When Does a Nonemployee Spouse Have a Right to the Employee's Retirement Accumulation?

In the first part of this article (The Matrimonial Strategist, December 2009), I outlined the statutory spousal protection provisions that apply to employee pension and profit-sharing plans governed by ERISA. For defined benefit pension plans and money purchase defined contribution plans, the participant's spouse has the right to: 1) a survivor benefit if the participant dies before retirement (the QPSA); and 2) a survivor annuity in the required default benefit at retirement (the QJSA). These benefits may be “waived” by the participant, that is, the participant may elect a different type of benefit (for example, distribution in a lump sum) or to designate a different beneficiary, but only with the written consent of his or her spouse that conforms to certain statutory requirements. Profit-sharing plans, including 401(k) plans, are not subject to the spousal protection rules, provided the spouse has the right to the death benefit under these plans, nor are rollover IRAs governed by these rules. Benefit distributions from these plans are typically made solely to the participant who may then do whatever s/he wants with the distributed funds. While these rules are intended to protect the wives or husbands of workers, they may have unexpected effects when the worker's marital status changes.

Who Is Entitled to Spousal Protections

The spouse entitled to spousal protections is one who had been married to the participant for 12 months preceding the participant's death before retirement or before the “annuity starting date,” which in most cases is the same as the participant's retirement date. When the participant is divorced and remarried, as we have seen, these rules can cause serious problems, and those problems may not surface until the participant dies. The participant can elect a benefit option other than the QJSA or QPSA, with the consent of his or her spouse, at the time, only during the “applicable election period.” IRC ' 417(a)(1)(A)(i); 29 USC ' 1055(c)(1)(A)(i). For the QJSA the “applicable election period” is the 180-day period ending on the annuity starting date. Are elections made within this time period irrevocable? Divorce and remarriage among the elderly has become more common, so attention needs to be paid to this requirement. When the benefit is paid as an annuity, the plan will determine the amount of annuity payments based on the age of the participant, of, if the annuity is a joint and survivor annuity, the ages of both the participant and the participant's spouse. Any change in the identity of the beneficiary of survivor interest will obviously affect the value of the benefit. For this reason, once the annuity starting date has passed and the participant's benefit is in pay status, the benefit can no longer be changed.

Case in Point

In McGowan v. NJR Service Corp., 423 F.3d 241 (3rd Cir. 2005), cert. denied, 549 U.S. 1174 (2007), a case discussed in my prior article, the husband had retired and elected to receive benefit payments as a QJSA with his then-wife, Rosemary. After a subsequent divorce and remarriage, the husband tried to replace Rosemary with his new wife as the survivor under the QJSA. As pointed out in the prior discussion, the court of appeals held that the plan administrator was required to abide by the terms of the plan; accordingly, it acted properly in treating Rosemary as the survivor, a result later confirmed by the Supreme Court in Kennedy v. Plan Administrator for Dupont Savings & Investment Plan, 129 S.Ct. 865 (2009). The court's opinion in McGowan suggested that the husband might have been able to change the survivor beneficiary through a Qualified Domestic Relations Order (QDRO), although it did not address this question because the marital settlement agreement in the case did not qualify.

The problem in McGowan is important, not just because more divorces might occur in the future between retired workers and their spouses. It is important because although QDROs may specifically address survivorship issues, they often do not. In fact, it seems that this omission is one of the most frequent errors in the drafting of QDROs, where the expectation of the parties may be that the participant whose qualified plan accumulations are at risk will survive, and that the divorcing spouse would then be protected by a QDRO assigning to him or her a share of the participant's pension when it enters pay status. There are several issues raised by interrelationship between the QDRO rules and the spousal protection provisions.

QDRO Issues

A QDRO may provide that the nonemployee spouse will be treated as the participant's surviving spouse for both QPSA and QJSA purposes, supplanting any subsequent spouse. IRC ' 414(p)(5); 29 USC ' 1056(d)(3)(F). If there is no QDRO, and divorce becomes final, then, presumably, the participant may designate different beneficiaries. Failure to designate a different beneficiary would raise the problem resolved in Kennedy, where the participant could have changed the designation but did not do so. Note, however, that survivorship rules are precise, and permit a QDRO to provide only that the nonemployee spouse to whom the order applies be treated as the participant's surviving spouse; the identification of alternative beneficiaries, such as the children of the parties to the divorce, cannot override the spousal protections. Hamilton v. Washington State Plumbing & Pipefitting Indus. Pension Plan, 433 F.3d 1091 (9th Cir.), cert. denied, 549 U.S. 818 (2006).

