Category Archives: Qualified Domestic Relations Orders

Does Your Retirement Plan Incorporate State Law Into the Plan?  Check Your Spousal Benefit Obligations!

jordan-mcdonald-766295-unsplashRetirement plan documents are contracts and generally they contain a “choice of law” provision.  The choice of law provision dictates what laws will govern interpretation of the contract, for instance in the event of a dispute over the contract’s application.  A recent, unpublished Ninth Circuit court opinion held that the Plan’s choice of California law required the plan to provide spousal survivor rights to registered domestic partners, because California law affords registered domestic partners the same legal status as spouses, and because doing so did not conflict with any provision of the plan document, ERISA or the Internal Revenue Code.  In light of the opinion, plan sponsors should examine their plan documents to determine whether or not choice of law provisions carry state domestic partner rights into their plan document, and if this is the case, should consult with counsel as to how that might impact their plan distribution and plan loan approval procedures, and QDRO procedures as well.

In Reed v. KRON/IBEW Local 45 Pension Plan, No. 4:16-cv-04471-JSW (9th Cir. May 16, 2019), plaintiff David Reed entered into a long-term relationship with Donald Gardner in 1998.  Gardner was an employee at KRON-TV and a participant in the KRON/IBEW Local 45 Pension Plan, a union-management sponsored defined benefit pension plan.  In addition to a choice of law provision that invoked California law, to the extent consistent with ERISA and the Internal Revenue Code, the KRON plan document did not limit the term “spouse” or “married” to opposite-sex spouses.

In 2004, Reed and Gardner registered as domestic partners under California law.  Registered domestic partners have had the same status under California law as legally married spouses since the California Domestic Partnership Rights and Responsibilities Act of 2003 went into effect on January 1, 2005.[1]

Gardner retired in 2009 and began receiving pension benefits under the plan.  Prior to retiring he attended meetings with KRON-TV’s human resources department together with Reed.  Although HR knew that the couple were registered domestic partners (Reed, for example, received benefits under the group health plan), the HR personnel did not mention the availability of a joint-and-survivor form of benefit under the Plan.  Gardner accordingly elected a single life annuity form of benefit.  He also designated Reed as his beneficiary under the Plan.

Gardner and Reed married in May 2014, five days before Gardner passed away.  Reed submitted a claim for survivor’s benefits under the plan.  Although the Pension Committee of the Plan never formally responded to Reed’s claim, Reed was deemed to have exhausted his administrative remedies and filed suit in federal court against the Plan, the Pension Committee, and the parent company of KRON-TV.  The federal trial court granted the Plan Committee’s motion for judgment on the pleadings, finding that it did not abuse its discretion in denying Reed’s benefit claim.

On appeal, a three-judge panel of the Ninth Circuit reversed the trial court and remanded the case with instructions to determine the payments owed to Reed.  The panel stated:

“The Committee abused its discretion by denying benefits to Reed. During either time the Committee evaluated the Plan’s benefits in this case—in 2009 or in 2016—California law afforded domestic partners the same rights, protections, and benefits as those granted to spouses. See Cal. Fam. Code § 297.5(a); see also Koebke v. Bernardo Heights Country Club, 36 Cal. 4th 824, 837-89 (2005). Neither ERISA nor the Code provided binding guidance inconsistent with applying this interpretation of spouse to the Plan. See United States v. Windsor, 570 U.S. 744 (2013) (striking down the Defense of Marriage Act’s definitions of “spouse” and “marriage” as unconstitutional); cf.26 C.F.R. § 301.7701-18(c) (as of September 2, 2016, the Code excludes registered domestic partners from the definition of “spouse, husband, and wife”). Therefore, because Reed and Gardner were domestic partners at the time of Gardner’s retirement, the Committee should have awarded Reed spousal benefits in accordance with California law, as was required by the Plan’s choice-of-law provision.”

Despite the fact that the Internal Revenue Code does not recognize domestic partners as equivalent to spouses, this did not limit the terms of the plan document; in this regard Reed successfully argued that federal law established a floor, but not a ceiling, for drafting the terms of the plan.  This case is of particular relevance to plan sponsors in California and Hawaii, as both states fall within the Ninth Circuit, and both states grant domestic partners the same rights as married couples.[2]  As mentioned, if domestic partner rights are imported into the plan document, they may be implicated even in the absence of joint and survivor annuity provisions.  For instance, domestic partner approval of plan loans and hardship withdrawals may be required, and QDRO procedures may have to be expanded.

For this to be the case, the plan’s choice of law provision must invoke the law of a state which grants to domestic partners rights equal to those of spouses, and the plan must also not define “spouse” in a more limiting way, for instance by limiting the term to legally married couples. These factors are more likely to be present in individually drafted retirement plans, whether in a “Taft-Hartley” plan such as the KRON plan, or in a document drafted specifically for a unique single employer.

The situation posed in the Reed case is not as likely to occur under a pre-approved plan document.  Fidelity’s Volume Submitter Defined Contribution Plan (Basic Plan Document No. 17), for instance, defines “spouse” as “the person to whom an individual is married for purposes of Federal income taxes.”  This, then, would include same-sex and opposite-sex spouses, but would exclude domestic partners, irrespective of the Fidelity plan document’s choice of law provision (which invokes the laws of the Commonwealth of Massachusetts).

