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PENSION BENEFIT GUARANTY CORPORATION

DIVORCE – INEQUITABLE DISTRIBUTION

A CAUTIONARY TALE

The Pension Benefit Guaranty Corporation (PBGC) is a wholly owned United States Government Corporation, modeled after the Federal Deposit Insurance Corporation. PBGC protects the pension benefits of more than 30 million private-sector American workers who participate in Defined Benefit Plans.

Among the major tasks of PBGC is protecting the retirement benefits of employees of failed corporate retirement plans.[1] Family attorneys should be familiar with the PBGC because PBGC is the Plan Administrator to whom a Domestic Relations Order is sent for qualification (of a Trusteed Plan), the Plan Administrator of plans qualified earlier by the failed corporation as well as the administrator of distributions to Alternate Payees pursuant to existing Qualified Domestic Relations Orders of Plans that have since become "Trusteed".

Regarding the assumption of the Qualified Domestic Relations Orders of failed corporations by PBGC. It is significant that PBGC reviews each assumed Order. It is possible that its interpretation will be at variance with that of the failed corporation. When such difference exists, the PBGC position prevails.

PBGC Limits.

Consider the following scenario.

Bill and Jane divorce on June 20, 2008. Bill in an executive with XYH Gadgets. Bill is an executive of this firm. Bill's monthly accrued benefit from his Defined Benefit Plan at the time of divorce was $6,500.00. The agreement calls for Jane to receive the fixed monthly benefit of $3,250.00 upon Bill's retirement.[2]

The pension portion of the settlement is implemented by a Qualified Domestic Relations Order.

At the start of 2013 Bill is advised that his monthly accrued benefit is now $9,429.06. Bill is looking forward to retirement and a comfortable pension. Shortly thereafter in June 2013 Bill's firm files for bankruptcy and the firm's Pension Plan is taken over by the PBGC. Bill's job is excessed and he retires at age 58. Jane anticipates her monthly pension benefit of $3,250.00.

PBGC reviews existing Qualified Domestic Relations Orders when they become the Trustee of a failed plan. What follows is the outcome of such PBGC review.

PBGC Calculation of Benefits.

The maximum monthly benefit payable in 2013 to a person retiring at age 58 is $2,730.17. No more can be paid pursuant to PBGC Regulations.[3]

Shortly after Bill's retirement, Jane receives her monthly pension benefit from PBGC in the amount of $2,730.17. Bill is advised by PBGC that based on the Qualified Domestic Relations Order award to Jane, there is no residue for Bill.[4] Bill receives nothing for his thirty-one years of efforts at XYH Gadgets. Bill's anticipated monthly pension of $6,179.06 no longer exists.[5] The maximum allowable amount is paid to Jane pursuant to the existing Qualified Domestic Relations Order.

Jane as a result of XYH's failure receives 84% of her agreed award. Bill receives 0% of his pension.

NO REMEDY EXISTS.

Challenging PBGC on this issue is not likely to be a productive act. What is emphasized is that attorneys be mindful of such unanticipated outcome and insulate themselves from the ire of the client. Should language have been inserted into the Marital Settlement Agreement to recognize this outcome? Our experience after drafting more than 20,000 Domestic Relations Orders is that such exculpatory language is useful but unlikely in a Marital Settlement Agreement. The vicissitudes of human behavior preclude anticipation of all contingencies.

Commentary.

Although is not possible to anticipate all future permutations, there are circumstances where it may be constructive to consider language that could have avoided the outcome of the above scenario. If you seek such language contact Troyaninc.com.

PBGC REGULATION

PBGC Publication 100,Revised October 2012

Appendix B – Domestic Relations Orders Qualified

Before PBGC Becomes Trustee.

Because PBGC guarantees may not cover a participant's full pension benefit, a

participant's benefit may be reduced after

PBGC takes over a plan. This can reduce benefits payable to one or both parties under the QDRO. PBGC will not treat the order as not qualified solely because benefits paid by PBGC require reduction of the participant's and/or the alternate payee's benefit. PBGC will apply the reduction rules to domestic relations orders qualified before PBGC becomes trustee (assuming the QDRO is silent) in the same manner as it applies the reduction rules to orders that are qualified after PBGC becomes

trustee. For example, if a QDRO awarded a fixed percentage of the participant's benefit to the alternate payee, the benefits payable to both the participant and the alternate payee would be reduced to reflect PBGC's guarantee limitations. On the other hand, if a QDRO awarded a fixed dollar amount of the participant's benefit to the alternate payee, the participant's benefit would be reduced first to reflect PBGC's guarantee limitations. The fixed dollar amount awarded to the alternate payee would be reduced only if the total decrease to be made exceeded the participant's benefit. If the participant or alternate payee desires that the guarantee limitation be applied differently, an amended order indicating how any

reduction should be addressed would need to be submitted to PBGC for review.



[1] These failed (insufficient assets to cover liabilities)plans are termed "Trusteed Plans".

[2] Other factors made this fixed sum advantageous to both spouses. Moreover a fixed amount award to an Alternate Payee is routine in Florida and Texas.

[3] The PBGC Regulation is printed in full at the end of the Article.

[4] See text of PBGC Regulation at end of this Article.

[5] Bill's calculation: Total Pension five years subsequent to divorce: $9,429.06. Less $3,250.00 to Jane. Net to Bill $6,179.06.