Articles Tagged with QDRO

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Carolyn Woodruff, JD, CPA, CVA
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In re Lawson, 570 B.R. 563 (Bankr. N.D. Ohio 2017)

Facts: A husband and wife filed divorce proceedings in Ohio. Among the marital assets was the husband’s defined contribution retirement plan. The parties read into the record in the Ohio action an agreement that awarded the wife 50% of the plan account. The court approved the agreement. No DRO was immediately entered.

After the divorce case was filed, the wife filed a petition in bankruptcy. The bankruptcy trustee argued that the wife’s interest in the husband’s retirement plan was part of the estate in bankruptcy. He asked the bankruptcy court to authorize him to seek a DRO in state court and to order the husband not to oppose the DRO.

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Carolyn Woodruff, JD, CPA, CVA
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In re Jeffers, No. 14-52328,    B.R., 2017 WL 2838104 (Bankr. N.D. Ohio June 30, 2017)

Facts: A husband and wife divorced in Ohio. The divorce decree awarded the wife an interest in the husband’s retirement benefits.

Before a DRO was entered, the husband filed a petition in bankruptcy under Chapter 13. When a bankruptcy case is filed, all state court actions are automatically stayed. 11 U.S.C. § 362. The wife asked the bankruptcy court to lift the stay so that she could obtain a DRO in state court. The bankruptcy trustee objected.

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Garcia-Tatupu  v.  Bert  Bell/Peter  Rozelle  NFL  Player  Ret.  Plan,  No.  CV 16-11131-DPW,     F. Supp. 3d   , 2017 WL 1398645 (D. Mass. Apr. 18, 2017)

Facts: The husband, a former NFL football player, was divorced from his wife in Massachusetts in 1997. No DRO was entered at the time. The husband died in 2010; he had not remarried. In 2012, the Massachusetts court issued a DRO, nunc pro tunc back to 1997.

The wife requested benefits from the plan under the DRO, the plan denied benefits, and the wife sued the plan. The plan filed a motion to dismiss.

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Dullea v. Pension Benefit Guar. Corp., 241 F. Supp. 3d 155 (D.D.C. 2017)

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.

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Patterson v. Chrysler Group, LLC, 845 F.3d 756 (6th Cir. 2017)

Facts: A divorce decree awarded the wife an interest in the husband’s retirement and survivor benefits, expressly ordering him not to elect a survivor beneficiary other than the wife. The wife did not obtain a QDRO.

Upon retirement, the husband elected to receive retirement benefits without survivor benefits, thereby violating this provision. The wife sought to enforce the decree by sending a copy to the plan. The plan refused to comply with the decree, finding that the decree did not meet the requirements for a QDRO.

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Walsh v. Dively, 551 B.R. 570 (W.D. Pa. 2016)

Facts: When husband and wife were divorced in Pennsylvania, they agreed that the wife would receive 50% of the husband’s retirement. The agreement was incorporated into the divorce decree, but no DRO was entered.

The wife then filed for Chapter 7 bankruptcy. The bankruptcy trustee moved in bankruptcy court for authority to ask the state court to issue a DRO. The bankruptcy court denied the motion. The trustee then appealed.

Issue: Should the trustee be permitted to seek a DRO?

Answer to Issue: No

Summary of Rationale: The trustee has a duty to collect property of the estate in bankruptcy.  But retirement plans with an antialienation provision are not part of an estate in bankruptcy. Patterson v. Shumate, 504 U.S. 753 (1992). The retirement plan at issue was governed by ERISA, and it was subject to the statutory antialienation provision in ERISA unless a QDRO was entered. Because a DRO had not even been entered, let alone qualified by the plan, there was no QDRO, and the antialienation provision remained operative. Thus, the pension was not part of the wife’s estate in bankruptcy.

Note: As we shall shortly see, it is quite important that the state court awarded the wife an actual interest in a retirement plan, and not an award of cash she could spend freely for any purpose.

 

In re Kizer, 539 R. 316 (Bankr. E.D. Mich. 2015)

Facts: In a consent judgment of divorce, a court awarded the husband 50% of three retirement accounts owned by the wife. The wife was also awarded the marital home, but required to pay the husband for his interest. Because she lacked the funds to make the payments, she agreed to pay for the home by giving up her interest in the requirement accounts, increasing the husband’s interest to 100%.

QDROs were subsequently entered and approved, directing the administrators of the accounts to transfer to the husband 100% of the balance of certain accounts. The plan administrators complied with the QDROs by giving the husband accounts containing the funds at issue. A finding of fact was made that the husband could make withdrawals from these accounts at any time, without any form of early withdrawal penalty. (The husband claimed that his withdrawals were subject to a penalty, but he failed to produce supporting evidence, even after the court gave the husband additional time.)

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State Farm Life & Assurance Co. v. Goecks, F. Supp. 3d       , 2016 WL 1715205 (W.D. Wis. 2016)

Facts: A Wisconsin divorce decree provided:

The respondent [Gary] shall be required to maintain the petitioner [Sharon] as the primary, irrevocable beneficiary on one third of the face value of all his life insurance policies in effect as of the date of the final hearing or in the amount of Seventy Five Thousand Dollars ($75,000) of the face value of said policies, whichever sum is greater. Respondent shall provide the petitioner proof of said insurance and beneficiary designations. Petitioner shall pay the respondent the sum of Twenty Five Dollars ($25.00) per month toward the cost of said insurance. The parties further agree to designate the children as primary beneficiaries of all life insurance policies except as set forth above.  2016 WL 1715205, at *1. The divorce decree was not submitted to the employer for qualification as a QDRO.

The husband initially complied with the above provision, but later changed the beneficiary on some of his life insurance to his new wife. Upon his death, the insurers paid some of the benefits to the new wife, and interpleaded the remainder. Both wives asserted competing claims to the proceeds.

Of the various insurance policies at issue, one was an employer-provided policy regulated by ERISA.

Issue: Who is entitled to the proceeds from the employer-provided policy?

Answer to Issue: The husband’s wife at the time of his death.

Summary of Rationale: The court first held that the husband had breached the contract, rejecting a rather weak state law argument that the agreement only required the husband to name his former wife and children as a beneficiary of the insurance, and not as the exclusive beneficiary.

The employer-provided life insurance policy was part of a benefit plan, and it was therefore subject to ERISA. Benefits regulated by ERISA can be transferred only under terms of a QDRO. No QDRO was ever submitted. Thus, federal law preempted state law and barred enforcement of the decree with regard to the ERISA- regulated policy.

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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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