In a recently issued opinion, the United States Court of Appeals for the Second Circuit (encompassing New York, Connecticut, and Vermont) held that two posthumously entered domestic relations orders were valid qualified domestic relations orders ("QDROs") under ERISA that properly assigned plan funds to the ex-wife of a deceased participant, despite the claims of the participant's surviving spouse to survivor benefits under the plans. A valid QDRO is one of the few exceptions to the ERISA prohibition on the assignment or alienation of plan benefits.
Yale-New Haven Hospital, as the plan administrator, initiated
court action to resolve the competing claims of Barbara Nicholls,
the surviving spouse of the late Harold Nicholls, and Claire
Nicholls, the ex-wife of Mr. Nicholls, to Mr. Nicholls'
benefits under several pension plans sponsored by Yale-New Haven
Hospital. Mr. Nicholls and Claire divorced on September 5, 2008
pursuant to a divorce settlement agreement entered in the
Connecticut Superior Court (the "Settlement Agreement")
providing Claire with half of Mr. Nicholls' pension and
retirement accounts that had accumulated during the marriage. The
Settlement Agreement further provided that the court maintained
jurisdiction for purposes of establishing or maintaining a QDRO
acceptable to plan administrators to carry out the division of
these assets. No QDRO was entered into and no pension and
retirement funds were transferred to Claire during Mr.
Nicholls' lifetime.
In 2009, Mr. Nicholls married Barbara Nicholls. Mr. Nicholls died
on February 11, 2012, and at the time of his death, Barbara, his
surviving spouse, was the named beneficiary to each of the pension
plans. On June 18 and August 1, 2012, the Connecticut Superior
Court entered two QDROs directing the plan administrator to
distribute to Claire her assigned portion of the pension and
retirement benefits consistent with the terms of the Settlement
Agreement.
Yale-New Haven Hospital filed an interpleader action in federal
court to resolve these competing claims. The District Court ruled
in favor of Claire holding that the Settlement Agreement was a QDRO
because it substantially complied with the requirements enumerated
under ERISA for a valid QDRO. On appeal, the Second Circuit
rejected the District Court's reasoning, noting that the
substantial compliance standard does not apply to domestic
relations orders issued after January 1, 1985. Nonetheless, the
Second Circuit confirmed the result, relying on the Pension
Protection Act of 2006 and the U.S. Department of Labor's
subsequent regulations clearly stating that a domestic relations
order meeting ERISA's enumerated requirements should not be
invalid solely because of the time at which it is issued, including
orders issued after the death of the participant.
While this case might suggest that plan administrators are entering
a world of uncertainty where a posthumously entered QDRO can lay
claim to death benefits already paid to another named beneficiary,
existing case law suggests that such fear may be unwarranted.
First, if plan administrators make a distribution in accordance
with plan terms prior to receiving notice of a conflicting
claim, they should be well positioned to defend any claim of
liability for a subsequent claim. Second, if plan administrators
are made aware of the conflicting claims prior to
distribution of benefits, they can follow the example set by
Yale-New Haven Hospital and ask a court to make the determination.
As a matter of best practice, plan administrators should pay
benefits in accordance with plan terms, and should not get involved
in resolving competing claims.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.