Articles Posted in QDRO

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Family Chiropractic Sports Injury & Rehab Clinic, v. Comm’r, T.C. Memo. 2016-10, 2016 WL 234515 (2016)

Facts: Husband and wife operated a chiropractic The practice had an Employee Stock Ownership Plan (“ESOP”). Husband and wife were the only participants.

The parties were divorced in Iowa. The decree was silent on the ESOP, but the wife agreed to transfer her interest in the ESOP to the husband. She later did so.

The IRS decertified the ESOP, resulting in the loss of valuable tax benefits, on the ground that the transfer to the wife violated the antiassignment provision of the plan and the antiassignment provision of ERISA. The practice filed a declaratory judgment action questioning the decertification.

Issue: Did the IRS err in decertifying the ESOP?

Answer to Issue: No.

Summary of Rationale: The plan provided that vested benefits could not be transferred. There was no divorce exception. The wife’s vested benefits were transferred to the husband. Therefore, the provision was violated and the ESOP was correctly decertified.

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Dahl Aerospace Employees’ Ret. Plan of Aerospace Corp., 122 F. Supp. 3d 453 (E.D. Va. 2015)

Facts: A Virginia divorce decree, incorporating a settlement agreement, gave each spouse the option to elect survivor benefits under the retirement plan of the other This provision was not immediately stated in a DRO or qualified by the plan.

The husband’s pension plan allowed him, upon retirement, to elect a 50%, 75%, or 100% survivor benefit.

The husband retired on July 31, 2014, 11 years after the divorce decree. He did not notify his former wife in advance, or give her any option to elect survivor benefits. Instead, he elected his current wife as 50% survivor beneficiary. He stated in his election that no outstanding court order required him to name another person as survivor beneficiary—a blatantly false statement.

Upon learning of the husband’s retirement, the former wife’s counsel prepared a draft DRO requiring the husband’s employer to act as if the husband had elected 100% survivor benefits for his former wife. The retirement plan refused to qualify this order, on the grounds that the husband had already elected a 50% benefit for his current wife and he was only permitted to name one survivor beneficiary.

The former wife sued the plan and the husband in federal court, seeking a declaratory judgment that the husband’s election of his current wife as survivor beneficiary was void for fraud, and that the plan was required to qualify an appropriate DRO naming the former wife as survivor beneficiary. The plan and the husband moved to dismiss the wife’s action.

Issue: Should the wife’s action be dismissed?

Answer to Issue: Yes.

Summary of Rationale: The plan argued that the wife lacked standing, because she was not an actual plan But a person with a claim to benefits is also entitled to sue the plan. The former wife had a colorable claim to benefits.

At the time the husband retired, there was no QDRO in effect limiting his choice of survivor beneficiary. Therefore, the former wife could prevail only by establishing that the husband’s survivor benefit election was void. She cited no case law holding that an election of survivor benefits is void if a false statement is made which defrauds a former spouse who has not yet obtained a QDRO. In the absence of such law, the court refused to hold that the survivor benefit election was void.

Because the former wife did not obtain a QDRO, the husband’s election of his current wife was enforceable under ERISA, even though the election violated a state court order.

Observations:

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CarolynCarolyn Woodruff, a North Carolina CPA and Family Law Specialist, frequently is faced in sending a divorce client in the right direction after receiving a retirement plan in a divorce settlement.   Here are her thoughts on the subject:

The recipient may be receiving generally one or more of three types of retirement funds: (1) IRA; (2) 401k; and/or (3) defined benefit plan. Each type of plan should be evaluated as each has unique characteristics discussed hereafter.

Overall, there are four questions the divorcee should ask immediately post-divorce: (1) Age: What is my age now and at what age do I expect to retire? (2) Debt: What is my debt? Do I owe credit cards? Car debt? Is my home paid for? (3) Advisor: Do I need a financial planner or advisor, or am I competent to make investments myself? If the divorcee can do some basic investment herself, she can save administrative costs with mutual funds such as Vanguard. (4) Goal:  How much will I need for retirement adjusted for inflation? The goal is to develop a plan that achieves the goal with moderate or low-risk investments.

