QDRO Drafting Strategies

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A QDRO Drafting Strategies Avoiding Pitfalls That Result in Unintended Loss of Retirement Plan Benefits TUESDAY, JUNE 5, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Carolyn A. D'Agostino, Attorney, Law Office of Carolyn A. D'Agostino, Albany, N.Y. Emily Widmann McBurney, Shareholder, Kegel McBurney LLC, Atlanta Pamela D. Perdue, Of Counsel, Summers Compton Wells, St. Louis The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Valuation Issues to Consider Carolyn A. D'Agostino, Esq. 21 Everett Road Ext. Albany, NY (518)

3 DB Plan Valuation: Benefits at retirement not yet known. Value does not accrue in the same proportion each year that t a member is accruing service Pension becomes much more valuable as the member approaches retirement age. 2

4 Understanding Present Value: Time Value of Money: A dollar invested today is worth $1.07 one year later, assuming a 7% annual rate of interest. In three years, the same dollar is worth $1.23. Conversely, $1.07 a year from now is worth $1.00 today, assuming a discount rate of 7%. The present value calculation focuses on what an individual id would pay today for a guarantee of certain payment in the future. 3

5 Double Discounting: Mortality probability of the member dying each year from the present time until the mortality table ends (generally at 110 years). Each year's benefit payment is discounted by a rate of interest AND probability of mortality. The sum of these discounted amounts is the present value of the pension. The present value amount is the actuarial equivalent of the deferred benefit, as discounted by the probability of mortality. It is not an actual equivalent (because we don't know when someone will die). 4

6 Effect of Mortality Tables on Present Value Gender-specific vs. Non-gender-specific tables which are not gender specific may result in lower present values for females than gender specific tables What actuarial table is being used and what is the valuation expert's reason for using it? PBGC method: gender specific valuation, will give higher present value GATT: non-gender specific, lower PV IRC Rev. Ruling : tables Plan would have to use if it paid a lump sum. Universal life tables: broadest population, lowest PV 5

7 Impact of the Discount Rate Remember: the higher the discount rate, the lower the PV Actuarial Standard: low risk rate of investment return, or derived from a published index or cost of purchase of an immediate or deferred annuity contract why was this rate chosen by the valuation expert? 6

8 Two Present Values for Each Pension? PV is a snapshot Date of commencement value may undervalue the pension ultimately payable at retirement. Pension is a Deferred Benefit. Each salary increase post-divorce will make all of the years marital and non-marital more valuable. If postdivorce salary increases dramatically, pensions value will be even greater upon retirement. 7

9 Cash Balance Plans Tend to vary tremendously May use different terminology: interest credits, employment credits, pension credits, all to refer to employer contributions ti based on salary You must review the SPD to have an understanding of plan terminology prior to incorporating it into the Agreement. 8

10 I. Introduction QUALIFIED DOMESTIC RELATIONS ORDERS By Pamela D. Perdue Summers, Compton & Wells, P.C. Exception to Anti-Alienation Requirements Both the Internal Revenue Code ( Code ) and the Employee Retirement Income Security Act of 1974 ( ERISA ) impose anti-alienation provisions on covered plans designed to prevent both participants and their creditors from reaching assets of covered plans. [IRC Section 401(a)(13); ERISA Section 206(d)] The Qualified Domestic Relations Order ("QDRO") rules, enacted as part of the Retirement Equity Act ( REA ), provide an exception to the anti-alienation requirements of both the Code and ERISA. Because the QDRO rules only apply to plans subject to the vesting requirements of the Code, without the application of IRC Section 411(e)(2) or plans subject to ERISA, as applicable, these rules do not apply to Individual Retirement Accounts unless part of an otherwise covered ERISA plan. This means that generally an order need not qualify as a QDRO in order to provide for the division of an IRA. Further, these rules do not apply to government plans or to church plans that have not elected to be covered by "ERISA". [Treas. Reg. Section 1.401(a)-13(a)] Special rules for Governmental and Nonelecting Church Plans However, distributions from governmental plans or from church plans are treated as made pursuant to a QDRO if made pursuant to a domestic relations order which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under the plan. [IRC '414(p)(11)] 1

