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THE FILES DECISION
A CAUTION TO FAMILY LAWYERS
FOLLOW THIS DECISION AT YOUR PERIL


The focus of this Practice Aid is the recent decision of the Court of Appeals, 3rd Circuit in:

Files v. Exxon: 428 F.3d 478 (November 2, 2005)

Discussed herein is the significance of Files v. Exxon as it relates to Property Settlement Agreements and Domestic Relations Orders prepared in the third circuit regarding the following types of Retirement Plans:

1.Qualified Defined Benefit Plans (ERISA)

2.Federal Civil Service Retirement Systems

3.Military Retirement Systems (Reserve & Regular Components)

4.New Jersey Retirement Systems

5.Non-Qualified Plans and Arrangements

At first glance it could appear that the Files decision provides clear guidance regarding Property Settlement Agreements, Domestic Relations Orders and an assignment of survivor annuity benefit awards to an Alternate Payee.

This article urges the family practitioner to employ caution when drawing conclusions from this decision. The Files reasoning can lead practitioners to make assumptions that may be to the detriment of their clients. The Files case dealt primarily with a survivor benefit issue provided by an ERISA Qualified Defined Benefit Plan of EXXONMOBIL. For ERISA Qualified Defined Benefit Plans such as the subject plan in this case there are two formats that may be used to divide pension benefits incident to divorce. These two formats are:

A. Separate Interest Domestic Relations Order
B. Shared Payment Domestic Relations Order

Pursuant to the Separate Interest Format the pension benefit awarded to an Alternate Payee becomes his or her sole and separate property. As such it is not subject to loss as a result of the death of the titled-spouse.

Pursuant to the Shared Payment Format the pension benefit awarded to an Alternate Payee will be extinguished by the death of the titled-spouse, absent a clear designation in the Property Settlement Agreement and then in the Domestic Relations Order that an Alternate Payee is to be deemed a surviving spouse.

To the extent the practitioner is dealing with an ERISA Qualified Defined Benefit Plan Files is relevant. However, this relevance may evaporate if the source of the pension is one of the entities mentioned at 2-5 above. We repeat; the following entities do not follow the concept of "Separate Interest". Hence, it is not possible to craft a Separate Interest Domestic Relations Order against any of the enumerated entities.

Federal Civil Service Retirement Systems
Military Retirement Systems (Reserve & Regular Components)
New Jersey Retirement Systems
Non-Qualified Plans and Arrangements

In support of our caution against unqualified acceptance of the Files decision we reference:

For Civilian Employees:
5 C.F.R.838.804(b)(2)(i),
57 FR 33570; Office Of Personnel Management, Federal Guidelines for the qualification of a COAP (the federal equivalent of a QDRO)

For Military Employees:
10 U.S.C.A. 1448(b)(2)

For New Jersey Retirement Systems
Not subject to ERISA. See Cleveland v. Board of Trustees, Police and Firemen's Retirement System, 229 N.J.Super. 156.
More commentary below based on discussions with a key figure in the State Retirement System.

THE FILES DECISION:
The basis for the court's view that Ms. Files was entitled as an Alternate Payee to a survivor benefit was the following language from the PSA (Paragraph 3.2), which was incorporated into the Dual Judgment of Divorce entered by the New Jersey Court on July 16, 1998:

The Husband is the owner of an Exxon pension and Exxon . [Savings] Account and a TOSCO pension. Wife hereby waives, now and forever, any right, title or claim on the Husband's TOSCO pension funds. The wife shall be entitled to one-half of the Exxon pension and one-half of the Exxon . . [Savings] Account. The transfer shall be by QDRO ["qualified domestic relations order"] as to the pension and by transfer to an account designated by the wife as to the . . . [Savings] Account.

Within the above text of the decision, the court, regarding a Qualified Defined Benefit Plan and the survivor benefit inherent in this plan focused on the following:

The wife shall be entitled to one-half of the Exxon pension..

