Background: There are two ways in which state courts can make a deferred future division of retirement benefits. The traditional method is the shared interest approach, which awards the nonowning spouse a portion of each future payment received by the owning spouse.
A less traditional but also permissible option is the separate interest approach. With the separate interest approach, the nonowning spouse is awarded a separate and distinct set of benefits under the plan, with a value equal to a stated percentage of the actuarial value of the owning spouse’s benefits. (Actuarial value is the total future benefits expected, times the chance of death before receiving them.) The owning spouse’s benefits are then reduced proportionately.
For example, if the actuarial value of the owning spouse’s benefits is $200,000, and the pension is divided equally, each spouse would receive benefits with an actuarial value of $100,000. The exact amount and starting date of the benefits would be elected separately by each spouse. This separate interest approach gives the nonowning spouse benefits over her own lifetime and therefore avoids completely the need to award survivor benefits to preserve the nonowning spouse’s retirement security.
Federal law permits both methods. State courts have traditionally used the shared interest approach, but this is slowly changing as the availability and benefits of the separate interest approach become better known. For a full discussion of the separate interest approach, see generally 2 Brett R. Turner, Equitable Distribution of Property § 6:34 (3d ed. 2005 & Supp. 2016).
Facts: A small pension plan, the Dullea Company Inc. Defined Benefit Pension Plan, encountered financial difficulty. Pursuant to federal law, control was assumed by the Pension Benefit Guaranty Corporation (“PBGC”), a government agency that has the thankless task of managing struggling or bankrupt plans.
The husband was a plan participant. One year after the PBGC took over the plan, he and his wife were divorced in Minnesota. The court ordered division of the husband’s benefits under the separate interest approach. The wife diligently obtained a DRO, which the PBGC duly qualified.
Four years later, the wife obtained from the state court a second DRO, dividing the benefits under the shared payment approach. She promptly submitted this DRO to the PBGC. The PBGC refused to qualify the DRO on the basis that its policy was never to approve a DRO that changed a separate interest division into a shared payment division. The wife promptly filed suit in federal court, seeking a review of the PBGC’s decision.
Issue: Did the PBCG abuse its discretion by arbitrarily refusing to qualify the DRO?
Answer to Issue: The reason stated by the PBGC was not a sufficient basis for refusing to qualify the DRO.
Summary of Rationale: The most important requirement for qualifying a DRO is that the DRO must not “require the plan to provide increased benefits (determined on the basis of actuarial value).” 29 S.C. § 1056(d)(3)(D)(ii). More simply put, this requirement says that the plan cannot qualify a DRO that awards the employee and the alternate payee together more benefits than the employee has earned. QDROs are intended to divide benefits, not to create them.
The PBGC had a blanket internal policy of “not qualifying any shared-interest domestic relations order presented after the alternate payee has begun receiving payment under a prior separate-interest order.” 241 F. Supp. 3d at 159. “The [PBGC] explained that replacing a separate-interest QDRO with a shared-interest QDRO could ‘potentially’ require the plan ‘to provide increased benefits,” in violation of ERISA. Id.
But the PBGC’s reasoning swept too broadly:
To be sure, a later order could “potentially” result in increased benefits, as illustrated by the hypothetical scenario offered by the Appeals Board to support its decision. But that is not necessarily so. There is nothing inherent in an alternate payee’s receipt of benefits under a separate-interest order that would cause a subsequent shared-interest order to require an increase in benefit payments. One can easily imagine scenarios where, unlike in the agency’s hypothetical, the alternate payee could be expected to live much longer than the participant. In such a case, a new shared-interest order would likely reduce the total amount of benefit payments. The PBGC’s blanket disqualification of all such orders is, therefore, arbitrary, capricious, and contrary to 29 U.S.C. § 1056(d)(3)(D)(ii).
Id. at 160 (citation to policy manual omitted). In other words, while the plan cannot qualify a DRO that orders payment of more benefits than the employee has earned, it is not always and necessarily true that every DRO that changes to a different division method will do that. If this specific division on these specific facts does not order payment of increased value, the requirements for a QDRO are met.
The case was remanded to the PBGC for further consideration, The PBGC presumably remains free to refuse to qualify the DRO if it requires payment of increased value on the facts or if it fails to meet some other QDRO requirement. But the PBGC cannot have a blanket policy that it will never allow a change in the method of division.
Observation: It is refreshing to see how promptly the wife in Dullea prepared DROs, submitted them to the state court for entry, submitted them to the plan for qualification, and filed suit when she disagreed with the plan’s response. This is how the system is supposed to operate!
Question: On what basis was the second DRO entered as matter of state law? Minnesota, like most states, generally does not permit modification of property division orders after they become final. See, e.g., Potter v. Potter, 471 N.W.2d 113, 114 (Minn. Ct. App. 1991) (“A trial court may not modify a division of property.”).
The most likely answer is that the parties agreed to the change. The opposing party in the federal action was the PBGC, not the husband. It is also possible that the state court might have determined that the change only effected the method of division and did not materially change the amount. Nationwide, changes in the division method after the divorce decree has become final are rare.
By Carolyn J. Woodruff, North Carolina Family Law Specialist