11 III. What is a QDRO A. Basic Definition A QDRO means a domestic relations order which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and which sets forth certain minimum specifications required under the statute and avoids violating other requirements similarly identified in the statute. [IRC Section 414(p)(1)(A)] Thus, in order to constitute a QDRO, an order must first qualify as a domestic relations order. B. Domestic Relations Order A domestic relations order is any judgment, decree or order, including approval of a property settlement agreement, that relates to the provision of child support, alimony payments, or marital property rights of a spouse, former spouse, child, or other dependent of a participant and which is made pursuant to a state domestic relations law, including a community property law. [IRC '414(p)(1)(B)] Note that, in the absence of a state law recognizing or treating orders issued by an Indian tribe as a domestic relations order, such an order can generally not constitute a QDRO. This is because in order to constitute a domestic relations order the order must be made pursuant to a State domestic relations law. ERISA Section 3(1) defines the word State to include any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, Wake Island, and the Canal Zone. However, Federal law does not generally treat Indian tribes as States, or as agencies or instrumentalities of States. [citing NLRB v. Pueblo of San Juan, 276 F.3d 1186, 1192 (10th Cir. 2002); Reich v. Mashantucket Sand & Gravel, 95 F.3d 174, 181 (2nd Cir. 1996)) ; Advisory Opinion A, February 2, 2011] C. Types of orders Generally being Drafted Aside from the statutory requirements as to what an order must or may not address, ERISA does not mandate the type of order that must be drafted in order to qualify as a QDRO. 2

12 Generally, there are two types of orders recognized in the practice: the Separate Interest QDRO and the Shared Payment QDRO. A Separate Interest QDRO divides the underlying account or benefit rather than merely each payment of the benefit. Separate Interest QDROs are usually the preferred method when an order seeks to divide a benefit as part of the marital property upon divorce or legal separation. A Separate Interest QDRO is generally drafted with the intent to give the alternate payee a separate right to receive a portion of the benefit at a time and in form that he/she may elect without regard to the elections made by the participant. This is to be contrasted with a Shared Payment QDRO which divides only the payment of the benefit made with respect to the participant. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status. The Shared Payment approach is used most frequently in the case involving an order of support or other temporary payment or where the order is being drafted after the participant is already in pay status. D. What Is Required to be Addressed in the Order In addition to being a domestic relations order, the order will not be deemed a QDRO unless the order clearly specifies: (i) (ii) (iii) (iv) the name and the last known mailing address, if any, of the participant and the name and mailing address of each alternate payee covered by the order, the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined, the number of payments or period to which such order applies, and each plan to which such order applies. [IRC ' 414(p)(2)(A)]. 3

13 E. What the Order Cannot Do If the above requirements are satisfied, the order will qualify as a QDRO provided: (i) (ii) (iii) the order does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, (for example, if the plan does not provide an early retirement benefit, an order that purports to require the payment of an early retirement benefit to the spouse would not constitute a QDRO), the order does not require the plan to provide increased benefits, determined on the basis of actuarial value, and does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a QDRO. [IRC '414(p)(3)]. IV. Who can qualify as an Alternate Payee A. Statutory Definition The term "alternate payee" means any spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant. [IRC '414(p)(8)]. B. Who are Other Dependents Who exactly falls within that definition of an other dependent not otherwise falling within the definition of a spouse, former spouse or child, has long been a subject of discussion. A district court has held that a woman who lived with a man for over 30 years, took care of the home and who, along with the man, held themselves out to the world as being married did constitute an alternate payee although they were never legally married. The court concluded that the nonparticipant non-legal spouse qualified as an other dependent under the definition of alternate payee. [Owens 4

14 v. Auto Machinists Pension Trust, 2007 WL (WD Wash. 2007)] C. Status of the Alternate Payee An alternate payee is generally treated as a beneficiary for all purposes under a plan. [ERISA Section 206(d)(3)(J)] However, plans have a statutory obligation to operate the plan for the exclusive purpose of providing benefits to participants and their beneficiaries. [ ERISA Section 404(a)(1)] Moreover, technically the status of beneficiary does not even arise until the potential alternate payee actually becomes an alternate payee in the eyes of the plan, that is, after issuance of a qualifying QDRO and determination by the plan that such does in fact constitute a QDRO. However, as a practical matter, the potential alternate payee will likely require some information from the plan before a QDRO can be drafted. The DOL, however, takes an expansive view of the disclosure obligations stating at Q & A-16 of its QDRO Booklet that: ERISA provides that a person who is an alternate payee under a QDRO generally shall be considered a beneficiary under the plan for purposes of ERISA. Accordingly, the alternate payee must be furnished, upon written request, copies of a variety of documents, including the latest summary plan description, the latest annual report, any final annual report, and the bargaining agreement, trust agreement, contract, or other instrument under which the plan is established or operated. The administrator may impose a reasonable charge to cover the cost of furnishing such copies. It is the view of the department that, at such time as benefit payments to the alternate payee commence under the QDRO, the alternate payee must be treated as a "beneficiary receiving benefits under the plan" and automatically furnished the summary plan description, summaries of material plan changes, and the plan's summary annual report. [DOL, QDRO Booklet at Q & A-16, citing ERISA Sections 104, 105, 206(d)(3)(J), 404(a), Labor Reg. Section b-1 et seq.] 5

