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THE KAZEL DECISION
SURVIVOR BENEFITS
A QDRO DRAFTING UPDATE


Kazel: 3 N.Y.3d 331; November 18, 2004, Decided
Files v. Exxon Pension Plan, 428 F.3d 478, U.S. Ct. of App. 3rd Cir. 11/2/2005

Our experience after drafting more than 16,000 Domestic Relations Orders indicates that the most difficult aspect of the drafting exercise relates to Survivor Benefits. This drafting duty becomes more complex when the federal (Retirement Equity Act) and state (common law and statute) guidelines are not understood. A further complication is the unsettled state of the federal view as indicated by the above cited decisions. Because clarity on the issue presented herein is absent, what is emphasized in this article is the necessity of specificity in drafting the pension provisions of your Property Settlement Agreement. Failure to observe the applicable rules for the assignment of survivor benefits to an Alternate Payee incident to divorce can result in a range of unpleasantries for the practitioner; from loss of entitlement by your client to a malpractice issue.

To better understand this need for drafting clarity we discuss the Kazel and Files decisions. These decisions highlight different interpretations of the parties intent as well as interpretations of a Property Settlement Agreement.

When a Defined Benefit Pension Plan is to be divided between the parties it is essential for the practitioner to establish at the outset specifically which elements of the pension are to be assigned to the Alternate Payee. This will include but not be limited to:

Pension payments over the lifetime of the titled-spouse
Pre and Post-retirement survivor annuity benefits.

To discuss the division of a pension as though the term "pension" was inclusive" evidences a lack of experience on the part of the attorney representing the non-titled spouse. To emphasize this caution, observe how the Kazel and Files courts reached different interpretations of the term"

"division of the pension"

Files is a 3rd Circuit decision. We found no equivalent to Files for the 2nd Circuit. From a reading of other state court decisions within the 2nd Circuit it is not unreasonable to conclude that the 2nd Circuit would not concur with Files. However, it is our understanding that a Kazel type case has yet to be heard by the 2nd Circuit. Hence, prudence mandates cautious drafting on the matter of the survivor annuity rights awarded to an Alternate Payee. For those seeking a detailed discussion of the flaws and traps inherent in the Files decision you are directed to Troyaninc.com's article in the State Plans section under "New Jersey".

With knowledge of Files at hand the central issue presented in this New York article is:

Does a Property Settlement Agreement which awards an Alternate Payee a "Majauskas" interest in the titled-spouse's Defined Benefit pension plan constitute an award of both pension and survivor annuity benefits?

Kazel answers with a clear No. Files answers with a clear Yes. This difference is predicated on each court's interpretation of the term "pension".

The Kazel court following (but not citing) the reasoning applied by the U.S. Office of Personnel Management and the Code of Federal Regulations (5 C.F.R. 838.237) ruled that survivor benefits are separate and distinct from pension benefits. For an Alternate Payee to have an entitlement to a survivor annuity the Property Settlement Agreement must provide a clear and definable award of a survivor annuity benefit.

Issues regarding interpretation of settlement language arise as a result of flawed drafting, generally based on uninformed assumptions. Be clear, based on Kazel, language akin to the following does not, in New York State, create a survivor interest for an Alternate Payee:
The Alternate Payee is assigned 50% of the Wife's pension or
The parties shall equally divide the pension of the Husband

Kazel makes clear that central to your negotiations and drafting is full recognition that to assign to an Alternate Payee both pension and survivor benefits a Property Settlement Agreement must include two separate and distinct assignments:

Payments to an Alternate Payee over the lifetime of the titled-spouse (the pension benefit).
Payments to an Alternate Payee as a result of the death of the titled-spouse (before or after his or her retirement). The survivor annuity benefit.

Additionally, there was an aspect of Files that was not discussed in Kazel. The New York practitioner should understand; the concept of a "separate interest" QDRO (for help with terminology, go to the Glossary at Troyaninc.com). Inherent in this type of QDRO is an awareness that a "separate interest" award to an Alternate Payee encompasses both pension and survivor benefits. Since, Kazel did not raise the issue of "separate interest", Kazel does not resolve the question of what language will be deemed by a New York court as obviating the need for both pension and survivor language due to the fact that the award to the Alternate Payee constitutes a transfer of marital property that will be treated as his or her sole and separate property. The Files court inferred "separate interest" from the language of the settlement. Because New York has not addressed this issue, a question remains. What if Sandra Kazel had argued that the intent of the parties was for a "separate interest" QDRO?

At this point, Troyan, Inc. assumes that the informed New York attorney representing a non-titled spouse in a matter involving an ERISA Qualified Defined Benefit Plan, will draft his or her Property Settlement Agreement as a "separate interest". That the attorney representing the titled-spouse will acquiesce is questionable. Beyond the scope of this article is "negotiating a separate interest QDRO.

Troyan, Inc. conducts seminars for New York attorneys geared to particular interests. For example, consider a seminar covering "Separate Interest" QDRO, "Shared Payment" QDRO, the Kazel decision, the Pagliaro decision plus recent federal changes to Military Disability Pensions (they are now subject to a QDRO).