ERISA Case in the District Court for the Southern District of New York Highlights Plan Sponsor QDRO Responsibilities
A sometimes forgotten issue in a divorce, separation, or other domestic relations proceeding is the division of retirement plan benefits between former partners and/or husband and wife. While the general rule is that ERISA and the Internal Revenue Code do not permit a participant to assign or alienate the participant's interest in a retirement plan to another person, a developed exception to the anti-assignment and alienation rules for the distribution of retirement benefits through qualified domestic relations orders (QDROs). A valid QDRO enables retirement benefits to be assigned to a spouse, former spouse, child, and even to satisfy family support or marital property obligations under certain conditions.
To be considered a QDRO, a domestic relations order must meet the requirements of ERISA § 206(d), including but not limited to,: the name and last known mailing address of the participant and each alternate payee; the name of each plan to which the order applies; the dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee; and the number of payments or time period to which the order applies. See ERISA § 206(d)(3)(C)(i)-(iv). A QDRO must also meet the requirements laid out in IRC § 414(p)(2)(A)-(D).
As part of their fiduciary responsibilities, ERISA plan administrators are obligated to (i) establish reasonable procedures to determine the qualified status of domestic relations orders;(ii) determine if a domestic relations order meets the elements of a QDRO and (iii) administer distributions pursuant to qualified orders. This is a significant responsibility and one that might be underappreciated among ERISA plan administrators and fiduciaries.
This context sets the stage for a recent case in the United States District for the Southern District of New York that made several conclusions relative to a QDRO issued for a New York defined benefit plan. The case is particularly instructive for plan administrators of defined benefit plans in ensuring compliance with a QDRO, in light of the generally greater complexity of defined benefit plans and their related benefit calculations as compared to defined contribution plans such as 401(k) plans.
In Amron v. Yardain Inc. Pension Plan, Plaintiff Kenneth Amron brought an action against Defendants Yardain Inc. Pension Plan (the pension plan in question), Yardain Inc. (the sponsor of the pension plan) and Plaintiff's former spouse, Sandra Adelsberg. Amron alleged breach of contract and violations of ERISA (including breach of fiduciary duty) in connection with the alleged plan's miscalculation of his retirement benefit.
Defendant Adelsberg originally filed for divorce from Amron on December 7, 2006, in New York Bronx County Supreme Court. The judgement of divorce issued by the Bronx Supreme Court (dated March 13, 2009) provided that the Plan at issue "shall be divided equally, fifty (50%) percent each between the parties" and that "[t]he parties shall facilitate such QDROs as required to accomplish the division of the assets." Then, on December 23, 2015, the Bronx Supreme Court issued a QDRO which assigned "to the Alternate Payee [Plaintiff] an amount equal to FIFTY PERCENT (50%) of the Participant's [Defendant Adelsberg's] vested accrued benefit under the Plan as of December 7, 2006."
On the same day the QDRO was issued, the Plan's actuary sent a memo to Plaintiff's counsel providing calculations of the benefits due to Plaintiff under the Plan, both as a direct Participant and as the Alternate Payee (the assignee) sharing in 50% of Defendant Adelsberg's vested benefit pursuant to the QDRO. The memo attached distribution election forms for Plaintiff for a lump sum distribution of "$263,013 (vested value)" consisting of "50% of benefit determined as of 12/07/2006 as per the QDRO agreement." Many plans would have followed a different practice, i.e., forwarding to the participant and alternate payee the administrator's interpretation of the QDRO, and providing them with a period of time to respond to the administrator if, in their view, the administrator had misconstrued the terms of the domestic relations order.
Plaintiff Adelsberg disputed this actuarial calculation on the basis that it incorporated the lump sum present value of the accrued benefits as of December 7, 2006. He instead argued that the calculation did not reflect the vested accrued benefit as of December 2006, the present value of which must be calculated on his normal retirement date. The difference in the value of Plaintiff's retirement benefit was stark - with consideration of Plaintiff's normal retirement date - Plaintiff alleged that his retirement benefits should have been calculated as $925,359.86 as opposed to the $263,013 that the Plan calculated.
Plaintiff sent several letters to Defendant Adelsberg addressed to the Plan Administrator, Yardain, Inc. Pension Plan. These letters argued that the plan's calculation of benefits violated ERISA the Internal Revenue Code and requested a revised and corrected calculation based on the valuation relative to Defendant Adelsberg's normal retirement date. Defendants, through matrimonial counsel, and their engaged actuary, rejected Plaintiffs' three letter requests. The last response delivered by Defendants' actuary stated that "our original valuation of $526,025 was the value as of December, 2006 NOT the current value. The December, 2006 date was stipulated and ordered to be the determination date by Judge Latisha Martin of the Bronx Supreme Court." Plaintiff then followed suit.
The dispute centered on the alleged miscalculation of Plaintiff's retirement benefit and whether there could be a plausible claim of breach of fiduciary duty against Defendant as plan administrator. In analyzing this issue, first, the court addressed the proper standard of review. Plaintiff argued that the review should be de novo, while Defendants argued that the arbitrary and capricious standard should apply The Court quickly dispersed with Defendants argument for two reasons (1) the claims alleges a violation of the statutory methodology for determining the present value of an accrued benefit under ERISA and the Code and (2) courts have found that plan administrator interpretations of a QDRO are subject to de novo review because the domestic relations order - unlike the Plan - is a separate, judicially approved contract which the Plan administrator has no special discretion to interpret.