In Hamilton, the divorce decree required the husband to name the parties' children beneficiaries of the death benefit under the plan in which he was a participant. The husband took no action to do so, and subsequently remarried. He died before reaching retirement, after naming his second wife as the beneficiary of the death benefit. She claimed the benefit under the spousal protection provisions. The district concluded that the provision in the divorce decree was a valid QDRO and required payment of the death benefit to the children. The court of appeals, however, in an exhaustive analysis, concluded that a QDRO could not override the rights of a subsequent spouse unless it required the former spouse to be treated as the surviving spouse. As the court pointed out, publications of both the Department of Labor (Appendix D, Drafting a Qualified QDRO, in the DOL Guide, available at http://www.dol.ebsa/publications/qdros_appD.html) and the IRS (Notice 97-11, 1997-1 C.B. 379, 383) specifically so provide. While the court of appeals thought that the divorce decree did not have the specificity required to constitute a QDRO, even had it qualified, it would have been ineffective to deprive the husband's second wife of her right to death benefits under the plan. That might not have been so if the husband had not remarried. In the negotiation of the divorce settlement, the possibility of the husband's remarriage might have been considered, but that would have been a problem as the husband would not likely have agreed to give up the spousal benefits for his prospective wife.

Carmona v. Carmona

Carmona v. Carmona, 544 F.3d 988 (9th Cir. 2008), carried this analysis one step further. In that case, the husband was married to Janis when he retired. Janis was designated as the survivor beneficiary under a QJSA, which went into pay status. Thereafter, husband and Janis divorced; the divorce court assigned husband's interest in his pensions solely to him, and Janis' interest in her pensions solely to her, with a compensating payment to equalize the value of the settlement from husband to Janis. Subsequently, the husband married Judy, and petitioned the domestic relations court for an order displacing Janis as the survivor under the QJSA. The state court issued the order which it determined to be a QDRO, concluding that Janis had waived her right under the QJSA and ordering a constructive trust to receive payments from Janis for Judy's benefit. Janis was unsuccessful in having this order reversed in the state courts, but one of the plans had not been a party to the state court proceedings. As to this plan, the court of appeals held that Janis' interest as the survivor under the QJSA had vested at the annuity starting date, and could not be divested by a subsequently issued QDRO. Moreover, the constructive trust imposed by the state court was preempted by ERISA because it had been created “for the explicit purpose of avoiding ERISA's rules.”

In some cases, the divorce court will reserve jurisdiction over the participant's plan for the purpose of making a more specific order once the participant's interest in the plan is better defined. Formulation of a QDRO for the division of a future benefit is a difficult task, and it may seem that reserving jurisdiction in the divorce action to do this later would be an effective way to deal with the problem. But there may be a problem with this approach, particularly when the participant remarries and then dies before retirement. Does the divorce court have authority at that point to issue a domestic relations order, which divests the then current spouse of her spousal interest in the participant's plan? There is a difference of opinion about the effect of inserting in the order a provision, not in the original decree, qualifying the former spouse for the death benefit. This problem was exhaustively explored in Padgett v. Padgett, 172 Cal. App. 4th 830, 91 Cal. Rptr. 3d 475 (Cal. Ct. App. 2009).

Padgett v. Padgett

In Padgett, the husband divorced Beverly under a divorce decree in which the divorce court “reserve[d] jurisdiction over husband's pension plan.” Seven years later, the husband married Donna, and ten years after that, he died before reaching retirement. In the interim, Beverly took no action to formulate a QDRO through which her community property interest in the husband's pension plan might be realized. After the husband's death, Beverly then went back to the divorce court and obtained an order, nunc pro tunc to the date of their divorce, to pay part of the survivor benefit to her. The lower courts viewed this order as a valid QDRO, but the court of appeals disagreed, holding that Donna's survivor interest in the husband's pension plan vested at his death. Unless the domestic relations order in Beverly's favor had defined her interest in the plan, she did not have an interest in the plan which could be enforced. That the parties to the divorce had not agreed on how to divide the husband's interest in the pension plans, with the issue deferred to a later date, is not sufficiently settled to justify a nunc pro tunc order. Clearly, it was up to Beverly, and more likely her counsel, to take the action necessary to define her interest sufficiently to protect her if the husband should die after remarriage.