15 Notwithstanding the language of the QDRO booklet, plans may still feel uncomfortable releasing participant-specific information to someone who is not yet an alternate payee particularly if that individual is also not then a beneficiary of the participant s benefit. Since this information is usually easily obtainable by the individuals as a result of the discovery rules applicable in a divorce, plans will sometimes prefer to have the parties obtain any personal information from each other as part of discovery. D. Can an Alternate Payee designate a Beneficiary other than a Common Child or other Dependent determined with respect to the Participant The statute is silent. However, the DOL states broadly in its QDRO Booklet that: a plan cannot prevent a QDRO from assigning to an alternate payee any type or form of benefit, or option, provided generally under the plan to the participant. [QDROs, The Division of Pensions through Qualified Domestic Relations Orders, U.S. Department of Labor, Q3-8] This can be read to mean that, in the case of designating a beneficiary, an alternate payee must have the same right to designate a beneficiary, subject to the inability to elect a joint and survivor annuity with a subsequent spouse, as the participant. However, many practitioners will instead take the position that, because the alternate payee is treated, by statute, as a beneficiary and not as a participant, the alternate payee need only be given the rights of other beneficiaries under the plan. Therefore, if the plan does not allow other classes of beneficiaries to designate a beneficiary, it need not allow an alternate payee to do so. Certainly, an argument can be made that, in the context of a Separate Interest QDRO, because the underlying benefit or account is actually divided and awarded in part to the alternate payee, the alternate payee should have the right, or at least a better argument for asserting the right, to designate a beneficiary. In In re Marriage of Janet D and Gene T. Shelstead, 66 Cal. App. 4 th 893, 78 Cal. Rptr. 2d 365 (Cal. 1998), 22 EBC 1906, however, one of the few courts to deal specifically with the issue, the California Court of Appeal held that an order which purported to be a QDRO but which allowed the nonparticipant spouse to designate 6

16 a beneficiary not limited to those individuals who could qualify as an alternate payee with respect to the participant failed to constitute a QDRO. The court concluded that only if the class of potential beneficiaries of the nonparticipant s spouse was limited to those who could qualify as alternate payees with respect to the participant would the designation of a beneficiary still allow the order to qualify as a QDRO. As a result, many plans take the position that a beneficiary designation applicable to the nonparticipant spouse s interest must be limited to those individuals who could qualify as an alternate payee of the participant, most notably, children of the marriage. If the order purports to expand the category of allowable beneficiaries, the order would then be rejected as a QDRO. Some have argued that the court s analysis in Shelstead should be limited solely to orders drafted as Shared Payment QDRO. That is, since a Separate Interest division effectively grants to the alternate payee a separate interest in the account or benefit, what the alternate payee can do with that separate interest is inherently different than a division limited to a Shared Payment QDRO. Indeed, the court in Shelstead, after arguing that ERISA does not allow a thirdparty not qualifying as an alternate payee and not otherwise constituting a beneficiary of the participant to gain rights to benefits under the plan, the court then appears to attempt to limit its holding by stating that: We stress the narrowness of our decision. Our holding concerns only the order before us today. We do not decide, as CPT urges us to do, that any testamentary devise contained in a QDRO is invalid. For example, we do not reach the issue of whether the February 1 order would be valid under ERISA if the parties had specifically identified Janet's successor in interest to be a particular individual who came within the alternate payee definition (e.g., the Shelsteads' child). We likewise do not determine the validity of a domestic relations order providing a nonemployee spouse with testamentary rights in a form different than that contained in the February 1 order. There are several different ways of dividing a pension benefit, including a shared payment approach (dividing the payments made to a retired employee) and a separate interest approach (dividing the retirement benefit rather than just the payments). (See 7