With the standard of review resolved, the Court turned to the heart of this case, whether the Plaintiff stated a claim for a miscalculation of retirement benefits pursuant to the Bronx Supreme Court QDRO. In deciding this issue, the Court first looked to the express terms of the QDRO which assigned "to the [Plaintiff] an amount equal to FIFTY PERCENT (50%) of [Defendant Adelsberg's] vested accrued benefit under the Plan as of December 7, 2006." The Court reasoned that, based on these terms, Plaintiff was entitled to a lump sum distribution from the Plan under IRC 411(c)(3) that should represent his one-half share of the accrued benefit assigned under the QDRO - equal in worth to the value of that annual benefit commencing at Defendant Adelsberg's normal retirement age. See 26 U.S.C. § 411(c)(3) ("[I]f an employee's accrued benefit is to be determined as an amount other than an annual benefit commencing at normal retirement age ... the employee's accrued benefit shall be the actuarial equivalent of such benefit ....").
The Court recognized that the dispute did not emanate from the valuation of Adelsberg's benefit for purposes of the QDRO, but rather the date to be used for purposes of calculating the present value of the lump-sum benefit payable to the Plaintiff. The court stated that "For purposes of valuing her benefit as of December 7, 2006, Defendant Adelsberg's benefit was fixed and fully vested in December 2006 under the Plan then in effect. In other words, the benefit did not increase in value after 2006. Whether measured in 2006 or 2019, the gross value (i.e., before a present value adjustment) is the same. And the parties do not materially dispute the gross value of Defendant Adelsberg's annual benefit commencing at her normal retirement age, and therefore do not dispute what one-half that value is."
In finding that the issue at hand was the determination of the lump-sum present value of the benefit, the Court concluded that Plaintiff sufficiently stated a claim that his benefit was miscalculated to the extent that the lump-sum present value was "discounted" back to December 2006. The Southern District, in fact, denounced Defendants' "discount" valuation theory noting that "this construction of the QDRO makes no sense because it means in effect that the amount of the assigned benefit is determined as if Plaintiff had received it in December 2006. As discussed above, the better interpretation of the QDRO is that it awards Plaintiff half of the benefit valued at the time of the divorce and without any increase in value thereafter, but calculated for purposes of a lump-sum payment pursuant to § 411(c)(3) to reflect the date of distribution."
Although the Court found that Plaintiff plausibly stated a claim for miscalculation of benefits, it dismissed Plaintiff's claims for breach of fiduciary duty under ERISA 502(a)(3) and determined any amendment Plaintiff might make to revise the complaint to propound these claims would be futile. The court rested this argument on the fact that the "gravamen" of the complaint only seeks money damages (classic legal relief) to impose personal liability on respondents for a contractual obligation to pay money and not equitable relief as appropriate for an ERISA breach of fiduciary duty claim.
In this case, even had the District Court reached the merits of Plaintiff's breach of fiduciary claim, Plaintiff would not have prevailed, because it was prudent for the plan to ask an actuary for its interpretation of the order, and to rely upon the actuary's analysis. It would not be standard practice to seek out a second actuary to confirm the first actuary's analysis. However, it is important to take into account the fiduciary elements associated with QDRO determinations as this is an area that the DOL has found fiduciary liability to exist. Consider the following DOL guidance in connection with plan administrator QDRO roles and responsibilities: "It is the view of the Department of Labor that a plan's QDRO procedures should be designed to ensure that QDRO determinations are made in a timely, efficient, and cost-effective manner, consistent with the administrator's fiduciary duties under ERISA. The Department believes that unnecessary administrative burdens and costs attendant to QDRO determinations and administration can be avoided with clear explanations of the plan's determination process, including: An explanation of the information about the plan and benefits that is available to assist prospective alternate payees in preparing QDROs, such as summary plan descriptions, plan documents, individual benefit and account statements, and any model QDROs developed for use by the Plan."  Courts also recognize a participant's right to bring a civil action for ERISA breach of fiduciary duty for failure to comply with ERISA § 206 (d) in distributing retirement benefits from a QDRO. See e.g., Stewart v. Thorpe Holding Co. Profit Sharing Plan, 207 F.3d 1143, 1157 (9th Cir. 2000) ("The record strongly suggests that neither Nielsen, Carpenter, nor any of the other Committee members serving as plan administrators in this case performed their fiduciary duties pursuant to 29 U.S.C. § 1056(d)(3)(G), ).
The Amron case is a reminder for Plan administrators (no matter the size of their plan) to incorporate, establish, and apply reasonable practices and procedures to respond to the submission of QDRO's. The high costs of litigation could be saved just by instituting such procedures to ensure they are in compliance with applicable regulations and establishing proper oversight to ensure they are complied with. Plan administrators should contact their ERISA counsel for further guidance on this issue.