A QDRO can be entered, and must be honored, after the death of a plan participant – as long as it meets certain criteria.
By Tim Voit, Financial Analyst
Many attorneys and even plan administrators believe that QDROs not implemented prior to the death of a plan-participant spouse will automatically make a QDRO null and void – not to mention create a liability concern. However, Section 1001 of the Pension Protection Act of 2006 (PPA) clarifies the issuance or timing of QDROs – including the ability to enter a QDRO after the death of a plan participant (posthumous QDRO).
Although not recommended, QDROs are often entered after the divorce – sometimes several years after. From a liability standpoint, you should enter a QDRO before or at the time of divorce, since the Internal Revenue Code defines an alternate payee as a spouse, former spouse, or dependent. Prior to PPA, if the plan participant died before a QDRO had been entered, then the former spouse was simply out of luck.
The PPA clarified a critical issue that was further reinforced in federal court in Yale-New Haven Hospital. v. Nicholls, 788 F.3d 79 (2d Cir. 06/04/2015). The court’s reasoning and application of PPA stated in part:
“In the Pension Protection Act of 2006, Congress made clear that a QDRO will not fail solely because of the time at which it is issued (see Pub. L. No. 109-280, § 1001, 120 Stat. 780 ), although several of our sister circuits had already reached that conclusion (see, e.g., Files v. ExxonMobil Pension Plan, 428 F.3d 478, 490-91 (3d Cir. ), finding that a posthumous order constituted a QDRO), cert. denied, 547 U.S. 1160, 126 S.Ct. 2304, 164 L.Ed.2d 834 (2006); Patton v. Denver Post Corp., 326 F.3d 1148, 1153-54 (10th Cir. 2003).”
The two QDROs entered posthumously in the Nicholls case were in fact considered QDROs and executed. The plans at issue were defined contribution plans; however, the reasoning applies regardless of the plan as long as the QDRO(s) are not creating an additional benefit or providing a benefit, or benefit option, not otherwise provided by the plan.
For instance, if the plan participant spouse has not yet retired, the former spouse can be deemed the beneficiary to their share of a retirement account, or as a surviving spouse to a defined benefit plan. If the plan is in-pay status (retired), the posthumous QDRO cannot create or modify the election made at retirement.
Pension Benefits in Pay
One point regarding pension benefits in pay: the benefit election made at retirement is irrevocable, especially as it pertains to ERISA plans (private sector). Attorneys reassure their clients that they are okay because the retired ex-spouse has elected joint and survivor coverage. However, many private-sector pension plans are being amended to allow for a joint and survivor annuity election (i.e., survivor benefits) to revert to a single life annuity upon divorce.
This means that the cost or reduction to provide for a survivor benefit versus a maximum life-only monthly pension benefit is effectively eliminated – but so, too, is the survivor benefit protection afforded to a former spouse.
Failing to consider these issues when preparing marital settlement agreements may have your client back in your office asking, “What happened to the money I was supposed to get?!” which could put you in a precarious position. ν
Tim Voit is a nationally recognized expert in QDROs and pension valuations in divorce. He is the author of Retirement Benefits & QDROs in Divorce, as well as Federal Retirement Plans in Divorce – Strategies & Issues. His firm is VoitEconometrics Group. www.vecon.com.