In a recently issued opinion, the United States Court of Appeals for the Second Circuit (encompassing New York, Connecticut, and Vermont) held that two posthumously entered domestic relations orders were valid qualified domestic relations orders (“QDROs”) under ERISA that properly assigned plan funds to the ex-wife of a deceased participant, despite the claims of the participant’s surviving spouse to survivor benefits under the plans. A valid QDRO is one of the few exceptions to the ERISA prohibition on the assignment or alienation of plan benefits.
Yale-New Haven Hospital, as the plan administrator, initiated court action to resolve the competing claims of Barbara Nicholls, the surviving spouse of the late Harold Nicholls, and Claire Nicholls, the ex-wife of Mr. Nicholls, to Mr. Nicholls’ benefits under several pension plans sponsored by Yale-New Haven Hospital. Mr. Nicholls and Claire divorced on September 5, 2008 pursuant to a divorce settlement agreement entered in the Connecticut Superior Court (the “Settlement Agreement”) providing Claire with half of Mr. Nicholls’ pension and retirement accounts that had accumulated during the marriage. The Settlement Agreement further provided that the court maintained jurisdiction for purposes of establishing or maintaining a QDRO acceptable to plan administrators to carry out the division of these assets. No QDRO was entered into and no pension and retirement funds were transferred to Claire during Mr. Nicholls’ lifetime.
In 2009, Mr. Nicholls married Barbara Nicholls. Mr. Nicholls died on February 11, 2012, and at the time of his death, Barbara, his surviving spouse, was the named beneficiary to each of the pension plans. On June 18 and August 1, 2012, the Connecticut Superior Court entered two QDROs directing the plan administrator to distribute to Claire her assigned portion of the pension and retirement benefits consistent with the terms of the Settlement Agreement.
Yale-New Haven Hospital filed an interpleader action in federal court to resolve these competing claims. The District Court ruled in favor of Claire holding that the Settlement Agreement was a QDRO because it substantially complied with the requirements enumerated under ERISA for a valid QDRO. On appeal, the Second Circuit rejected the District Court’s reasoning, noting that the substantial compliance standard does not apply to domestic relations orders issued after January 1, 1985. Nonetheless, the Second Circuit confirmed the result, relying on the Pension Protection Act of 2006 and the U.S. Department of Labor’s subsequent regulations clearly stating that a domestic relations order meeting ERISA’s enumerated requirements should not be invalid solely because of the time at which it is issued, including orders issued after the death of the participant.
While this case might suggest that plan administrators are entering a world of uncertainty where a posthumously entered QDRO can lay claim to death benefits already paid to another named beneficiary, existing case law suggests that such fear may be unwarranted. First, if plan administrators make a distribution in accordance with plan terms prior to receiving notice of a conflicting claim, they should be well positioned to defend any claim of liability for a subsequent claim. Second, if plan administrators are made aware of the conflicting claims prior to distribution of benefits, they can follow the example set by Yale-New Haven Hospital and ask a court to make the determination. As a matter of best practice, plan administrators should pay benefits in accordance with plan terms, and should not get involved in resolving competing claims.