By contrast, the Empower basic plan document (formally, the Great-West Trust Company Defined Contribution Prototype Plan and Trust (Basic Plan Document #11)) allows the plan sponsor to define “spouse” in Appendix B to the Adoption Agreement.  If the plan sponsor fails to specify a definition, the basic plan document choice of law clause (Section 7.10(H)) defaults to the law of the state of the principal place of business of the employer, to that of the corporate trustee, if any, or to that of the insurer (for a fully insured plan).  Plan sponsors using an Empower prototype document may want to consult benefits counsel as to the consequences of the default language as applied to their specific factual circumstances.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2019 Christine P. Roberts, all rights reserved.

 

 

 

 

 

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Filed under 401(k) Plans, Benefit Plan Design, Defense of Marriage Act, ERISA, GINA/Genetic Privacy, Profit Sharing Plan, Qualified Domestic Relations Orders, Registered Domestic Partner Benefits, Same-Sex Marriage, Uncategorized

Bankruptcy Case Highlights Importance of Promptly Transferring Retirement Assets in Divorce

When a couple divorce, it is not uncommon for one partner to have accumulated significantly larger retirement accounts (e.g., in 401(k) plans or IRAs) than the other.  In such cases the parties generally divide IRA accounts pursuant to Internal Revenue Code 408(d)(6) and/or enter into a qualified domestic relations order (QDRO) to divide a 401(k) or other qualified retirement plan.

The importance of moving promptly to divide and transfer title to retirement accounts in divorce was highlighted in a Bankruptcy Court case from 2018, In re Lerbakken, 590 B.R. 895 (8th Cir. 2018).  In the case, the husband’s failure to take formal legal custody of half of his ex-wife’s 401(k) account (through obtaining a QDRO), and the entirety of one of her IRAs, resulted in those amounts becoming available to creditors in the husband’s bankruptcy case.

In Lerbakken, the court’s dissolution order/property settlement directed Lerbakken’s attorney to submit a QDRO with respect to the 401(k) account, and presumably contained language relevant to transferring title to the IRA, for which a QDRO is not necessary.  However no steps towards obtaining a QDRO or transferring title of the IRA were taken.  When Lerbakken filed a voluntary Chapter 7 bankruptcy petition, he claimed his share of the 401(k) account, and the IRA, as exempt retirement accounts.  The bankruptcy court disallowed the exemption on the basis of the Supreme Court’s opinion in Clark v. Rameker, 134 S.Ct. 2242 (2014), which held that a non-spousal inherited IRA (in that case, from a mother to a daughter) was not entitled to the same protection from bankruptcy creditors as are retirement funds that are individually set aside by the person claiming bankruptcy protection; e.g. inherited accounts are more in the nature of a financial windfall than an intended source of retirement living expenses.

On appeal, the Bankruptcy panel of the 8th Circuit court agreed, noting that Clark v. Rameker limits the bankruptcy exemption to “individuals who create and contribute funds into the retirement account,” and disregarding Lerbakken’s claim that he would use the funds for retirement income.  The court’s final summing up suggests that a different result would have obtained,  had Lerbakken obtained a QDRO and moved the IRA funds into his own name, rather than simply having relied on the wording of the property settlement:

            “We recognize that Lerbakken’s interest in the 401(k) and IRA did not arise in the identical manner as the IRA account addressed in Clark.  This distinction is not material to our de novo review.  Any interest he holds in the Accounts resulted from nothing more than a property settlement.  Applying the reasoning of Clark the 401(k) and IRA accounts are not retirement funds which qualify as exempt under federal law.”  (Emphasis added.)

In essence, the result is that without having taken actual ownership to the retirement funds, Lerbakken could not “borrow” the exemption status for the 401(k) and IRA that his wife would have been able to claim, had she been the bankruptcy debtor.  The fact that Lerbakken himself may have been saving money during the marriage to allow for his ex-wife’s 401(k) and IRA contributions simply does not come into play.   The Lerbakken opinion did not address the question of how one of Lerbakken’s creditors (who included his family law counsel) would actually obtain the assets still held in the ex wife’s 401(k) account and IRA, but presumably they would intervene in any attempt to later transfer these amounts over to Lerbakken or to accounts established on his behalf.

As legal precedent, the Lerbakken ruling is limited to states in the 8th Circuit, namely Arkansas, Iowa, Minnesota, Missouri, Nebraska, and North and South Dakota, but it’s invocation of the Supreme Court’s Clark v. Rameker decision could be invoked in other districts.  It is also possible that this concept could influence state courts deciding the rights of non-bankruptcy creditors.  It therefore provides a timely reminder of the importance of moving promptly to obtain a QDRO and to move IRA assets pursuant to Internal Revenue Code 408(d)(6) pursuant to divorce.  Sitting on your rights in such instances could result in loss of the protected status of retirement savings in a bankruptcy or possibly other creditor situation.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2019 Christine P. Roberts, all rights reserved.

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Filed under 401(k) Plans, IRA Issues, Qualified Domestic Relations Orders