Regarding an ERISA Qualified Defined Benefit Plan, The Files court interpreted the above sentence as the clear intent of the parties to settle the pension issues pursuant to the "Separate Interest" format. Pursuant to a "Separate Interest" format the Alternate Payee's interest was not subject to extinction as a result of the death Mr. Files, hence, no survivor benefit was needed. Pursuant to the language of the Property Settlement Agreement a "survivor benefit" was inherent in the award to the Former Spouse. On this basis the court distinguished Files from Samaroo (193 F.3d 185). In Samaroo no survivor benefit had been granted at the time of divorce or up to the time of the titled-spouse's death. Hence, a post death of the titled-spouse nunc pro tunc order granting a survivor benefit was not possible because it was contrary to Internal Revenue Code § 414(p)(3)(A). In Files, there is no controversy regarding a survivor annuity award to the Former Spouse. This argument has been avoided according to the court by the fact that Files was given a clear interest in the titled-spouse's plan based on the language of the Property Settlement Agreement:

The wife shall be entitled to one-half of the Exxon pension..

Based on this reasoning and the earlier reasoning in Gendreau (122 F.3d 815), Files, at the time of divorce was invested with an interest in this pension that could only be extinguished by her death. A Qualified Domestic Relations Order was not in this case an instrument that created Ms. Files interest in the plan, rather the Qualified Domestic Relations Order was simply the vehicle that enabled her to give effect to her already existing interest in this Plan. Further, the Files court reasoned, the Property Settlement Agreement language constituted a separate interest Qualified Domestic Relations Order. Predicated on this assumption the court then concluded that a timely award of an interest not subject to loss as a result of the death of the titled-spouse existed (based on the Separate Interest format) existed for the benefit of the Former Spouse. This interest of the Alternate Payee was created by the Property Settlement Agreement which the Files court deemed to be a Qualified Domestic Relations Order.

Without question for the third circuit, Files is relevant to ERISA Qualified Defined Benefit Plans, provided a fact pattern identical to that of Files exists. The danger to avoid is the practitioners inferring from this decision that the case has applications beyond ERISA Qualified Defined Benefit Plans. We urge the practitioner to view Files as a decision of limited applicability. For example, it is constructive to observe that the Internal Revenue Service's guides do not conform to the language of Files. Rather, the IRS view of "Separate Interest" is significantly more limited in application. Clear evidence of this difference of interpretation of the concept of "separate interest" are the IRS QDRO drafting guidelines as published at Internal Revenue Notice 97-11. In this Notice separate interest is related only to the benefit payments to be made to an Alternate Payee. Significantly the language of 97-11 does not automatically invest in an Alternate Payee pension rights that survive the death of the titled-spouse. Based on this IRS Notice, if an Alternate Payee is to have an interest in a Qualified Defined Benefit Plan that is not extinguished by the death of the titled-spouse, then there must be a clear and unique award to such Alternate Payee of survivor annuity benefits. The IRS Guidelines do not provide that "separate interest" language as discussed in this Notice creates an interest in a Qualified Defined Benefit Plan that survives the death of the titled-spouse. For the Alternate Payee's interest to exist beyond the death of the titled-spouse clear language awarding the Alternate Payee a survivor interest must exist in the Property Settlement Agreement and Qualified Domestic Relations Order.

The Internal Revenue Service is not alone in its view that an Alternate Payee's interest in a Defined Benefit Plan is extinguished by the death of the titled-spouse absent a clear and distinct award of survivor benefits. As the citations that follow make clear:

Files is not applicable to the division of Federal Civil Service Retirement Benefits Pursuant to a Court Order Acceptable for Processing (COAP).

Support for this view is found at 5 C.F.R.838.804:

§838.804 Court orders must expressly award a former spouse survivor annuity or expressly direct an employee or retiree to elect to provide a former spouse survivor annuity.

(a) 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.

(b) To expressly award a former spouse survivor annuity or expressly direct an employee or retiree to elect to provide a former spouse survivor annuity as required by paragraph (a) of this section the court order must-
(1) Identify the retirement system using terms that are sufficient to identify the retirement system as explained in §838.911; and
(2) (i) Expressly state that the former spouse is entitled to a former spouse survivor annuity using terms that are sufficient to identify the survivor annuity as explained in §838.912; or (emphasis mine)
(ii) Expressly direct the retiree to elect to provide a former spouse survivor annuity using terms that are sufficient to identify the survivor annuity as explained in §838.912.

The Code of Federal Regulations clarifies the above section at 5 C.F.R. 838 Appendix A, which provides as follows:

A complete court order requires three separate provisions one addressing each type of benefit that the court can affect.

