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UNINTENDED OUTCOMES – DRAFTING ERRORS

FEDERAL, MILITARY, ERISA PLANS

Much post-divorce litigation concerning Qualified Domestic Relations Orders issue are a result of:

DRAFTING ERRORS OR UNINTENDED OUTCOMES

ATTORNEY ALERT.

Attorneys are cautioned that the preparation of a Domestic Relations Order is a legal function. To delegate this function to a non-lawyer is likely to jeopardize an attorney's malpractice coverage. Prior to retaining a non-lawyer to prepare a Domestic Relations Order it is suggested that the attorney confirm with her or his malpractice carrier that such retention does not void malpractice protection. The unauthorized practice of law, e.g. QDRO preparation by a non-lawyer constitutes a 3rd class felony in Florida. Review the applicable statutes in your jurisdiction prior to retaining a non-lawyer for the purpose of drafting a Domestic Relations Order.

Consider these Scenarios

Scenario # 1.

A federal employee divorces in 2010.

This employee is a member of the Federal Employees Retirement System (FERS).

  • Pursuant to the terms of the settlement, the Former Spouse is awarded "one-half of the employee's annuity accumulated up to February 1, 2010". The Marital Settlement Agreement provided that this annuity award to the Former Spouse shall continue for the lifetime of the former spouse.
  • A Court Order Acceptable for Processing (COAP) is accepted by Office of Personnel Management (OPM) in September 2010.
  • The FERS employee dies while an active employee on July 22, 2013.
  • The Former Spouse contacts OPM for her annuity benefit.
  • The Former Spouse is advised that no annuity is payable to her based on the "language" found in the COAP.

OPM's Reasoning:

No Former Spouse Survivor Annuity was specified in the COAP.

Subsequent to this denial of benefits, the attorney for the Former Spouse advised OPM that it was the intent of the parties that the Former Spouse receive her stated share of the annuity for her lifetime. In support of this argument the attorney advised OPM that the language from the Marital Settlement Agreement was inserted into the COAP. This language "clearly" provided that the Former Spouse's annuity "will continue for the lifetime of the former spouse". The attorney thus confidently reiterated to the Former Spouse that she has a clear entitlement to a Former Spouse Survivor Annuity.

Not So! This attorney was wrong on the law.

See 5 C.F.R. 838.302(b).

Additional Basis for OPM's denial of Former Spouse Survivor Annuity.

OPM's reply referenced the Former Spouse's attorney to

5 C.F.R.838.804(a), which provided in relevant part:

A court order awarding a former spouse survivor annuity is not a court order acceptable for processing unless it expressly awards (emphasis mine) a former spouse survivor annuity or expressly directs an employee or retiree to elect to provide a former spouse survivor annuity…

Subsequent to being made aware of this exchange and denial of benefits, the Former Spouse contacts a Pension Valuator to compute the present cash value of her "lost" benefit. She then contacted a malpractice attorney.

Scenario # 2. This discussion is based on Perry v. OPM, U.S. Court of Appeals for the Federal Circuit, 243 F.3d 1337, March 20, 2001.

The language inserted into the COAP by the attorney representing the participant spouse that she was confident clearly established (and limited) the magnitude of the Former Spouse's monthly Annuity was:

The Former Spouse is awarded one-half of the participant's annuity accumulated to February 1, 2004.

Note:

The Normal Retirement Age for a FERS employee is age 62*. The statistical support for this Scenario is found at Appendix "A".

*Not applicable to: Federal Judges, Law Enforcement and Firefighters, Air Traffic Controllers, CIA, Foreign Service.

Commentary.

The participant's attorney was certain that as of February 1, 2004 the total monthly annuity was $1,456.00 (See Appendix A). Based on this annuity, accumulated to the jurisdiction's End of Marriage Date, the monthly award to the Former Spouse of half of the accumulated monthly annuity should be $728.00. Based on his attorney's representation the employee accepted the recommended settlement. The monthly award of $728.00 to the Former Spouse firmly fixed in the employee's mind.

UNANTICIPATED OUTCOME.

Due to uninformed negotiating and drafting by the attorney representing the employee spouse, the actual monthly annuity paid to this Former Spouse will be substantially greater than anticipated.

The retiree's actual monthly annuity at retirement is $3,200.50 (see Appendix A). Recall, the employee anticipated the following allocation of his retirement annuity upon his retirement.

Actual Total Monthly Payout: $3,200.50

Monthly to Former Spouse: $728.00

Monthly to Retiree: $2,472.50

Caution:

Attorneys are advantaged by familiarity with the C.F.R. prior to negotiating and drafting a COAP.

Please Read the C.F.R. prior to negotiation and drafting.

5 C.F.R. 838.621(c):

A court order that awards a portion of an employee annuity as of a specified date before the employee's retirement awards the former spouse a prorata share as defined in paragraph (a) of this section.

