When Clients Divorce: Avoiding the Retirement Income Trap

Even when everything goes according to plan, clients can find retirement income planning to be filled with complications and uncertainties—which are only magnified when the issue of divorce is thrown into the mix. Under these circumstances, the presence of a qualified domestic relations order (QDRO) is often necessary in order to divide up qualified retirement plan assets. 

Unfortunately, absent careful planning, this area is one in which additional unanticipated complications can easily arise. A recent case has highlighted the need for a carefully drafted QDRO in order to avoid the potentially significant loss of retirement income that can result from one particular complication—the unforeseen death of the non-participant spouse prior to the participant spouse’s retirement.

Cingrani: The Facts of the Case

In the Cingrani case, a QDRO was issued when two spouses divorced. It granted a 50% interest in a plan participant’s vested pension interests to his former spouse. At the time, the participant had yet to retire, so that the defined benefit plan had not begun making his pension payments. Before the participant retired, however, his former spouse died having never received any benefits under the QDRO.

Unfortunately, the QDRO did not contain a provision addressing the consequences of a situation where the non-plan participant predeceases the plan participant before benefit payments commence. Because of this, when the plan participant eventually retired, the plan was only willing to pay 50% of his pension, arguing that the remaining funds reverted to the plan upon the non-plan participant’s death. The plan further argued that reversion to the plan is the default rule that applies when a QDRO is silent with respect to the issue.

The plan participant appealed the decision and eventually obtained an amended QDRO providing that if the non-participant spouse predeceased him, her portion of the benefit would revert to the participant spouse. The plan refused to honor the amended QDRO, and the plan participant challenged that decision in court.

Fortunately for him, the court agreed and found that the plan participant was entitled to his full pension benefit. In so holding, the court found that the amended QDRO was valid, but also found that the non-participant spouse’s benefit reverted to the plan participant upon her death.

Generally, a QDRO may not require that the plan provide any form of benefit not otherwise provided under the plan and may not require that the plan provide increased benefits. In this case, the court found that the amended QDRO was sufficient to override the terms of the plan because it did not increase the cost of the pension in general (among other requirements).