17 U.S. Dept. of Labor, Pension and Welf. Admin., QDROs: The Division of Pensions Through Qualified Domestic Relations Orders (1997) ch. 3 [available at (accessed June 9, 1998) ].) As noted by the DOL, under the separate interest approach, a court may have additional options permitting it to provide the divorced nonemployee spouse with a form of testamentary rights consistent with CPT's plan and with ERISA. These and other related questions are properly left to a dispute where both spouses are still living, and thus able to advocate their respective positions. V. When Can Distribution be Made to an Alternate Payee A. Special Early Payment Rule Despite the requirement that an order, in order to constitute a QDRO, may not alter the amount or form of benefit under the plan, an order will not be deemed to fail to satisfy this requirement merely because the order requires the payment of benefits to the alternate payee: (i) in the case of any participant before the participant has separated from service, on or after the date on which the participant attains, or would have attained, the earliest retirement age, (ii) as if the participant had retired on the day on which such payment is to begin under such order, but taking into account only the present value of the benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement, and (iii) in any form in which such benefits may be paid under the plan to the participant, other than in the form of a joint and survivor annuity with respect to the alternate payee and his or her subsequent spouse. [IRC '1.414(p)(4)]. The earliest retirement age means the earlier of: (i) (ii) the date on which the participant is entitled to a distribution under the plan, or the later of (I) the date the participant attains age 50, or 8

18 (II) the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service. [IRC '414(p)(4)(B)]. B. Distributions made at any time pursuant to Plan provision Notwithstanding whether a participant has attained the earliest retirement age, the plan may be drafted to allow distributions to an alternate payee, pursuant to a QDRO at any time. Specifically, Treasury Regulations provide that a plan will not be deemed to violate qualification restrictions which otherwise preclude distribution (such as the restrictions on distributions of elective deferrals under a Section 401(k) plan or restrictions on in-service distributions from a money purchase plan) merely because of a payment to an alternate payee. This rule is available even if the plan provides for payments pursuant to a QDRO to an alternate payee prior to the time it may make payments to a participant. Thus, for example, provided the order so requires, a pension plan is permitted to make payment to an alternate payee even though the participant may not receive a distribution because he continues to be employed by the employer. [Treas. Reg. '1.401(a)-13(g)(3)] VI. Drafting the QDRO A. Separate Interest or Shared Payment There are generally two types of QDROs which may be drafted: the Shared Payment QDRO and the Separate Interest QDRO. The Shared Payment QDRO seeks to divide only the actual payments made with respect to the participant under the plan. As such, a Shared Payment QDRO is one in which only the actual payments under the plan are divided. That is, only the stream of payments are divided. The alternate payee is not actually given a portion of the actual retirement benefit but rather, a portion of each payment as and when received by the participant. This means that the ability of the alternate payee to receive a payment is tied to the participant's receipt of payments under the plan. As such, the alternate payee will not receive any payments pursuant to the QDRO unless the participant receives a payment or unless the participant is already in pay 9

19 status at the time of the issuance of the QDRO. This approach is often preferred where the QDRO is used to effectuate a support order or where the participant is already in pay status as of the drafting of the QDRO. On the other hand, a Separate Interest QDRO divides the actual retirement benefit, rather than merely the payments to be received. The benefit is divided into separate portions with the intent of giving the alternate payee a separate right to receive a portion of the retirement benefit to be paid at a time and in a form different from that chosen by the participant. This is often the preferred approach where the order seeks to divide a pension as part of the marital property as opposed to providing for support payments. In a Separate Interest QDRO, the alternate payee's ability to receive a benefit is not dependent upon whether the participant receives a benefit, or in what form. As a practical matter, an order applying to a defined contribution plan should generally be drafted as a Separate Interest QDRO. B. Treatment of Former Spouse as a Survivor Beneficiary Generally, the Code and ERISA require that the automatic beneficiary of a participant's benefits or account under a qualified plan must be the participant's spouse. In the case of a defined benefit plan or a defined contribution plan subject to the minimum funding requirements, in order to designate a beneficiary other than or in addition to the spouse, the participant must waive the automatic spousal beneficiary and the spouse must consent in writing all within the requisite statutory period. [IRC ' 401(a)(11), 417]. With respect to plans subject to the survivor beneficiary requirements of Section 417 and 401(a)(11), a QDRO may specify the treatment with respect to a former spouse of a participant as follows: (i) (ii) a QDRO may specify that the former spouse is to be treated as the surviving spouse of the participant; a QDRO may specify that if married to the participant for at least one year, the surviving spouse is to be treated as satisfying the one year marriage requirement for purposes of the survivor benefit requirements; [IRC '414(p)(5)(B)]; 10

