It has been said that employee benefits are among the least understood property types by family law attorneys. When the subject comes up in a dissolution, it is commonly proposed that benefits issues be referred to one or another of the actuarial firms which purport to specialize in drafting disposition orders. It is less common, now, to put the subject off with a reservation of jurisdiction to permit disposition when the benefits eventually become payable, but there are certainly plenty of cases lurking about where that is what was done. Both of these approaches are fraught with hazard for the non-participant spouse’s attorney.
The risks of loss of benefits by delay in analyzing and dividing employee benefits are both substantial and, for the most part, avoidable.
Civil Code §340.6 provides the statute of limitations for an action against an attorney for errors and omissions. While it is not uncommon for us to be sanguine because of the one year limitations period provided there, one should not overlook the fact that the tolling provisions provide that the period does not begin to run until there is actual injury (subdivision (a)(1)). This likely puts the attorney whose client has an interest in any deferred compensation plan in the same category as the estate planning draftsperson, whose errors and omissions may rise up to bite only upon the event of retirement many years after the work was thought to have been completed.
Of the two situations cited in the first paragraph, the latter is much easier to analyze. Deferring division of deferred compensation benefits past the termination of the status of marriage is very likely to be error per se. This is so because of the frequent provisions of deferred compensation plans to provide residual benefits for a surviving spouse. Such benefits can take the form of joint and survivors’ annuities, but also pre-retirement survivor’s death benefits (see Family Code §2610(a)(1) & (2)). Deferred compensation plans ordinarily couch these provisions in language limiting their benefit to a surviving spouse, and if the person is not a spouse at the time of election, plans will refuse to honor the attempted election. The better course is to join the plan and provide for the “election” in the court order dividing the benefit before marital status is terminated. That way, if the plan were to disallow the employee’s retirement time election of the benefit to the then non-spouse, the eventuality of the latter looking to the assets of the employee and his or her former attorney to make up the then present value of the annuity will be avoided.
The former situation is not so concrete. We lawyers are required to represent our clients “competently.” (Rules of Professional Responsibility, Rule 3-110). Among the duties of a family law attorney is the duty to counsel the client to bring him or her to a sufficient level of understanding of the issues so that he or she can make an informed judgment about the disposition of the case. The rule does provide that we may act competently, where we do not have the requisite knowledge ourselves, by associating a lawyer who we reasonably believe to have that knowledge. There is, however, no such safe harbor for reference to any “expert” who is not a lawyer. Even where such an association is made, the associating attorney’s name is still going to be at the top of the order disposing of the deferred benefit, and hence identifying one of the defendants in the malpractice suit.
All of this arguably supports the proposition that the better option for the competent family lawyer is to include the knowledge of how to explain to the client and dispose of deferred compensation plans right alongside the knowledge of how to explain, value, characterize and divide real and personal property, explain and demonstrate “best interests of the children”, and explain the elements of marital standard of living. If, as is often stated, students only retain about twenty-five percent of the information they are given in lectures, something beyond sitting through MCLE courses is probably required.
Employee benefit plans may be classified as those covered by the Employee Retirement Income Security Act of 1974 (ERISA; 29 USC 1001-1461) and those that are not. Most “private” (non-governmental) plans will be covered by ERISA because of tax favored treatment. One of the motivations for enacting ERISA in the first place was the existence of discriminatory employee benefit plans that favored owners and executives over non-management employees. However, where closely held businesses are involved it is still possible to find nonqualified plans which discriminate against non-owning employees. Other non-ERISA plans are primarily found covering state and local government employees.
It cannot be emphasized too much that the risks of loss of benefits by delay in analyzing and dividing employee benefits are both substantial and, for the most part, avoidable. The event which, in California, fixes the right of the nonparticipant spouse to a share of the benefit is the date of separation. It is an exceptional case where this date is not established by the filing of the petition for dissolution. After this date, the following events can result in the loss of some or all of the non-participant spouse’s rights if the order dividing benefits has not already been entered: death of the employee spouse, death of the nonparticipant spouse, bifurcated status termination, liquidation, merger or bankruptcy of the employer, retirement of the employee spouse, modification of employee benefit plans by the employer, and others. It is therefore very important for issues affecting employee benefits to be taken up early on, if not first thing, in the process of property analysis.
The first line of defense is notice to the administrator of any benefit plan of the claim of the non-participant spouse. Because of this, a prudent attorney will consider service of the family law form interrogatories with interrogatory number 14 checked, as soon as possible after the action is commenced (see CCP §2030.020). The advisability of using a formal procedure for this purpose is commensurate with the financial risk the attorney will face in a malpractice action if something goes awry. The advantage of using formal discovery over the procedure provided in Family Code §2062(c) is that the discovery statutes provide for sanctions, including staying the action until the discovery is provided, thus protecting the non-participant spouse from the consequences of a bifurcated status termination. In contrast, while Family Code §2337(c)(5) appears to be protective of such consequences, that protection only exists until the entry of final judgment on all other issues, and may have no efficacy at all if the effect of the bifurcation is to adversely effect the claims of the non-participant to be classed as surviving spouse under the terms of a deferred compensation plan. Also, what protection there is from that statute depends on the financial resources of the non-participant spouse, which may or may not exist. Notice may take the form of a letter “Notice of Adverse Interest” or joinder of the plan. In the case of governmental plans, joinder is the only effective option. This is true of CalPERS, CalSTRS, the UC Retirement System, municipal retirement plans, for example the Contra Costa County Employees’ Retirement Association, and others. Interestingly, it is true of ERISA qualified plans of churches as well, and of non-qualified plans. A notice of adverse interest letter is all that is required for ERISA covered plans.
