News Briefings - Pension & Benefits

The following article was taken from the 5/20/13 issue of Pension & Benefits Week.

5/20/13 -- Purported QDRO could not divest participant's first wife of survivor annuity benefit after annuity starting date

A federal district court upheld PBGC's determination that the spousal beneficiary of a qualified joint and survivor annuity (QJSA) at the time of the annuity starting date could not have waived her survivorship rights in the divorce decree, and could not be divested of her rights in favor of the participant's second wife under a later-issued domestic relations order (DRO). (VanderKam, John, v. Pension Benefit Guaranty Corporation (2013, DC DC) 2013 WL 1882329)

Background. John VanderKam, an employee of Huffy Corporation and a participant in the Huffy Corporation Retirement Plan, retired in August of 1994. Before his retirement, he had elected to receive his plan benefit as a joint-and-100%-survivor annuity--a Code Sec. 205(a)(1) QJSA--and he had designated his then-wife, Melissa, as the survivor beneficiary. Upon his retirement, John began receiving payouts under the plan.

John and Melissa divorced in March of 2002. A Texas state court entered a final decree of divorce, awarding all rights to any pension plan stemming from his employment as John's "sole and separate property."

RIA observation: The district court decision did not specify whether the divorce decree was treated as a QDRO.

In March of 2003, John married Gaylyn. John then petitioned a Texas state court seeking a DRO in order to designate Gaylyn as an alternate payee for the survivor benefits under the Huffy plan. Melissa objected to the DRO, arguing that she had not disclaimed any interest in the plan as part of the divorce decree. However, the Texas court concluded that Melissa had waived her entitlement to the survivor annuity as part of the decree, which had divested Melissa of all interest and rights to John's retirement benefit under the Huffy plan, including her rights as the beneficiary of the survivor annuity. Thus, the Texas court approved the DRO, which named Gaylyn as the alternate payee. In August of 2003, the plan determined that the DRO issued by the Texas court was a valid QDRO, and the plan administrator designated Gaylyn as an alternate payee with respect to the survivor benefits.

In August of 2005, the plan terminated, and PBGC became the plan's trustee. In February of 2006, after PBGC apparently had reduced the amount of John's monthly benefit payments, John requested a review of his benefit payments. In September of 2008, PBGC notified John that his monthly benefit would increase from $2,840 to $4,320. But PBGC also determined that Melissa, not Gaylyn, was the proper beneficiary for the survivor annuity benefits under the plan.

John contacted PBGC seeking clarification. In December of 2008, PBGC responded by saying that once the survivor annuity election is made, it cannot be changed or waived after the first payment has been made. Thus, the 2002 divorce decree, and the purported QDRO, had no effect on Melissa's entitlement and eventual receipt of the survivor annuity.

In February of 2009, John formally requested an initial determination from PBGC concerning the change to his beneficiary designation for the survivor portion of his retirement annuity.

Meanwhile, in October of 2009, John and Gaylyn (the plaintiffs) brought a lawsuit against PBGC (a) seeking a reversal of the PBGC Appeals Board's determination, and (b) alleging that the Appeals Board decision violated the ERISA § 204(g) anti-cutback rule. In addition, the plaintiffs asserted a number of claims under Texas common law, including claims for: (i) declaratory judgment that John had equitable title to the survivor annuity benefits under the plan; (ii) unjust enrichment, asking the court to impose a constructive trust on any survivor annuity benefits received by Melissa under the plan; and (iii) anticipatory breach of contract. The legal action was delayed while the plaintiffs exhausted their administrative remedies with PBGC.

In December of 2009, PBGC formally responded to the plaintiffs' request for an initial determination by explaining that the DRO issued by the Texas state court was not a valid QDRO, and that Melissa's purported waiver and disclaimer of the survivor annuity benefit was ineffective.

RIA observation: PBGC did not give, as a reason that the divorce decree was ineffective as a waiver by Melissa of her survivor rights in John's QJSA, that the decree had failed to specify that Melissa had intended to waive or disclaim her survivor annuity benefit, or that the decree had omitted other pivotal language.

Vesting of Melissa's survivor benefits. Decisions of the PBGC Appeals Board are subject to review under the Administrative Procedure Act (APA). Under the APA, a court must set aside agency action as unlawful if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. Thus, the court said that it had to uphold PBGC's decision if PBGC had engaged in reasoned decision making, and PBGC's decision was adequately explained and supported by the record.