Hypothetical: A 40- year-old divorcee would like to retire at 67, which means she has 27 years to plan for retirement. Let’s say she has a 20-year mortgage on her newly acquired home, so this should be paid for before retirement, and perhaps available for a reverse mortgage at some point after retirement if needed. The availability of a reverse mortgage might be the source for medical bills in retirement.  However, she still has school debt, credit card debt and a car payment. She thinks that she will want $4000 per month in retirement after inflation adjustments are made. Let’s say she receives $100,000 in a 401k at the divorce, $20,000 in an IRA, and a small defined benefit plan that will pay $250 a month for her life when she is 67. Her predicted social security is $1500. So with social security at $1500 and the defined benefit plan at $250, she has $1750 of the needed $4000, so she has to make up $2,250 per month or $27,000 per year.. Let’s say her life expectancy is 88, but quite frankly it is good to plan for 100 so you do not out live your money. So that means the money needs to last for 33 years in retirement. The question is how does the divorcee plan for $27,000 per year for the 33 years? What is the amount of savings she will need to make up the $27,000.  At a planned withdrawal rate of  5 percent in retirement, this divorcee is going to need around $540,000  in retirement to meet her goal. At a planned withdrawal rate at retirement of 4 percent, she will need a nest egg of $675,000.  While a financial planner could do some allegedly precise calculations, here’s generally how the discussion will go. (I say allegedly because no one can be sure what inflation will be and what investment rate of return will be. Conservatively, the IRA should grow to at least $150,000 in 33 years. The $100,000 in the 401k should grow to make up the remainder of the needed money. So, the focus should be on investment vehicles that will turn the $20,000 in the IRA and the $100,000 in the 401k into $675,000 between now and retirement.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

VanderKam v. VanderKam, 776 F.3d 883 (D.C. Cir. 2015)

(a) Facts: Before the parties were divorced, the wife was the death beneficiary of the husband’s retirement plan. The parties were divorced in Texas. Their divorce decree was silent on survivor benefits, but awarded the husband all rights existing because of his employment.

After divorce, the husband sought to name his second wife as survivor beneficiary. The first wife objected, and asked a Texas state court to hold that she was the proper beneficiary. The state court held that the first wife had waived her rights, and that the husband was free to name the second wife.

The plan encountered financial difficulty, and was taken over by the Pension Benefit Guaranty Corporation (PBGC). PBGC determined that the death beneficiary could not be changed after the first payment of retirement benefits to the employee and the order could not be qualified as a QDRO.

The husband asked a federal district court to overturn PBGC’s determination. The district court held that PBGC’s ruling was correct and that any rights the husband might have under Texas state law were preempted by ERISA.

(b) Issue: Did ERISA preempt the husband’s rights under Texas state law?

(c) Answer to Issue: Yes.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Yale-New Haven v. Nicholls, 788 F.3d 79 (2d Cir. 2015)

(a) Facts: A husband and wife were divorced in Connecticut in 2008. The divorce decree incorporated a settlement agreement, which provided that the husband would transfer to the wife half of the marital share of his retirement benefits. No QDRO was entered to enforce this language, and the husband did not make the required transfer to the wife.

The husband remarried, and then died, leaving his second wife as survivor beneficiary of all his pension plans. After the husband’s death, the Connecticut state court issued a series of orders nunc pro tunc, purporting to be QDROs, requiring payment of the promised benefits to the first wife.Both wives asserted competing claims to the benefits, and the plan filed an interpleader action. The District Court held that the first wife was entitled to half of the marital share of the benefits, finding that the divorce decree met the requirements for a valid QDRO.

(b) Issue: Is the first wife entitled to half of the marital share of the husband’s retirement benefits?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: To constitute a QDRO, a state order must provide a mailing address for the alternate payee and state the name of each plan at issue. The district court erred in treating the divorce decree as a QDRO.

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I.R.C. § 414(p) and 29 U.S.C. § 1056

Morris v. Metropolitan Life Ins. Co., 751 F. Supp. 2d 955 (E.D. Mich. 2010)

(a) Facts: When the husband and the wife were divorced, the state court divorce decree extinguished all rights held by one in any life insurance of the other.  But the husband retained the wife as beneficiary of his employer-provided life insurance.  Upon his death, the plan paid the proceeds to the first wife, and the husband’s second wife sued to recovery the proceeds.

(b) Issue: Who is entitled to the proceeds?

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