Participant May Not Change QJSA Beneficiary after Retirement
October 17, 2008
The Ninth Circuit Court of Appeals recently held that once a pension plan starts paying benefits under a qualified joint and survivor annuity (“QJSA”), the QJSA surviving spouse benefits irrevocably vest in the participant’s spouse as determined at that time. (A QJSA provides an annuity to a participant with some percentage of the amount payable to the participant continuing to his or her surviving spouse after the participant’s death.) In Carmona v. Carmona, the participant retired in 1992 when he was married to Spouse A and immediately started collecting benefits from two pension plans in the form of a QJSA with Spouse A as survivor beneficiary under both plans. The couple divorced in 1997, and the participant married Spouse B in 1997. He then obtained a qualified domestic relations order (“QDRO”) revoking designation of Spouse A as survivor beneficiary and substituting Spouse B under both QJSAs. The participant died in 1999 survived by both Spouse A and Spouse B. The Nevada family court directed the pension plan administrators to make Spouse B the survivor beneficiary under the QJSAs or alternatively directed that funds paid to Spouse A be placed in a constructive trust for Spouse B.
After extensive litigation, in which various courts upheld the QDRO assigning the survivor benefits to Spouse B, the Ninth Circuit reversed and held that because Spouse A was married to the participant at the time of his retirement, her interest in the QJSA vested at the time of his retirement, and a QDRO could not reassign those benefits. The court extensively cited to a 1997 case from the Fourth Circuit Court of Appeals that reached similar conclusions on similar facts. That court emphasized that a QDRO may create an alternative payee’s right to benefits “payable with respect to a participant under a plan,” but under the circumstances, an attempt to reassign surviving spouse benefits would relate to a beneficiary’s benefits, not a participant’s.
This case raises issues similar to questions often asked by defined benefit plan sponsors. Participants who select a QJSA form of payment at retirement and subsequently are widowed or divorced often request a change in the form of benefit payment. A widowed participant may ask to revert to a life only form of payment, and a divorced participant may ask to substitute a new spouse as beneficiary under the QJSA. Since the optional forms of payment under a defined benefit plan are determined based on specific actuarial factors and the ages of the participant and spouse, subsequent changes in the form of payment would change the value of the benefit.
Well drafted plan documents should specifically provide that an optional form of payment may not be changed after benefit payments start. This information also should be included in the summary plan description and benefit notices and election forms provided to retiring participants. This type of provision protects the plan if a participant requests a change after retirement. Since a QDRO may not require a plan to pay benefits that it does not otherwise provide, this type of provision also should prevent assignment of survivor benefits under a QJSA to a new beneficiary.