Beware the Retroactive QDRO
Employers know that they must honor qualified domestic relations orders (QDROs) that assign a portion of a retirement benefit to a participant’s former spouse, known as an alternate payee, when the participant and alternate payee divorce. Those orders by law are not allowed to provide greater benefits than were otherwise provided under the plan. A recent federal district court case ignored that provision when it recognized a retroactive QDRO.
The case involved the divorce of Henry and Ardella. Their divorce became final in September of 1993. The divorce decree awarded Ardella half of her former husband’s pension benefits. He began receiving his benefits in April of 1994 and died in November of 2007.
Ardella first submitted her QDRO in December of 1994, which is after Henry began receiving retirement benefits. According to the plan’s records, Ardella was told by phone that the order would not be qualified and a sample order was mailed to her counsel. It seems that the same 1994 order was submitted again in early 2008 after Henry had died. That order was formally determined not to be a QDRO on February 28, 2008. The plan concluded that because the participant had elected a single life annuity and had died, no remaining benefits were available to be paid to Ardella.
Ardella tried again in 2012 to get the order accepted and when that was rebuffed, she sought a new order from the family court “nunc pro tunc,” which is an order that is retroactive to an earlier date. The family court issued an order in 2012 that was said to be retroactive to 1993, when the original divorce decree was entered. That order was sent to the plan which again said that there were no benefits remaining to be divided and so rejected the order. Ardella then sued for her benefits.
The district court found in favor of Ardella, noting that there is a split of authority as to the validity of nunc pro tunc QDROs. Some courts accept the legal fiction that the order relates back to the original date; others do not. The district court decided that it would accept the order as having been entered in 1993 so that at the time it was entered there was a benefit to be split. As of that date, if the order had been implemented it would not have provided for increased benefits. Therefore, the plan was required to pay a survivor benefit to Ardella, the alternate payee, even though the participant had elected – and been paid – a life annuity that was larger in amount than the benefit that would have been paid to him if he had elected a survivor annuity for Ardella’s benefit.
Employers will need to monitor the cases in the jurisdictions in which they operate to determine whether courts will allow retroactive QDROs. Unfortunately, the fiction of a nunc pro tunc order can result in the reality that the plan must pay more actuarially than it would have had to pay if the order had been presented in a timely fashion. Had the order been processed before Henry began receiving his benefit, he would have had to elect a benefit that provided a survivor annuity for Ardella. In that case, the monthly amount paid to him during his lifetime would have been lower than the amount paid to him under the single life annuity he in fact elected. Ultimately, the plan must pay an actuarially increased benefit to Ardella and Henry – which is not supposed to happen with a QDRO.
Contact Benefits Notes for more information.