5 C.F.R. 838.621(a) provides:

Prorata share means one-half of the fraction whose numerator is the number of months of Federal civilian and military service that the employee performed during the marriage and whose denominator is the total number of months of Federal civilian and military service performed by the employee.

The attorney representing this employee spouse is likely to have an unhappy client!

As a result of the flawed drafting by the retiree's attorney the actual allocation of the retiree's monthly annuity is as follows.

Total Monthly Annuity: $3,200.51

Actual Monthly to Former Spouse: $1,163.82

Monthly to Retiree: $2,036.69

Percent of Increase for Former Spouse: 59.87%

The OPM monthly payout to the Former Spouse was based on its interpretation of the language of the above referenced sections of the C.F.R. Clearly, the intent of the participant was not implemented due to an absence of knowledge of the applicable C.F.R. sections.

Scenario # 3.

Of all retirement award issues, Survivor Benefits are the most complex and probably the most litigious. It is not possible in a single article to cover all entities providing a Former Spouse Survivor Annuity, i.e. Joint and Survivor Annuity. The Survivor Annuity Benefits provided by the following Retirement Systems are the focus of this section:

  • Federal Civil Service [1]
  • Military Retirement System

Regular Component Retirement

Reserve Component Retirement

  • Employee Retirement Income Security Act (ERISA)*

*Corporate Retirement Plans. Size may vary from a single participant to several hundred thousand (Target, I.B.M., Bank of America, United Parcel Service).

What should be understood at the outset is that there is no uniform procedure for an assignment of a Joint and Survivor Annuity to a Former Spouse. Each system has a format unique to that Retirement System.

Commentary.

Although each Retirement System has a unique format for the awarding of a Former Spouse Survivor Annuity each does observe in a form specific to that System that:

ANY AWARD OF A FORMER SPOUSE SURVIVOR ANNUITY MUST BE CLEARLY SPECIFIED IN THE UNDERLYING DIVORCE INSTRUMENT.

FEDERAL EMPLOYEES RETIREMENT SYSTEM.

PROCEDURE TO AWARD A FORMER SPOUSE SURVIVOR ANNUITY

Step I.

Begin by clearly identifying the subject Retirement System. [2]

Step II.

The Final Judgment of Dissolution of Marriage must expressly award a Former Spouse Survivor Annuity. [3]

Step III.

The award language of the Final Judgment of Dissolution of Marriage must comply with the Retirement System's procedure to determine the amount of survivor annuity awarded to a Former Spouse. [4]

Step IV. Allocation of the cost of a Former Spouse Survivor Annuity. [5]

Caution.

Unlike some ERISA plans, it is unlikely that a Former Spouse Survivor Annuity can be awarded subsequent to the earlier of the death or retirement of the employee. [6]

MILITARY RETIREMENT SYSTEM, PROCEDURE TO AWARD A FORMER SPOUSE SURVIVOR BENEFIT.

Practice Aid.

For purposes of understanding an award of a Former Spouse Survivor Annuity not one but TWO military Retirement Systems must be understood.

  • Reserve Component Survivor Benefit Plan (RCSBP)
  • Regular Component or Soldiers who die on Active Duty Survivor Benefit Plan (SBP)

Useful Information: Reserve Component Survivor Benefit Plan.

This survivor benefit does not become payable until:

  • Earliest Date Payable: The member receives her or his Notice of Eligibility (20 year letter) and elects Option C. [7]
  • The member receives her or his Notice of Eligibility (20 year letter) and elects Option B. [8]

Alert.

If the soldier elects Option A. No survivor benefit is payable to a Former Spouse.

Monthly Amount Payable as a Former Spouse Survivor Annuity.

The Former Spouse Survivor Annuity is not a fixed amount, e.g. 55% of the members final pay or 55% of the retiree's retirement allowance. Rather the RCSBP is computed as follows:

Useful Information: Active Duty Soldier Survivor Benefit Plan.

This survivor benefit is payable immediately upon the death of an active duty soldier.

The range of an award of a Former Spouse Survivor Annuity is from a minimum of $300.00 per month up to 55% of the "base" annuity.

General Information for either Component Soldier.

There can only be one Survivor Annuitant. If the Former Spouse is to receive any amount of Survivor Benefit, then any subsequent spouse is not eligible for a Survivor Annuity Benefit.

To compute the cost of the Former Spouse Survivor Annuity. [9]

  • Determine the "Base Amount"
  • Multiply the "Base Amount" by 6.5%

For Example:

Soldiers Monthly Benefit: $3,500.00

Desired Monthly Former Spouse Survivor Annuity: $1,375.00

Base Amount Required: $2,500.00

($1,375.00 ÷ 55% = $2,500.00)

Monthly Cost of Former Spouse Survivor Annuity: $162.50

($2,500.00 X 6.5% = $162.50)

Former Spouse Coverage Subsequent to Divorce.