QDRO Post Mortem

Issuance of a QDRO post mortem to enforce a domestic relations order issued before death is a contentious problem. Courts have disagreed whether qualifying a domestic relations order entered prior to death, often with technical adjustments necessary to meet the statutory requirements, and enforcing it nunc pro tunc to date of the divorce is an appropriate remedy. The issue often arises over the insertion of the right to the survivor benefit after the participant's untimely death before retirement. One of the first cases to be faced with this problem is Samaroo v. Samaroo, 193 F.3d 185 (3rd Cir. 1999), cert. denied, 529 U.S. 1062 (2000). There, the husband, a participant in a defined benefit pension plan, divorced his wife. Their property settlement specified that the husband would receive a stated pension were he to retire at the date of divorce and that he agreed to pay wife one-half of this amount on “receipt” of his pension. Three years later, he died while actively employed. The wife obtained an order from the divorce court, nunc pro tunc to the date of the divorce, awarding her survivorship rights to the QPSA under the plan, which otherwise would lapse as the husband had not remarried. The court held that the order could not be a QDRO because it retroactively created an interest in the husband's plan, which would have increased benefits provided by the plan in violation of IRC ' 414(p)(3)(B), and denied her claim.

Samaroo seems to define the fault line for correcting oversights in the divorce negotiation when survivorship rights are not considered. Technical problems in obtaining a properly qualified domestic relations order can be cured nunc pro tunc, in most jurisdictions, after the participant has died, but omission of the survivorship right cannot generally be supplied on that basis. As might be expected, the survivorship issue is sensitive, particularly for the participant whose interest is to preserve that right for a future relationship. The dimensions of this problem are thoroughly explored in Albert Feuer: Who Is Entitled to Survivor Benefits from ERISA Plans? 40 J. Marshall L. Rev. 919 (2007).

Changing Entitlements

As discussed above, once the annuity starting date has passed, and the form of benefit elected, benefit entitlements based on the participant's account cannot, in general, be changed. This, however, depends on the terms of the plan.

Hall v. Kodak Retirement Income Plan

In Hall v. Kodak Retirement Income Plan, 2009 WL 778102 (W.D.N.Y. 2009), the Kodak plan did permit the participant to change the form of the benefit he had elected after payments had begun under the plan. The participant in this case had retired while married to Marlene, wife number one, and at the time elected a straight life annuity for himself with Marlene's consent. Shortly after retirement, they divorced and some time later, the participant married Peggy. The evidence was clear that the participant had been fully informed of the various benefit options at the time he made the original election and subsequently, after payments had begun. But he did not change the election and continued to receive payments under a straight life annuity until he died, 12 years later. Then, the plan denied Peggy's claim for survivor benefits as if the QJSA had been elected by her husband. She sued the plan, arguing that neither of them had been fully informed about the benefit options available to them. This claim was denied at summary judgment based on the evidence that her husband had in fact been informed as to benefit options.

While it may be unusual for a plan to offer a retired participant the option to change his or her benefit election, these changes always involve a cost. In Hall, Peggy was more than 20 years younger than her husband, so an election to change the straight life annuity into a joint and survivor annuity would have meant a significant reduction in the payments they had been receiving while he was alive. It may be that this choice was never discussed before his death, and he might not have wanted even to consider such an election. One can infer from the evidence that his divorce from Marlene and remarriage to Peggy was already being planned at the time of his retirement, and if so, the problem for Peggy, her future support, should have been discussed at the time those decisions were made. It is very difficult to look ahead and make decisions currently for events which will occur in the future.

Hallingby v. Hallingby

There is one other recent case to consider here, Hallingby v. Hallingby, 2009 WL 2207824 (2nd Cir. 2009), which was also discussed in Part One. There, the husband had been receiving annuity payments under a QJSA that was the benefit option he had chosen at retirement when married to his first wife. After payments had begun, the employer had terminated its plan under a standard termination and purchased annuities to fulfill its obligations under the plan. The husband and his first wife divorced, with the settlement agreement providing that each acknowledged that neither had any “right, title or interest” in the other's assets, including the annuity. The husband then remarried and, ten years later, died. His second wife claimed the survivorship right, which was denied by the annuity company.