20 (iii) note, however, that if the divorce occurs prior to the "annuity starting date", any beneficiary designation made by the spouse prior to the divorce will remain valid and in effect unless, the QDRO provides otherwise, or unless the participant subsequently and validly executes another beneficiary designation or the participant remarries; [Treas. Reg. ' 1.401(a)-20, Q& A 25(b)(3)]; In an important Supreme Court case styled Egelhoff v. Egelhoff, 532 U.S.141, (2001), the Court held that a Washington State statute automatically providing that the designation of a spouse as the beneficiary would be rendered null and void as a result of a divorce was preempted as it applied to benefits covered by ERISA. This makes it even more imperative that the participant change his/her beneficiary designations with the plan incident to a divorce. C. Subsequent Orders Between the same Parties and Orders issued Nunc Pro Tunc The DOL had earlier ruled that a plan was required to honor an amendment to a previously approved QDRO that changed the amount assigned to the alternate payee. This was the case even though the amendment reduced the amount assigned to the alternate payee. [Advisory Opinion A, February 17, 2004] Prior to the issuance of the regulations, courts were divided as to the legitimacy of an order as a QDRO issued nunc pro tunc. Congress was concerned that plans were improperly refusing to recognize domestic relations orders as QDROs based upon the timing of the issuance of the order or the order of issuance of the domestic relations order. For example, Congress was concerned that once an order between the same parties had been officially recognized by a plan as a QDRO, an attempt to amend that order was being improperly refused by some plans. As such, Congress attempted to clarify any lingering concerns by requiring that the DOL issue regulations recognizing that an order that otherwise meets the requirements to constitute a QDRO will not fail to be a QDRO merely because it amends or alters a prior domestic relations order or QDRO or solely because of the time at which it is issued. 11

21 In response, the DOL issued an interim final rule designed to clarify these issues effective as of April 6, [72 Fed. Reg., (Mar. 7, 2007)] With respect to issues regarding the order of issuance, the guidance provides that a domestic relations order will not fail to constitute a QDRO solely because it is issued after, or revises, another domestic relations order or QDRO. Example : Participant and spouse divorce and the administrator of the participant's Section 401(k) plan receives a domestic relations order. The administrator determines that the order is a QDRO. The QDRO allocates a portion of the participant's benefits to the spouse as the alternate payee. Subsequently, before benefits commence, participant and spouse seek and receive a second domestic relations order. The second order reduces the portion of the participant's benefits that the Spouse was to receive under the QDRO. The second order does not fail to be a QDRO solely because it is issued after, and reduces the prior assignment, contained in the first order. [Labor Reg. Section (b)(2), Ex. 1] The same analysis applies even if the second order had involved a different spouse provided that the second order did not purport to assign benefits previously assigned under the first QDRO. [Labor Reg. Section (b)(2), Ex. 2] With respect to the issue of timing, the interim rules provide that a domestic relations order will not fail to be treated as a QDRO solely because of the time at which it is issued.[labor Reg. Section (c)] This means, for example, that a domestic relations order cannot be denied QDRO status solely because it is issued after the death of the participant, [Labor Reg. Section (c)(2), Ex. 1] or after the couple has already divorced so that, technically, the non-participant no longer qualifies as a surviving spouse. [Labor Reg. Section (c)(2), Ex. 2] Similarly, the interim rule provides that an order will not be denied QDRO status solely because it is issued after the participant's annuity starting date. VII. Tax Treatment of Alternate Payee Distributions from a qualified plan pursuant to a QDRO to an alternate payee who is the spouse or former spouse of the participant are taxable to the alternate payee in the year of distribution. [IRC '402(e)(1)(A)] However, the spouse or former spouse may roll over to an IRA or to another eligible retirement plan, amounts 12

