement substantially complied with the statute and, therefore was a valid QDRO.
On appeal, the Second Circuit rejected the District Court’s reasoning, noting that the substantial compliance standard does not apply to domestic relations orders issued after January 1, 1985, as a result of an amendment to the statute prescribing the specific rules governing QDRO’s. The court refused to follow contrary decisions of two other appellate courts. Nonetheless, the appeals confirmed the result, relying on a statutory change to the QDRO rules in 2006 and the regulations promulgated thereunder. The new rules state that a domestic relations order meeting ERISA’s enumerated requirements should not be invalid solely because of the time at which it is issued, including orders issued after the death of the participant.
The court’s holding that the provisions of a court order (including an agreement incorporated into an order) must fully comply with the QDRO requirements to be recognized is a positive development for plan administrators who need to make QDRO determinations. Adoption of a “substantial compliance” standard makes it much more difficult to determine whether a court order qualifies as a QDRO. Nevertheless, since other appellate courts have approved the “substantial compliance” standard it is recommended that plan administrators seek the assistance of counsel when the issue arises.
While the law is clear that a domestic relations order should not be denied qualified status merely because it is entered by the court after the death of the participant, this case is important for the proposition that this result holds even if there is a competing claim that was valid on the date of the participant’s death. In other words, even if the current spouse had a claim that matured on the participant’s death, it may still be subject to a competing claim that arose prior to the participant’s death (as a result of the settlement agreement) and matured with the entry of a QDRO that retroactively awards some or all of a participant’s plan benefit.
Another important take away from this decision is that anytime a plan administrator is faced with competing claims, the best course of action is to let a court decide who is entitled to the participant’s benefit. This avoids the possibility that the plan administrator will be forced to pay the benefit twice. If the plan administrator pays the benefit before being put on notice of a competing claim, the administrator should be able to avoid having to pay twice since payment was validly made in accordance with the plan.
[i] We do not know why the section 457 account was not included. A section 457 plan is not required to recognize QDRO’s and it is possible the plan had no procedure for recognizing a QDRO and assigning benefits in accordance with its terms.
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