The district court, consistently with the cases discussed here, held that the interest of wife number one in the annuity had vested at retirement, and could not be changed under the survivorship protection rules. 541 F.Supp. 2d 391 (S.D.N.Y. 2008). This holding seemed like a routine application of survivor protections, which, under IRS regulations, apply to annuities distributed by the plan to participants and held by them, including annuities distributed in a termination. Treas. Reg. ' 1.401(a)-20 Q-A 2. In a twist not previously encountered, the court of appeals reversed and remanded, concluding that annuities distributed in a standard termination also terminated the application of ERISA to the benefit. Accordingly, the right to the survivor interest in the annuity would be determined under state law, so that the ERISA survivor protections would presumably no longer apply.

This conclusion is dubious. The court of appeals relied on statements in the Supreme Court's opinion in Beck v. PACE Int'l Union, 551 U.S. 96 (2007), taken out of context, in deciding that annuities purchased by the plan in a standard termination ended ERISA's application to those benefits. In Beck, the issue was whether the proposal made by the Union in that case constituted a termination of the plan, rather than a continuation, not whether the rules governing how benefits were paid and to whom no longer applied to a payout in annuity form. Since payment of benefits by the purchase and distribution of an annuity contract is not unusual, and may even be required by the rules in some circumstances, this holding, if it does represent how the rules should be applied, could cause a whole other set of problems.

Conclusion

The problems explored in this article mainly occur in defined benefit plans, or in situations where the benefit is paid as an annuity. In a world dominated by 401(k) plans, the accumulation in the plan can be split in a divorce settlement in a way that avoids some of the problems the spousal protections address. With so much emphasis now placed on retirement security, and with the interest of policymakers in requiring annuitization of benefit payments, spousal protection issues are sure to be important in the future as the baby-boom generation enters retirement.

Thomas R. White, 3rd, a member of this newsletter's Board of Editors, is a John C. Stennis Professor of Law at the University of Virginia Law School.

In the first part of this article (The Matrimonial Strategist, December 2009), I outlined the statutory spousal protection provisions that apply to employee pension and profit-sharing plans governed by ERISA. For defined benefit pension plans and money purchase defined contribution plans, the participant's spouse has the right to: 1) a survivor benefit if the participant dies before retirement (the QPSA); and 2) a survivor annuity in the required default benefit at retirement (the QJSA). These benefits may be “waived” by the participant, that is, the participant may elect a different type of benefit (for example, distribution in a lump sum) or to designate a different beneficiary, but only with the written consent of his or her spouse that conforms to certain statutory requirements. Profit-sharing plans, including 401(k) plans, are not subject to the spousal protection rules, provided the spouse has the right to the death benefit under these plans, nor are rollover IRAs governed by these rules. Benefit distributions from these plans are typically made solely to the participant who may then do whatever s/he wants with the distributed funds. While these rules are intended to protect the wives or husbands of workers, they may have unexpected effects when the worker's marital status changes.

Who Is Entitled to Spousal Protections

The spouse entitled to spousal protections is one who had been married to the participant for 12 months preceding the participant's death before retirement or before the “annuity starting date,” which in most cases is the same as the participant's retirement date. When the participant is divorced and remarried, as we have seen, these rules can cause serious problems, and those problems may not surface until the participant dies. The participant can elect a benefit option other than the QJSA or QPSA, with the consent of his or her spouse, at the time, only during the “applicable election period.” IRC ' 417(a)(1)(A)(i); 29 USC ' 1055(c)(1)(A)(i). For the QJSA the “applicable election period” is the 180-day period ending on the annuity starting date. Are elections made within this time period irrevocable? Divorce and remarriage among the elderly has become more common, so attention needs to be paid to this requirement. When the benefit is paid as an annuity, the plan will determine the amount of annuity payments based on the age of the participant, of, if the annuity is a joint and survivor annuity, the ages of both the participant and the participant's spouse. Any change in the identity of the beneficiary of survivor interest will obviously affect the value of the benefit. For this reason, once the annuity starting date has passed and the participant's benefit is in pay status, the benefit can no longer be changed.