22 received from a qualified plan pursuant to a QDRO. [IRC '402(e)(1)(B)] As such, where distribution to the alternate payee who is or was the spouse of the participant is made pursuant to a QDRO, the participant will not be taxed on such amounts. However, amounts paid to an alternate payee who is not the spouse or former spouse of the participant are treated as taxable to the participant. [IRC '402(a) & (e)] This means, for example, that if distribution is made to the participant's children pursuant to a QDRO, the distribution will be taxable to the participant. VIII. QDROs and Competing Death Benefit Claims A. Continuing Survivor Benefit Rights To the extent provided in a QDRO, the former spouse of a participant is to be treated as a surviving spouse for purposes of the survivor benefit provisions of Section 401(a)(11) and 417 which apply to defined benefit and defined contribution plans subject to the minimum funding requirements. Profit sharing plans and Section 401(k) plans can be drafted to be exempt from the survivor benefit requirements provided that, in addition to other requirements, the plan provides that benefits in the event of a participant s death will be paid, absent the designation of another beneficiary with the spouse s consent, to the spouse. When the participant in a plan subject to the survivor benefit requirements has previously designated his/her spouse as the primary beneficiary and the parties subsequently divorce but no new designation is issued to the plan, disputes often arise as to who should be the beneficiary of the participant s account or benefit. This is often exacerbated in cases involving participants who have been married more than once with children from a prior marriage. B. State Laws Automatically Nullifying Death Beneficiary Designations Post Divorce Impact on Plans Subject to Survivor Benefit Requirements The Supreme Court in Egelhoff v. Egelhoff, 532 U.S. 141 (2001) held that a Washington State statute automatically providing that the designation of a spouse as the beneficiary would be rendered null and void as a result of a divorce was preempted as it applied to benefits covered by ERISA. 13

23 In addition, Treasury Regulation Section 1.401(a)-20, Q & A-25(b)(3), applicable to plans subject to the survivor benefit requirements, provides that if a participant divorces prior to the annuity starting date, any elections made while the participant was married to the former spouse remain valid, unless otherwise provided in a QDRO, or unless the participant changes the election or remarries. In McGowan v. NJR Service Corporation, BF3dC, 2005 W.L (3 rd Cir. N. J. 2005), at the time McGowan retired and began receiving benefits, his designated beneficiary was his then current wife Rosemary. Payments were made in the form of a joint and survivor annuity. Subsequently, he and Rosemary divorced and she waived her rights to his pension benefits as part of the divorce. Rosemary subsequently executed a form consenting to the election of McGowan=s first wife as the beneficiary. However, the plan informed McGowan that the plan did not permit changes to his prior contingent beneficiary election once benefits had begun. A few years later, after McGowan had remarried, he again sought to substitute, this time, his then current wife as his beneficiary. The plan again denied his request and McGowan filed suit. On appeal, the court first recognized that there is split among the circuits on this issue with, according to the court, the majority of circuits holding that waivers are valid under certain circumstances. [citing, Altobelli v. Int=l Bus. Mach. Corp., 77 F. 3d 78 (4 th Cir. 1996); Mohamed v. Kerr, 53 F. 3d 911 (8 th Cir. 1995); Brandon v. Travelers Ins. Co., 18 F. 3d 1321 (5 th Cir. 1994); Metro. Life Ins. Co., v. Hanslip, 939 F. 2d 904 (10 th Cir. 1991); Fox Valley & Vicinity Constr. Workers Pension Fund v. Brown, 897 F. 2d 275 (7 th Cir. 1990), en banc.] However, two circuits have ruled that plan administrators need not look beyond the documents on file with the plan to determine whether there has been a valid waiver. [citing, Krishna v. Colgate Palmolive Co., 7 F. 3d 11 (2d Cir. 1993); McMillan v. Parott, 913 F.3d 310 (6 th Cir.1990)] The majority approach is primarily based on the premise that, although ERISA is a comprehensive statute, there are gaps that can be filled by reliance on the common law. However, the court at hand found that the case could be resolved by looking to the express terms of ERISA and therefore, there was no need to follow the federal common law. Specifically, the court noted that ERISA requires that plans be administered in accordance with the documents and instruments governing the plan. The plan documents in this case, the court reasoned, designate Rosemary as the beneficiary and any requirement imposed on the plan administrator to look beyond these plan documents would go against the specific provisions of ERISA. Moreover, this 14