One should not then rest on his or her laurels after giving notice. One should proceed to orders dividing the plan interests, even while collecting other property information and dealing with temporary orders. With ERISA covered plans, the instrument provided by the Retirement Equity Act of 1984 is the Qualified Domestic Relations Order (QDRO; 29 USC 1056). Non-ERISA plans often refer to allocation orders as “Domestic Relations Orders”, or “DROs”.
Often, upon request, form QDROs and DROs will be available from a plan administrator. These should not be relied upon to cover everything that needs to be covered. One should obtain the summary description of each plan (Summary Plan Document, or SPD) and also should pay attention to the provisions of Family Code §2610.
There are two general types of plans, and two situations to be considered for each type. The types are “defined benefit” and “defined contribution” (the latter often call 401k plans after the Internal Revenue Code provision which defines their tax treatment, but may also be plans covered by other IRC sections). The situation which complicates the drafting of orders dividing plans is whether or not there was any premarital credited service or contribution to a plan.
Defined benefit plans specify a formula for determining what the employee will receive upon retirement, but do not specify the amount nor do they maintain segregated accounts for each employee.
Defined contribution plans maintain separate accounts for each employee, and at any moment in time the amount of the employee’s benefit is whatever is on deposit in the account. The contribution may be from the employee’s income, or the employer’s profits or some combination of the two. Neither party ever owes anything other than that year’s contribution to the plan (unless the plan permits loans to the participant) and the employer and participant can control the extent of their respective contributions for any period.
In one instance, the non-participant spouse lost very valuable health insurance benefits that accompanied participation in a retirement plan which she would have had if she had retained a $1 interest in the plan.
Defined contribution plans where there is no premarital contribution are relatively easy to divide. The amount on deposit in the employee’s account at the date of separation can simply be divided equally between the parties. However, note that the employer’s contributions for services can be made up to 8-1/2 months after the credited services are concluded, so orders should be drafted with provision to include all contributions based on services which occurred prior to the specified date of separation. Also, such plans generally have provision to roll out the non-participant’s contribution into another retirement vehicle such as an IRA, or in some cases the defined contribution plan of the non-participant spouse who is employed elsewhere. Drafting a QDRO or DRO for such plans should not be much of a challenge to the attorney, since there are no long term or survivor benefits to be considered.
However, if there are premarital contributions, those contributions and investment gains and losses on them are the separate property of the employee spouse. In such cases computation of the separate and community portions of the benefit may best be left to an accountant to trace through the life of the plan. The attorney should, however, take the trouble to fully understand and document the accountant’s methodology in arriving at the characterization, so that it may be explained to the client and available in the event of later dispute.
Defined contribution plans are, at once, simpler and more complex. They may be divided according to the “time rule” (see Marriage of Poppe (1979) 97 Cal.App.3d 1, 8). In general this may be accomplished by specifying in the order the date of marriage, date of separation, the date of beginning of credited service, and the fraction which defines the community portion of the benefit, in days or months. However, model plans of this type sometimes omit to provide for the required selection of joint and survivor annuity benefits and survivors death benefits, and also for apportionment of enhancements to the benefit (see Marriage of Lehman (1998) 18 Cal.4th 169). The attorney should be cautioned against ever totally waiving division of a plan which provides for future benefits in exchange for some other property without fully understanding what those benefits are. In one instance, the non-participant spouse lost very valuable health insurance benefits that accompanied participation in a retirement plan which she would have had if she had retained a $1 interest in the plan (see Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1093).
In short, the attorney representing a spouse with an interest in the other spouse’s employee benefits must be mindful of his or her responsibility to fully understand the ramifications of those benefit plans which are part of a marital estate. He or she also must be mindful of the notion that once the status of the marriage is terminated the nonparticipant party may no longer be a “spouse” under the terms of a plan, and hence may not be eligible for election of very valuable surviving spouse annuity and death benefits.
One simply cannot rely on a statute of limitations to immunize oneself against mistakes which may cause actual damage far into the future, nor can one rely on Family Code 2337 to indemnify the party who suffers that damage. An attorney cannot simply turn employee benefits over to a QDRO drafter, particularly a non-attorney, and sleep well on the belief of having made a safe harbor. The attorney who represents a non-participant in a case where employee benefit plans are part of the marital estate must expend the time and effort to know what are the provisions of the plan, and to get orders allocating rights under such plans done promptly and correctly, before other events can crop up to interfere with the non-participant’s rights.
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