Case in Point

In McGowan v. NJR Service Corp. , 423 F.3d 241 (3rd Cir. 2005), cert. denied, 549 U.S. 1174 (2007), a case discussed in my prior article, the husband had retired and elected to receive benefit payments as a QJSA with his then-wife, Rosemary. After a subsequent divorce and remarriage, the husband tried to replace Rosemary with his new wife as the survivor under the QJSA. As pointed out in the prior discussion, the court of appeals held that the plan administrator was required to abide by the terms of the plan; accordingly, it acted properly in treating Rosemary as the survivor, a result later confirmed by the Supreme Court in Kennedy v. Plan Administrator for Dupont Savings & Investment Plan , 129 S.Ct. 865 (2009). The court's opinion in McGowan suggested that the husband might have been able to change the survivor beneficiary through a Qualified Domestic Relations Order (QDRO), although it did not address this question because the marital settlement agreement in the case did not qualify.

The problem in McGowan is important, not just because more divorces might occur in the future between retired workers and their spouses. It is important because although QDROs may specifically address survivorship issues, they often do not. In fact, it seems that this omission is one of the most frequent errors in the drafting of QDROs, where the expectation of the parties may be that the participant whose qualified plan accumulations are at risk will survive, and that the divorcing spouse would then be protected by a QDRO assigning to him or her a share of the participant's pension when it enters pay status. There are several issues raised by interrelationship between the QDRO rules and the spousal protection provisions.

QDRO Issues

A QDRO may provide that the nonemployee spouse will be treated as the participant's surviving spouse for both QPSA and QJSA purposes, supplanting any subsequent spouse. IRC ' 414(p)(5); 29 USC ' 1056(d)(3)(F). If there is no QDRO, and divorce becomes final, then, presumably, the participant may designate different beneficiaries. Failure to designate a different beneficiary would raise the problem resolved in Kennedy, where the participant could have changed the designation but did not do so. Note, however, that survivorship rules are precise, and permit a QDRO to provide only that the nonemployee spouse to whom the order applies be treated as the participant's surviving spouse; the identification of alternative beneficiaries, such as the children of the parties to the divorce, cannot override the spousal protections. Hamilton v. Washington State Plumbing & Pipefitting Indus. Pension Plan , 433 F.3d 1091 (9th Cir.), cert. denied, 549 U.S. 818 (2006).

In Hamilton, the divorce decree required the husband to name the parties' children beneficiaries of the death benefit under the plan in which he was a participant. The husband took no action to do so, and subsequently remarried. He died before reaching retirement, after naming his second wife as the beneficiary of the death benefit. She claimed the benefit under the spousal protection provisions. The district concluded that the provision in the divorce decree was a valid QDRO and required payment of the death benefit to the children. The court of appeals, however, in an exhaustive analysis, concluded that a QDRO could not override the rights of a subsequent spouse unless it required the former spouse to be treated as the surviving spouse. As the court pointed out, publications of both the Department of Labor (Appendix D, Drafting a Qualified QDRO, in the DOL Guide, available at http://www.dol.ebsa/publications/qdros_appD.html) and the IRS (Notice 97-11, 1997-1 C.B. 379, 383) specifically so provide. While the court of appeals thought that the divorce decree did not have the specificity required to constitute a QDRO, even had it qualified, it would have been ineffective to deprive the husband's second wife of her right to death benefits under the plan. That might not have been so if the husband had not remarried. In the negotiation of the divorce settlement, the possibility of the husband's remarriage might have been considered, but that would have been a problem as the husband would not likely have agreed to give up the spousal benefits for his prospective wife.

Carmona v. Carmona

Carmona v. Carmona , 544 F.3d 988 (9th Cir. 2008), carried this analysis one step further. In that case, the husband was married to Janis when he retired. Janis was designated as the survivor beneficiary under a QJSA, which went into pay status. Thereafter, husband and Janis divorced; the divorce court assigned husband's interest in his pensions solely to him, and Janis' interest in her pensions solely to her, with a compensating payment to equalize the value of the settlement from husband to Janis. Subsequently, the husband married Judy, and petitioned the domestic relations court for an order displacing Janis as the survivor under the QJSA. The state court issued the order which it determined to be a QDRO, concluding that Janis had waived her right under the QJSA and ordering a constructive trust to receive payments from Janis for Judy's benefit. Janis was unsuccessful in having this order reversed in the state courts, but one of the plans had not been a party to the state court proceedings. As to this plan, the court of appeals held that Janis' interest as the survivor under the QJSA had vested at the annuity starting date, and could not be divested by a subsequently issued QDRO. Moreover, the constructive trust imposed by the state court was preempted by ERISA because it had been created “for the explicit purpose of avoiding ERISA's rules.”

