On death, divorce and retirement

Splitting a company retirement account in a divorce generally involves a qualified domestic relations order, where the nonparticipant spouse will end up with an agreed upon portion of the other spouse's plan funds. But what happens when the nonparticipant spouse dies first? Does the spouse's portion revert to the participant or plan sponsor? In a recent case, the court ruled that the death of a taxpayer's ex-spouse prior to the start of his pension caused the portion of his pension benefit that had been awarded to her during their divorce to revert to him. Thus, he was able to receive his full pension. The case name is Anthony Cingrani Jr. v. Sheet Metal Workers' Local No. 73 Pension Fund. [More: Can inherited IRAs be split in a divorce?]

WHEN HIS WIFE DIED FIRST

Anthony Cingrani Jr. was a sheet-metal worker, starting in 1978. He was married to Deborah, but they divorced on May 16, 2002. As part of the divorce settlement, a QDRO was issued. The 2002 order assigned 50% of Mr. Cingrani's vested interests in three pension funds to Deborah. One of the three pension funds was the Local 73 Pension Fund, a defined-benefit pension plan that was to begin making payments when Mr. Cingrani retired. The QDRO, however, did not address the possibility that Deborah might predecease Mr. Cingrani. Deborah passed away nine years after the divorce on February 17, 2011. At that time, Mr. Cingrani was still working, so Deborah had never received any benefits from the fund. In 2014, Mr. Cingrani decided to retire as of 2015, and applied for his pension. He was surprised to discover that, because of the assignment of 50% of his pension to Deborah by the 2002 QDRO, the fund would only pay him 50% of his pension. The fund said the 50% that would have been awarded to Deborah reverted to the fund. Since the QDRO did not provide for the possibility that Deborah might predecease Mr. Cingrani, the fund based its decision on what it claimed was its “default rule for QDROs,” which it disclosed in a document attached to the denial letter. It read, “Upon the alternate payee's death before benefits commenced to him or her, the alternate payee's assigned benefit will be forfeited and will revert to the [plan/participant].” Mr. Cingrani decided to fight for his full pension. On February 15, 2015, he got an amended QDRO from the same court that had issued the 2002 QDRO. The 2015 QDRO provided that if Deborah should predecease him before any benefits were paid to her, all of her assigned benefits and rights would revert entirely to Mr. Cingrani. The fund refused to honor the 2015 QDRO. Mr. Cingrani did not give up. He appealed this denial and the fund denied his appeal.

COURT RULES QDRO VALID

The court ruled in favor of Mr. Cingrani and held he was entitled to his full pension. It stated not only that the 2002 QDRO allowed Deborah's 50% interest in the pension to revert to Mr. Cingrani, but that even if it did not, the 2015 QDRO was valid to accomplish the same purpose. The court held that under the 2002 QDRO, Deborah's 50% interest in the pension reverted to Mr. Cingrani upon her death. In reaching this conclusion, the court noted that when a plan has granted the plan administrator discretion to construe plan terms, a court may only overrule the plan administrator if their actions are “arbitrary and capricious.” According to the court, this was because it was “obvious” that where the QDRO is silent, and there is no default rule, and a beneficiary dies prior to their interest vesting, there is nothing to revert to the fund. It would have been different if the pension had vested and there had been an interest owned by Deborah's estate. The court determined that the QDRO was valid because posthumous QDROs are allowed and it met the formal requirements necessary to override the plan terms. In addition, the court said the 2015 QDRO met the formal requirements necessary to override the terms of the plan. Critical to those requirements is that the QDRO not increase the cost of the pension. When it comes to QDROs, advisers for the nonparticipant spouse (the wife in this case) should make sure the plan funds awarded can actually be received regardless of who dies first. Or alternatively, if that is questionable, then during the divorce proceedings the attorney should negotiate for the wife to receive other marital assets of equal value in lieu of plan benefits that might not ever be received. Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group. He can be reached at irahelp.com.