FILES IS NOT APPLICABLE TO MILITARY DOMESTIC RELATIONS ORDERS REGARDING SURVIVOR BENEFITS.

Military Retirement Benefits:
Based on the following it is our view that Files is not applicable to Domestic Relations Orders dividing military retirement benefits. The basis for this view is 10 U.S.C.A. 1448(b)(2). Federal Plans require a clear and specific assignment to a Former Spouse of survivor annuity benefits if such award is to comply with applicable federal law.

FILES IS NOT APPLICABLE TO STATE OF NEW JERSEY RETIREMENT PLAN DOMESTIC RELATIONS ORDERS REGARDING SURVIVOR BENEFITS.

State of New Jersey Retirement Plans.
Pursuant to statute the reader is aware that survivor annuity benefits are not available to Former Spouses of Police, Fire and Judges. The balance of the State's plans will accept Domestic Relations Orders that award a survivor annuity benefit to a Former Spouse. However, let us first be clear on the basis for this State acceptance of Domestic Relations Orders. See Cleveland v. Board of Trustees, Police and Firemen's Retirement System; 229 N.J.Super. 156. From the Cleveland case we learn that the Retirement System deems the member bound by the Domestic Relations Order, but significantly not the Retirement System. Hence, the following is a troubling scenario regarding cases in which a New Jersey court executes a Domestic Relations Order against a part of the New Jersey Retirement System that permits designation of an Alternate Payee as a survivor spouse e.g. Public Employees Retirement System or Teachers' Retirement System.

THE SCENARIO

Step I. The parties divorce
Step II. A Domestic Relations Order is executed by the court and filed with the Retirement System designating a Former Spouse as the surviving spouse of the member.
Step III. Prior to retirement the member remarries. Upon retirement he or she names his or her new spouse as the surviving spouse. With reluctance and admonition the State of New Jersey will permit the member to name his or her new spouse.

The point of the above three step scenario is to make clear that Files is without impact on the rights of a New Jersey Public Employee to name a spouse in violation of the Domestic Relations Order as his or her surviving spouse. Is this in violation of the parties Property Settlement Agreement and the Domestic Relations Order? Yes. Can this violation readily take place? Do remedies exist? Yes, provided a Former Spouse can afford further costly litigation. In lieu of such costly litigation will the Former Spouse opt for a malpractice action against his or her attorney maintaining economic loss because a benefit provided for in the Property Settlement Agreement and Domestic Relations Order was not made available to him or her? You decide!.

Additionally. State of New Jersey Retirement Plans are not ERISA Plans. They are not subject to the Retirement Equity Act. They do not recognize the concept of "separate interest". If you assume Files is applicable to this Retirement System, you do so at your and your client's peril.

A MORE COMPLEX ISSUE NOT ADDRESSED IN FILES.

This point was left to the end as it covers a more esoteric element of the case that may not be of interest to all readers. This issue is the fact that a "separate interest" as it relates to survivor benefits may not take effect until the actual retirement of the titled-spouse. Many ERISA plans maintain that the "separate interest" of an Alternate Payee begins on the Alternate Payee's Annuity Starting Date (date benefits commence). Prior to this date the plan does not create (and is not under ERISA) required to create the separate interest of an Alternate Payee. For plans that maintain this format it is essential to designate an Alternate Payee as the surviving spouse of the employee's Qualified Pre-Retirement Survivor Annuity (QPSA). The mere designation of a "separate interest" for an Alternate Payee will not bar loss of entitlement as a result of the death of the titled-spouse prior to his or her retirement or the Alternate Payee's Annuity Starting Date is earlier. Absent such formal designation in the Property Settlement Agreement and the Qualified Domestic Relations Order the death of the titled-spouse prior to his or her Annuity Starting Date extinguishes the interest of an Alternate Payee in this plan. For elaboration on this issue contact Troyaninc.com

The Troyan Organization provides seminars on negotiating and drafting the survivor benefit aspects of Property Settlement Agreements. Among the cases covered in this seminar are: Ross, Samaroo, Files, and Sanzo. In its expanded format these seminars include decisions from other federal circuits, especially the ninth and federal circuit. Among other cases these seminars also cover in detail; Gendreau, Tise, Stewart, O.P.M. and C.F.R. Guidelines as well as those relevant to Military, Railroad and Executive Compensation cases.