In some cases, the divorce court will reserve jurisdiction over the participant's plan for the purpose of making a more specific order once the participant's interest in the plan is better defined. Formulation of a QDRO for the division of a future benefit is a difficult task, and it may seem that reserving jurisdiction in the divorce action to do this later would be an effective way to deal with the problem. But there may be a problem with this approach, particularly when the participant remarries and then dies before retirement. Does the divorce court have authority at that point to issue a domestic relations order, which divests the then current spouse of her spousal interest in the participant's plan? There is a difference of opinion about the effect of inserting in the order a provision, not in the original decree, qualifying the former spouse for the death benefit. This problem was exhaustively explored in Padgett v. Padgett , 172 Cal. App. 4th 830, 91 Cal. Rptr. 3d 475 (Cal. Ct. App. 2009).

Padgett v. Padgett

In Padgett, the husband divorced Beverly under a divorce decree in which the divorce court “reserve[d] jurisdiction over husband's pension plan.” Seven years later, the husband married Donna, and ten years after that, he died before reaching retirement. In the interim, Beverly took no action to formulate a QDRO through which her community property interest in the husband's pension plan might be realized. After the husband's death, Beverly then went back to the divorce court and obtained an order, nunc pro tunc to the date of their divorce, to pay part of the survivor benefit to her. The lower courts viewed this order as a valid QDRO, but the court of appeals disagreed, holding that Donna's survivor interest in the husband's pension plan vested at his death. Unless the domestic relations order in Beverly's favor had defined her interest in the plan, she did not have an interest in the plan which could be enforced. That the parties to the divorce had not agreed on how to divide the husband's interest in the pension plans, with the issue deferred to a later date, is not sufficiently settled to justify a nunc pro tunc order. Clearly, it was up to Beverly, and more likely her counsel, to take the action necessary to define her interest sufficiently to protect her if the husband should die after remarriage.

QDRO Post Mortem

Issuance of a QDRO post mortem to enforce a domestic relations order issued before death is a contentious problem. Courts have disagreed whether qualifying a domestic relations order entered prior to death, often with technical adjustments necessary to meet the statutory requirements, and enforcing it nunc pro tunc to date of the divorce is an appropriate remedy. The issue often arises over the insertion of the right to the survivor benefit after the participant's untimely death before retirement. One of the first cases to be faced with this problem is Samaroo v. Samaroo , 193 F.3d 185 (3rd Cir. 1999), cert. denied, 529 U.S. 1062 (2000). There, the husband, a participant in a defined benefit pension plan, divorced his wife. Their property settlement specified that the husband would receive a stated pension were he to retire at the date of divorce and that he agreed to pay wife one-half of this amount on “receipt” of his pension. Three years later, he died while actively employed. The wife obtained an order from the divorce court, nunc pro tunc to the date of the divorce, awarding her survivorship rights to the QPSA under the plan, which otherwise would lapse as the husband had not remarried. The court held that the order could not be a QDRO because it retroactively created an interest in the husband's plan, which would have increased benefits provided by the plan in violation of IRC ' 414(p)(3)(B), and denied her claim.

Samaroo seems to define the fault line for correcting oversights in the divorce negotiation when survivorship rights are not considered. Technical problems in obtaining a properly qualified domestic relations order can be cured nunc pro tunc, in most jurisdictions, after the participant has died, but omission of the survivorship right cannot generally be supplied on that basis. As might be expected, the survivorship issue is sensitive, particularly for the participant whose interest is to preserve that right for a future relationship. The dimensions of this problem are thoroughly explored in Albert Feuer: Who Is Entitled to Survivor Benefits from ERISA Plans? 40 J. Marshall L. Rev. 919 (2007).