24 approach, looking solely to the plan documents, is also required by the need to promote one of the principal goals of ERISABensuring that plans be uniform in their interpretation and simple in their application. As such, the court of appeals affirmed the decision of the district court granting summary judgment for the plan. The Supreme Court case of Kennedy v. DuPont Savings and Investment Plan, 2009 WL (2009) arose out of facts that recur quite often in this area. Specifically, the case arose out of a deceased participant s failure to designate a new beneficiary following his divorce from his previously designated spouse. The divorce decree divested the former spouse of her interest in the plans at issue, however, no new beneficiary designation form was ever signed by the participant. Moreover, while a QDRO was prepared and approved as part of the divorce, it did not address the plan that became the subject of the litigation. Both the former spouse and the deceased participant s estate claimed entitlement to the plan benefits. The company, relying on the existing death beneficiary designation form in its file, denied the estate's claim and instead made payment to the former spouse, i.e., the beneficiary named on the designation form on file with the plan. The Supreme Court held in favor of the former spouse and, therefore, in favor of the plan. While concluding that Kennedy s voluntary waiver as part of the divorce decree was not prohibited by ERISA, the Court importantly concluded that the plan administrator fulfilled its fiduciary duty by paying the plan benefits to the former spouse in conformance with the plan documents. Because ERISA provides no exception to the plan administrator's duty to act in accordance with the terms of the plan, the estate's claim necessarily stands or falls, the Court reasons, by "the terms of the plan". While not mandating that plans must always ignore voluntary waivers, the Court concludes that plans have the right to rely on a straightforward rule of "hewing to the directives of the plan documents that lets employers establish a uniform administrative scheme [with a set of standard procedures to guide processing of claims and disbursements of benefits" (quoting in part, Egelhoff v. Egelhoff, 532 U.S. 141 (2001) quoting Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, (1987))]. A less certain rule, the Court concludes, would force plan administrators to examine a multitude of external documents that might purport to affect the dispensation of benefits (citing Altobelli v. IBM Corp., 77 F. 3d 78, (CA4 1996)), and be drawn into more litigation like the one at issue over the meaning and enforceability of purported waivers. 15

25 B. Plans Not Subject to the Survivor Benefit Requirements Most Profit Sharing and Section 401(k) Plans Drafted to be Exempt While no comparable language like that contained in Treasury Section 1.401(a)-20, Q & A-25(b)(3) is contained in the Code as applicable to plans not subject to the survivor benefit requirements, the court cases preempting state nullification provisions would apply equally. 16

26 PLAN CHECKLIST QUALIFIED DOMESTIC RELATIONS CHECKLIST Answer each question with respect to the Order received. Underline the correct response. If any question is answered no, the order is not a QDRO. 1. Does the Order clearly state that it applies to this Plan? Yes No 2. Does the Order clearly appear to have been issued by a court? Yes No 17

27 3. Does the Order clearly appear to be a judgment, decree, or order (including approval of a property settlement agreement)? Yes No 4. Does the Order clearly appear to relate to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a Participant? Yes No 5. Does the Order clearly appear to be made pursuant to a state domestic relations law (including a community property law)? Yes No 18

28 6. Does the Order clearly appear to create or recognize the existence of an alternate payee's right to, or assign to an alternate payee the right to receive all or a portion of a Participant's account under the Plan? Yes No 7. If the answer to question 6 is yes, is each such person either a current or former spouse, child or other dependent of the Plan Participant (hereinafter "alternate payee")? Yes No 8. Does the Order clearly specify the name, mailing address of the Participant and the name and mailing address of each alternate payee covered by the Order? Yes No 19

29 9. Does the Order clearly specify how much of the Participant's benefit is to be paid to each alternate payee, that is, does the Order clearly specify the amount or percentage of the Participant's benefits to be paid by the Plan to each such alternate payee, or the manner in which such amount or percentage is to be determined? Yes No 10. Is it clear that the total benefits payable to the Alternate Payee(s) under the Order do not and could not exceed the value of the Participant's Plan benefits? Yes No 20

30 11. Does the Order state how to pay benefits to each alternate payee? Yes No Are all benefit payments prescribed by the Order permissible methods of distribution under the terms of the Plan? Yes No 12. Does the Order state when benefits are to be begin to each alternate payee? Yes No 21

31 Is the timing permissible under the Plan? Yes No 13. Is the Order consistent with all other QDROs received by the Plan with respect to the Participant? Not Applicable Yes No If no, explain. 22

32 14. Does the Order refrain from requiring the Plan to provide to the alternate payee any type or form of benefits or any option not otherwise available under the Plan; the Participant and alternate payee with increased benefits, and pay benefits to the alternate payee which are required to be paid to another alternate payee under a prior QDRO? Yes No 23