“The pension dies with the employee.”
That’s the traditional rule for pensions, but nothing is ever that simple, especially in divorce. One of the most fought over aspects of a pension Qualified Domestic Relations Order (QDRO) is the award of survivor benefits – typically a reduced pension amount that is paid out if the pension participant dies before or after retirement. In California, at least, the rule is clear from the Family Code: these benefits are part of the pension rights of the alternate payee, so we should endeavor to split these benefits and award at least a proportionate share to the ex-spouse (saving some for the current spouse, if applicable).
But what happens when the ex-spouse dies first? Does that person’s share “revert” back to the employee, rather than dying with the alternate payee? Traditionally, yes, but under a recent California ruling, that’s no longer allowed.
What Happens When the Participant or Alternate Payee (Non-Employee) Die Before or After a Pension Commences Payments?
When a pension plan is divided during a divorce, the timing of the deaths of the participant (employee) and the alternate payee (non-employee spouse) can significantly impact the distribution of benefits. If the alternate payee dies before the pension payments commence, the plan’s provisions and any court orders will determine the disposition of their share. Typically, without specific provisions, the benefits likely would revert to the participant rather than expire. If the alternate payee dies after the pension payments have started, the distribution depends what form of benefit the alternate payee selected and the plan’s rules.
Wait, likely would? And now they won’t? That’s the rub and the issue in a recent California case that flipped our reversionary clauses right on their heads.
What is a Reversionary Interest?
A reversionary interest is a provision in a pension plan or court order that allows the benefits allocated to the alternate payee to revert back to the participant upon the alternate payee’s death. This means that if the non-employee spouse dies, their share of the pension benefits would return to the employee spouse, rather than being distributed according to the non-employee spouse’s estate plan.
Here is an example of a reversionary clause that came across my desk two weeks ago:
Interestingly, the QDRO preparer that drafted these (a non-lawyer) was so reliant upon company models that two of the three pension orders had this reversionary clause, despite such clauses now being illegal in California. A third pension order did not – that company’s model that was used by this preparer used proper non-reversionary language.
What Was the Belthius Ruling?
The In re Marriage of Belthius case addressed the legality of reversionary interest provisions in pension plans. The California Court ruled that such provisions, which would revert the non-employee spouse’s share of the pension back to the employee spouse upon the non-employee spouse’s death, violate California Family Code section 2610. This ruling ensures that the non-employee spouse’s share of the pension remains protected, even after their death.
It is important to note that Belthius only applies in California – though other states may have similar laws or court rulings.
What Does Family Code Section 2610 Have to Say About the Issue?
California Family Code section 2610 mandates that each party in a divorce receives their full community (martial) property share of any retirement plan, including survivor and death benefits. This section prevents reversionary interest provisions that would undermine the non-employee spouse’s entitlement to their share of the pension benefits. It ensures that the non-employee spouse’s share remains protected and cannot revert to the employee spouse upon the non-employee spouse’s death. Instead, the estate of the non-employee spouse (alternate payee) should receive that share of the pension.
Note that California law sets the defaults, but parties are free to agree to other things in their divorce. We’ve also seen many cases where the alternate payee’s estate (typically the kids) do not want the pension and wish for it to revert to the employee-participant, who is often their other parent. In those cases, we’ve executed waivers of their inherited interest to restore the full pension to the employee.
What Are Some Examples of Bad Reversionary Interest Language?
Bad reversionary interest language includes provisions that explicitly state the benefits will revert to the participant if the alternate payee dies before or after the commencement of the pension payments. For example:
- “The Alternate Payee’s awarded benefit shall revert to the Participant in the event the Alternate Payee dies prior to the commencement of the awarded benefit in the Plan.
Such language violates the principles established in the Belthius ruling and California Family Code section 2610, as it undermines the protection of the non-employee spouse’s share of the pension benefits.
Proper Language for Allotting the Alternate Payee’s Share
To comply with the Belthius ruling and California Family Code section 2610, the language should ensure that the alternate payee’s share is protected and can be passed on to their estate or named beneficiaries. For example:
- “In the event the Alternate Payee dies before the commencement of the awarded benefit, the benefit shall be distributed to the Alternate Payee’s estate or to the beneficiaries named under the plan terms.”
- “If the Alternate Payee dies after the commencement of the awarded benefit, the remaining benefit shall continue to be paid in accordance with the benefit form selected by the Alternate Payee and the plan’s provisions, ensuring it is distributed to the designated beneficiaries.”
This language ensures that the alternate payee’s share remains protected and is distributed according to their wishes, rather than reverting to the participant.
Do Separate Interest QDROs Sidestep Both Survivor Benefits and Reversionary Interest Issues?
What Are Separate Interest Orders?
Separate interest QDROs (Qualified Domestic Relations Orders) create an independent right for the alternate payee, separate from the participant’s benefits. Unlike shared interest orders, where the alternate payee receives a portion of each payment made to the participant, separate interest orders allocate a distinct portion of the pension to the alternate payee. This means the alternate payee’s share is calculated based on their own life expectancy and can be paid out independently of the participant’s retirement status.
How Do Separate Interest Orders Impact Survivor Benefits?
Separate interest QDROs can mitigate concerns related to survivor benefits. Since the alternate payee’s benefits are independent of the participant’s, they are not contingent on the participant’s life or retirement decisions. This ensures that the alternate payee receives their share of the pension benefits regardless of whether the participant is alive or has retired. Consequently, the alternate payee’s benefits are protected, and they do not need to rely on survivor benefits to secure their share.
How Do Separate Interest Orders Impact Reversionary Interests?
Separate interest QDROs effectively sidestep reversionary interest issues. Because the alternate payee’s share is independent and based on their own life expectancy, it does not revert to the participant upon the alternate payee’s death. This ensures that the alternate payee’s share remains protected and can be passed on to their estate or named beneficiaries, in accordance with the plan’s provisions. By creating a distinct and independent right for the alternate payee, separate interest QDROs align with the principles established in the Belthius ruling and California Family Code section 2610.
Build Your Own QDRO That Complies With These Rules
Separate interest QDROs sidestep many tricky legal issues by tying each party’s benefits to their own lifespan, making them a good choice for most parties. However, other factors may call for a shared interest order, such as if either party is expected to have a short lifespan, the employee has already retired, or if the plan does not allow for separate interest orders.
To ensure your QDRO meets your needs, you can generate it on LexyAlgo.com, which supports both separate and shared interest pension orders.