The PBGC Appeals Board reached its determination that a survivor benefit irrevocably vests in the beneficiary at the annuity starting date and cannot be reassigned by a DRO by relying on decisions from the Fourth Circuit (Hopkins v. AT&T Global Information Solutions), the Fifth Circuit (Rivers v. Central and South West Corp), and Ninth Circuits (Carmona v. Carmona).

The situation in Carmona was particularly analogous to John's claims, the district court said. In Carmona, Lupe Carmona participated in two pension plans. Lupe married Janis, his eighth wife, in 1988, and designated Janis as his survivor beneficiary under the plans. Lupe retired in 1992 and began receiving payments under the plans. In 1994, Lupe and Janis began divorce proceedings, and Lupe sought to remove Janis as the survivor beneficiary. Ultimately, the Nevada state family court granted Lupe both pensions "as his sole and separate property." In 1997, Lupe married Judy, and petitioned the Nevada family court for a QDRO revoking the designation of Janis as survivor beneficiary, and substituting Judy. Lupe died in 1999, survived by both Janis and Judy. After the Nevada courts and the federal district court, in which Janis brought a suit, found for Judy, the Ninth Circuit reversed. The Ninth Circuit held that QJSA surviving spouse benefits irrevocably vest in the participant's spouse at the time of the annuity starting date, and could not be reassigned to a subsequent spouse.

Here, the district court noted the reasons for the Ninth Circuit's conclusion. First, ERISA allows a participant and spouse to opt out of a QJSA benefit only in writing (see ERISA § 205(c)(2)) during a limited election period (which is now 180 days before the annuity starting date, see ERISA § 205(c)(7)). Second, the Ninth Circuit noted that the Retirement Equity Act (i.e., "REA," P.L. 98-397, 8/23/1984) did away with the requirement that a spouse had to be married to the participant at the time of the participant's death to qualify for survivor benefits. This led the court to conclude that the retirement date was the crucial date for establishing the rights of the surviving spouse. Third, the court believed that the vesting rule served Congress's objectives to ensure a stream of income for surviving spouses. Fourth, the vesting rule helps ensure that plans are uniform in their interpretation and simple in their application, one of ERISA's goals.

Here, the district court found that PBGC's conclusion--that Melissa did not waive her right to the survivor annuity benefit, and that even if she'd had the authority to waive her right to the survivor annuity benefit, the benefit could not have been reassigned to Gaylyn through a QDRO--satisfied the arbitrary and capricious standard of judicial review.

The plaintiffs argued that Hopkins, Rivers, and Carmona did not consider ERISA's nonforfeitability provisions, and that even if Congress had intended survivor benefits to vest in a spouse, those benefits were not intended to vest until the spouse actually survived the participant. In rejecting this theory, the court said that ERISA's definition of "nonforfeitable" refers to a claim obtained by a participant (or his beneficiary) to that part of an immediate or deferred benefit--and not to the payment of the benefit. Thus, even if Melissa's right to payment of the survivor annuity benefit under the plan did not become "nonforfeitable" until John predeceased her, that would in no way have eliminated Melissa's irrevocable right to a claim for the survivor benefit, which vested upon John's retirement.

The plaintiffs also argued that, under the Supreme Court's decision in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, which held that ERISA's anti-alienation provision does not render all waivers of plan benefits null and void, a surviving spouse beneficiary, such as Melissa, was authorized to waive her plan benefits. But the court here pointed out that the Supreme Court in Kennedy also reiterated the "plan documents" rule. Under this rule, to be valid, a waiver must adhere to ERISA's other statutory requirements and the governing procedures and terms of the plan. Here, the court said, Melissa did not waive her surviving spouse benefits in accordance with the plan's terms, because John and Melissa never executed a waiver within the 90-day election period preceding his retirement. In fact, John expressly elected otherwise, designating Melissa as the survivor beneficiary. Thus, PBGC "correctly and reasonably" determined that the holding in Kennedy did not govern the Appeal Board's decision.

The plaintiffs also relied on Reg § 1.401(a)-20, Q&A-25(b)(3), which provides that, unless waived, the spouse to whom the participant was married on the annuity starting date is entitled to QJSA protection under the plan, even if the participant and spouse are not married on the date of the participant's death--except as provided in a QDRO. The plaintiffs argued that this meant that QDROs could alter QJSA benefits. The court agreed--but only, as explained above, if the QDRO is secured before the participant's retirement, when the surviving spouse benefits vest in the then-current spouse.