Unless appropriate action is taken divorce terminates the Survivor Annuity. To continue this coverage to the now Former Spouse the required forms must be filed with Defense Finance Accounting Service (DFAS), within 1 year of date of the decree of divorce, dissolution, or annulment, whichever is later. [10]

Forms Required.

  • DD-2656-10 (Deemed Election Form)
  • Dated and Certified Original of Court Order awarding a Former Spouse Survivor Annuity

EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) PLANS.

This article discusses a drafting issue that may lead to attorney dyspepsia.

Scenario.

Regarding a Qualified Defined Contribution Plan.[11] Failure to craft an effective waiver of Survivor Benefits by a Former Spouse into the Final Judgment of Dissolution of Marriage.[12]

Consider the following.

At the time of divorce the marital share of Wife's 401(k) Plan was $800,000.00. Two years subsequent to divorce, Wife died. The worth of her plan at the time of her death was $900,000.00.

The intent of the Wife was that this money upon her death is to be paid to her estate. To bar any portion of this pension benefit being paid to her ex Husband the following language was inserted into the Final Judgment of Dissolution of Marriage regarding Wife's 401(k) Plan.

Husband is divested of all right, title, interest, and claim in and to any and all sums, the proceeds from and any other rights related to any retirement plan, pension plan, or like benefit program existing by reason of Wife's past, present or future employment.

The ISSUE:

Which document controls:

  • Final Judgment of Dissolution of Marriage
  • Beneficiary Designation on file with the Plan's Administrator

Result.

Upon Wife's death, with full knowledge of the above waiver, the plan paid the full death benefit to her ex-Husband. The estate litigated and lost. The estate then brought suit against the Wife's attorney for the full value of its loss. The suit against the attorney argued that his drafting was so flawed as to constitute malpractice.

For a recent decision in support of the views expressed above, see:

Kennedy v. DuPont Savings and Investment Plan, 129 S. Ct. 865.

APPENDIX "A"

Data for FERS Employee

Date of Birth 2/1/1951

Date of Marriage 2/1/1979

Date of Hire 2/1/1980

Action Began 2/1/2004

Retired 2/1/2013

Coverture Fraction

At EOMD* 100.00%

Numerator Years 24

Denominator Years 24

*EOMD: Jurisdictions' End of Marriage Date

Coverture Fraction At Retirement 72.73%

Numerator 24

Denominator 33

Percent To FS 36.36%

Annuity When Action Began $1,456.00

If FS gets Half $728.00

Actual Monthly Annuity @ Retirement $3,200.51

Retiree's Expected Annuity $2,472.50

FS should get $728.00

Total Mo. Payout $3,200.51

Actual Allocations at Retirement

Annuity at Retirement $3,200.51

OPM award to FS $1,163.82

To Retiree $2,036.69

Total Payout $3,200.51

% of FS increased annuity 59.87%



[1] Because no employee has entered the CSRS in more than 29 years, only the Federal Employees' Retirement System (FERS), is discussed in this section.

[2] See 5 CFR 838.911, which provides in relevant part:

To satisfy the requirements of § 838.804(b)(1), a court order must contain language identifying the retirement system affected. For example, "CSRS," "FERS," "OPM," or "Federal Government" survivor benefits, or "survivor benefits payable based on service with the U.S. Department of Agriculture," etc., are sufficient identification of the retirement system.

[3] See 5 CFR 838.804, which provides in part (there are several parts to this CFR):

A court order awarding a former spouse survivor annuity is not a court order acceptable for processing unless it expressly awards a former spouse survivor annuity or expressly directs an employee or retiree to elect to provide a former spouse survivor annuity as described in paragraph (b) of this section.

[4] See 5 CFR 838.921, "Determining the amount of a former spouse survivor annuity".

[5] See 5 CFR 838.933, "Payment of the cost of a former spouse survivor annuity".

[6] See 5 CFR 838.806.

[7] Election to provide the Soldiers eligible Former Spouse survivor with an annuity the day following the date of the Soldiers death, regardless of the Soldier's age at the time of death.

[8] Election to provide the Soldiers eligible Former Spouse survivor with an annuity at what would have been the Soldier's 60th birthday.

[9] This is the computation of premiums for members who initially entered active duty after Feb. 28, 1990, and who are not retiring for disability. For prior entry soldiers there are two calculation options.

[10] See Financial Management Regulation (FMR), 430503. Former Spouse or Former Spouse and Children.

[11] For example: Thrift Plan, Savings Plan, 401k Plan or any other plan where the benefit payable to the participant is based on her or his individual account balance.

[12] For Federal and Military Plans the relevant term was:

Former Spouse Survivor Annuity

For ERISA Plans the relevant term is:

Joint and Survivor Annuity (generally a Joint and 50% Survivor Annuity)