Changing Entitlements

As discussed above, once the annuity starting date has passed, and the form of benefit elected, benefit entitlements based on the participant's account cannot, in general, be changed. This, however, depends on the terms of the plan.

Hall v. Kodak Retirement Income Plan

In Hall v. Kodak Retirement Income Plan, 2009 WL 778102 (W.D.N.Y. 2009), the Kodak plan did permit the participant to change the form of the benefit he had elected after payments had begun under the plan. The participant in this case had retired while married to Marlene, wife number one, and at the time elected a straight life annuity for himself with Marlene's consent. Shortly after retirement, they divorced and some time later, the participant married Peggy. The evidence was clear that the participant had been fully informed of the various benefit options at the time he made the original election and subsequently, after payments had begun. But he did not change the election and continued to receive payments under a straight life annuity until he died, 12 years later. Then, the plan denied Peggy's claim for survivor benefits as if the QJSA had been elected by her husband. She sued the plan, arguing that neither of them had been fully informed about the benefit options available to them. This claim was denied at summary judgment based on the evidence that her husband had in fact been informed as to benefit options.

While it may be unusual for a plan to offer a retired participant the option to change his or her benefit election, these changes always involve a cost. In Hall, Peggy was more than 20 years younger than her husband, so an election to change the straight life annuity into a joint and survivor annuity would have meant a significant reduction in the payments they had been receiving while he was alive. It may be that this choice was never discussed before his death, and he might not have wanted even to consider such an election. One can infer from the evidence that his divorce from Marlene and remarriage to Peggy was already being planned at the time of his retirement, and if so, the problem for Peggy, her future support, should have been discussed at the time those decisions were made. It is very difficult to look ahead and make decisions currently for events which will occur in the future.

Hallingby v. Hallingby

There is one other recent case to consider here, Hallingby v. Hallingby, 2009 WL 2207824 (2nd Cir. 2009), which was also discussed in Part One. There, the husband had been receiving annuity payments under a QJSA that was the benefit option he had chosen at retirement when married to his first wife. After payments had begun, the employer had terminated its plan under a standard termination and purchased annuities to fulfill its obligations under the plan. The husband and his first wife divorced, with the settlement agreement providing that each acknowledged that neither had any “right, title or interest” in the other's assets, including the annuity. The husband then remarried and, ten years later, died. His second wife claimed the survivorship right, which was denied by the annuity company.

The district court, consistently with the cases discussed here, held that the interest of wife number one in the annuity had vested at retirement, and could not be changed under the survivorship protection rules. 541 F.Supp. 2d 391 (S.D.N.Y. 2008). This holding seemed like a routine application of survivor protections, which, under IRS regulations, apply to annuities distributed by the plan to participants and held by them, including annuities distributed in a termination. Treas. Reg. ' 1.401(a)-20 Q-A 2. In a twist not previously encountered, the court of appeals reversed and remanded, concluding that annuities distributed in a standard termination also terminated the application of ERISA to the benefit. Accordingly, the right to the survivor interest in the annuity would be determined under state law, so that the ERISA survivor protections would presumably no longer apply.

This conclusion is dubious. The court of appeals relied on statements in the Supreme Court's opinion in Beck v. PACE Int'l Union , 551 U.S. 96 (2007), taken out of context, in deciding that annuities purchased by the plan in a standard termination ended ERISA's application to those benefits. In Beck, the issue was whether the proposal made by the Union in that case constituted a termination of the plan, rather than a continuation, not whether the rules governing how benefits were paid and to whom no longer applied to a payout in annuity form. Since payment of benefits by the purchase and distribution of an annuity contract is not unusual, and may even be required by the rules in some circumstances, this holding, if it does represent how the rules should be applied, could cause a whole other set of problems.

Conclusion

The problems explored in this article mainly occur in defined benefit plans, or in situations where the benefit is paid as an annuity. In a world dominated by 401(k) plans, the accumulation in the plan can be split in a divorce settlement in a way that avoids some of the problems the spousal protections address. With so much emphasis now placed on retirement security, and with the interest of policymakers in requiring annuitization of benefit payments, spousal protection issues are sure to be important in the future as the baby-boom generation enters retirement.

Thomas R. White, 3rd, a member of this newsletter's Board of Editors, is a John C. Stennis Professor of Law at the University of Virginia Law School.