DRO was not a valid QDRO. The Appeals Board also found that Gaylyn could not be substituted as the beneficiary for the survivor annuity benefits because the substitution would have improperly required the payment of a type of benefit not otherwise provided under the plan's terms--and thus would have failed the QDRO requirement under ERISA § 206(d)(3)(D)(i). The Appeals Board recognized that the DRO changed neither the total monthly amounts or the timing of the benefit payments that PBGC was required to make, given that the survivor benefit would have been paid to Gaylyn for the duration of Melissa's life. But the plan did not contain a provision under which a survivor benefit was paid to one beneficiary based on the remaining lifetime of another individual. The Appeals Board said that the Texas DRO would have imposed additional administrative burdens on PBGC, because PBGC would have had to monitor whether or not Melissa remained alive (even though PBGC would not have been paying benefits to her), because the payments to Gaylyn would have ended on Melissa's death under the DRO. PBGC also pointed out that the DRO would have created, but not addressed, a novel issue, namely, the effect of Gaylyn predeceasing Melissa.

PBGC's application of ERISA § 206(d)(3)(D)(i) was a reasonable and permissible interpretation of ERISA, the district court said. The plaintiffs identified courts that have provided that ERISA § 206(d)(3)(D)(i) prohibited a DRO from being a QDRO where it would have required benefits to be paid in a specific manner or time frame that was not provided for in the terms of the plan, or required a plan to pay benefits before they were otherwise payable under the plan. But, while none of these cases said that the cases prohibited the approach taken by the Texas court's DRO, the court also noted that none of those cases undermined PBGC's position, either. In view of PBGC's reasonable interpretation, the court found that the plaintiffs had not established that PBGC's decision was arbitrary and capricious.

Plan administrator's waiver. According to the plaintiffs, because the original plan administrator (before plan termination and the appointment of PBGC) had approved the Texas court's DRO as a valid QDRO and substituted Gaylyn as the beneficiary, the plan had waived any arguments to the contrary. Thus, the plaintiffs argued, the common-law doctrine of waiver precluded PBGC from arguing that the DRO could not have been qualified as a QDRO, or that Gaylyn could not have been recognized as the proper survivor beneficiary under the plan.

The district court noted that the circuits are divided as to whether the federal common-law under ERISA incorporates the principle of waiver. But the court said that, even if the DC Circuit were to incorporate waiver as part of ERISA's common law, the plaintiffs failed to present any authority that would have permitted them to foist a former plan administrator's purported waiver onto PBGC. Specifically, the court noted that none of the cases that have applied the waiver doctrine in ERISA benefit cases applied an insurer's waiver against any party other than the original plan insurer. Upon becoming the trustee of a terminated plan, PBGC assumes a wide range of fiduciary responsibilities, including the duty to rescind and remedy actions that violate ERISA. There was no authority supporting the plaintiffs' proposition that PBGC's functions under ERISA Title IV can be hampered by a former plan administrator's misinterpretations of ERISA, the court said.

State law claims against Melissa. Even if the court upheld PBGC's determination that Melissa could not be divested of her survivor beneficiary status, the plaintiffs, in the alternative, asked the court to impose a constructive trust under Texas common law. Specifically, the plaintiffs sought a declaratory judgment directing Melissa to hold in trust, and be required to transfer to John's successors, any survivor benefit payments Melissa received from PBGC under the plan.

Melissa opposed the plaintiffs' request on the grounds that these state law claims were preempted by ERISA. ERISA preempts state laws that relate to an employee benefit plan, including general common law causes of action that affect ERISA-protected rights, the court said. Melissa argued that ERISA preempted the plaintiffs' Texas common law actions because the method by which a former spouse may secure an interest in plan benefits is provided under ERISA.

The plaintiffs countered that, although ERISA preempts state laws and state-law claims relating to ERISA plans, Congress did not intend a sweeping preemptive effect over all aspects of plan benefits. This argument was based on language from Fort Halifax Packing Co. v. Coyne, a case involving a Maine statute requiring employers to provide a one-time severance payment in the event of a plant closing. Because the imposition of a constructive trust would have come into play only after the plan followed its administrative scheme, and would not have interfered with PBGC, the plaintiffs argued that the state law actions should not have been preempted.

The district court disagreed, concluding that the plaintiffs' argument was nothing more than an effort "to make an end-run around ERISA" and the requirements of the plan in question. Unlike in Fort Halifax, the benefits here were undoubtedly related to the Huffy plan, an employee benefit plan covered by ERISA. Other courts also have rejected the plaintiffs' type of argument, the district court said. Because the plaintiffs' claims to undistributed plan benefits were clearly governed by ERISA, the Texas common-law actions were preempted by ERISA.

In conclusion, the district court denied the plaintiffs' motion for summary judgment, and granted PBGC's and Melissa's cross-motions for summary judgment.

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