Looking for ways to transfer an alternate payee's community property interest in undistributed retirement benefits at death? The Fourth Appellate District's recent ruling In re the Marriage of Shelstead (1998) 66 Cal.App.4th 893, provides some guidance--but not enough to close the door on this issue.
This article summarizes the Shelstead decision, which cautiously suggests that a Qualified Domestic Relations Order (QDRO) may provide an alternate payee spouse with testamentary-like rights. Keep in mind that the issue presented in Shelstead is one of many important considerations in drafting the death provisions of a QDRO.
Other issues that deserve attention include the legal and actuarial effect of awarding the alternate payee a survivor annuity; whether to assign life insurance benefits under an employer plan to the alternate payee; and the extent to which the alternate payee is entitled to lump-sum death benefits.
Boggs as Background
The Supreme Court's ruling in Boggs v. Boggs, 117 S.Ct. 1754 (1997) sets the tone for whether ERISA tolerates testamentary-like transfers of a non-participant spouse's share of undistributed retirement benefits. Boggs held that ERISA preempts Louisiana's community property law, thereby preventing a deceased non-participant spouse from transferring her community property share of undistributed retirement benefits to her children.
In short, the Court reasoned that ERISA's primary purpose is to guarantee a stream of income to plan participants and their beneficiaries. Beyond this, ERISA protects surviving and former spouses under the survivor annuity and QDRO provisions, respectively. The attempted transfer in Boggs fails because it would allow a third party to assert a claim to benefits reserved for a limited class of individuals.
Shelstead Addresses the Issue
Since Boggs did not involve a dissolution, it did not answer the question whether a non-participant spouse may transfer his or her community property share of undistributed retirement benefits to a third party pursuant to a QDRO. Shelstead addresses this issue.
The focus in Shelstead is on a domestic relations order that awarded Janet Shelstead, the non-participant spouse (the "alternate payee"), 50% of the community property interest in Gene Shelstead's pension plan.
The domestic relations order also provided that "[t]he share payable to [Janet] shall commence to be paid to [Janet], or her designated successor in interest should [Janet] predecease Gene, until terminated by Gene's death."
The issue in Shelstead is whether the domestic relations order providing that Janet can name a successor-in-interest to receive her share of community property retirement benefits upon her death, constitutes a QDRO. For the reasons stated below, the court concluded the order was not a QDRO, thereby invalidating the attempted transfer.
The court's analysis is straightforward. ERISA § 206(d)(1) and (d)(3) provides that the transfer of pension benefits between spouses in the context of a dissolution is prohibited unless made pursuant to a QDRO. ERISA § 206(d)(3)(B) states that a domestic relations order is "qualified" if it "creates or recognizes the existence of an alternate payee's rights to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to the participant under a plan . . ." (italics added).
For purposes of this rule, an "alternate payee" is any spouse, former spouse, child, or other dependent of the participant who is recognized by the domestic relations order as having a right to receive plan benefits.
Since the order allows Janet to name anyone as successor to her share of plan benefits, it could require the plan to pay benefits to someone other than an alternate payee (e.g., a friend, neighbor, or creditor). Accordingly, the court found the domestic relations order invalid.
We Have Some Answers
1. Contingent Alternate Payee
As Shelstead points out, its decision does not address the validity of a domestic relations order that attempts to transfer an alternate payee's share of undistributed retirement benefits upon death to other individuals who qualify as "alternate payees."
This type of transfer is consistent with ERISA, which contemplates that a QDRO may provide for payments to more than one alternate payee. In practice, this allows an alternate payee to transfer his or her share of retirement benefits at death to a child or children of both the alternate payee and participant.
To accomplish this, the QDRO should specifically identify the "qualifying" individual as the alternate payee's successor or name the individual as a "contingent alternate payee" entitled to receive the alternate payee's share of undistributed benefits at his or her death.
2. The Method of Division
Shelstead provides that dividing retirement benefits under a "separate interest" approach may give the alternate payee more options with respect to transferring retirement benefits at death under a QDRO.
There are significant differences concerning an alternate payee's rights to plan benefits based on the method of apportionment used in the QDRO. Generally speaking, the method of apportionment determines whether a plan administrator treats the alternate payee like a beneficiary, or elevates the alternate payee to a quasi-participant status.
Although ERISA provides that an alternate payee under a QDRO is considered a beneficiary under the plan, nothing in ERISA prevents a plan from granting an alternate payee the same or similar rights as a participant.
The "shared payment" method of apportionment must be used when the participant is already in pay status. If, for example, a participant is receiving benefit payments as a single life annuity, whereby payments terminate at the participant's death, the alternate payee's share of benefits will revert to the participant (or the plan) if he or she predeceases the participant.
In this sense, the alternate payee is merely a beneficiary of the plan, because he or she lacks control over the timing and manner of distribution of his or her share of benefits. When the "shared payment" method is used, it appears that the alternate payee's rights to dispose of benefits at death are limited to naming a "contingent alternate payee" in the QDRO.
Seperate Interest Method
The "separate interest" method of apportionment assigns the alternate payee a separate ownership interest in the plan. This method is typically used when the QDRO is in place before the participant's benefits are in pay status.
Since the participant has not elected a form of benefit payment, the alternate payee has control over the timing and manner in which benefits are distributed. For example, if a plan offers a participant the option of receiving a "period certain annuity" which consists of monthly payments for a guaranteed period of time (e.g., 10-years), the alternate payee may also elect a "period certain annuity" with respect to his or her share of benefits.
If the annuitant dies before the expiration of the guaranteed period, the plan will continue making payments to the annuitant's designated beneficiary. In this sense, the alternate payee is elevated to a quasi-participant status and will enjoy rights afforded to a participant--namely, the right to designate a third party to receive unpaid benefits at death.
In the case of defined contribution plans (i.e., 401(k) plans, profit sharing plans, etc.) an alternate payee is awarded a "separate interest" often payable as a single lump-sum. Clearly, if the distribution is made before the alternate payee's death, he or she can dispose of benefits to anyone.
A question arises whether an alternate payee has testamentary-like rights if he or she dies after the QDRO is entered by the court (and approved by the plan administrator), but before the plan makes a lump-sum distribution.
Even in this case, most plan administrators will treat the alternate payee as a quasi-participant and permit a transfer of unpaid benefits to a third party, including the alternate payee's estate--if the QDRO so provides.
3. Type of Plan Involved
Keep in mind that Boggs and Shelstead involved tax-qualified retirement plans governed by ERISA. If you are dealing with a plan that is not covered by the anti-alienation rules of the Internal Revenue Code or ERISA (e.g., governmental plans such as military pensions, FERS, CSRS, PERS, STRS, etc.) your client is not bound by these rulings. Although the QDRO rules will not apply, a similar type of court order is required to divide benefits under these plans.
In drafting such court orders, pay close attention to the applicable statutes and regulations dealing with the rights of a former spouse to determine if he or she has the ability to transfer their share of benefits at death.
Need for Additional Guidance
Our understanding of an alternate payee's rights to transfer his or her share of retirement benefits at death is clearer than before. There is still, however, potential for inconsistent results because ERISA and the Internal Revenue Code are silent with respect to an alternate payee's testamentary rights over retirement benefits.
As a result, the determination of an alternate payee's rights arguably relates to the fictitious characterization of an alternate payee as a beneficiary versus a quasi-participant. Until the Department of Labor and/or Internal Revenue Service provide additional guidance concerning this issue, we will have to rely on plan administrators for direction and case law for answers.
*This Article appeared in the Family Law News, Winter 1998. The Family Law News is the official publication of the State Bar of California Family Law Section*