Most plan administrators are familiar with a qualified domestic relations order or “QDRO,” which is used to split retirement plan benefits between a plan participant and an alternate payee, such as an ex-spouse or minor child. Even an experienced plan administrator may not be aware that a QDRO can also apply to a welfare benefit plan.
Example: A divorce decree specifies that husband will name ex-wife as a beneficiary of his employer-sponsored life insurance during the time period that she is entitled to marital support payments. Husband remarries and designates his new spouse as a beneficiary of his group-term life insurance. Husband then dies when ex-wife is still entitled to marital support payments. Both ex-wife and current wife claim the life insurance proceeds. Who wins?
The plan administrator’s typical reaction is to direct the life insurance carrier to pay the life insurance proceeds to the named beneficiary, the current spouse in this example, as the beneficiary designation generally is controlling under ERISA preemption principles. However, Sixth Circuit precedent provides that a divorce decree is not preempted by ERISA if it qualifies as a QDRO, and regardless of whether the benefit addressed in the divorce decree is a pension plan or a welfare benefit plan. See, Metropolitan Life Ins. Co. v. Marsh, 119 F.3d 415 (6th Cir 1997).
In order to qualify as a QDRO, the order must “clearly specify” four items. Courts in the Sixth Circuit have been fairly lenient in interpreting divorce decrees that assign life insurance benefits to an alternate payee, as discussed below:
- The name and mailing address of each of the participant and the alternate payee. This information can generally be determined from the face of the divorce decree or from the employer’s records.
- The amount or percentage of the benefit to be paid to each alternate payee. The divorce decree will typically spell out the amount to be paid to the alternate payee, such as “all employer-provided life insurance” or “two-thirds of the life insurance proceeds to the minor children”. In the case of multiple alternate payees, such as two minor children, the court will typically interpret the decree as providing for equal distribution among the children. Id.
- The number of payments or period to which the order applies. Unlike a pension plan, which may offer multiple ways in which the retirement benefit can be paid, a life insurance benefit is paid in one lump sum, and the courts have not required any greater degree of specificity. The order should specify the time period during which the required benefit designation is in effect, such as, while the minor child is age 18 or younger, or during the period in which marital support payments are received.
- Each plan to which the order applies. A QDRO for a pension plan customarily specifically identifies the name of the plan, such as the “ABC Company Retirement Savings Plan.” However, the courts in the Sixth Circuit have required far less specificity for life insurance benefits:
- “[Participant’s] insurance through Metropolitan Life Insurance Company, maintained at his place of employment”. Id.
- “All employer provided life insurance.” Sun Life Assurance Co. of Canada v. Jackson, 877 F.3d 698 (6th 2017).
- “All life insurance policies.” Teenor v. LeBlanc, Case No. 18-cv-12364 (E.D. Mich. May 10, 2018).
Lessons and Issues for the Plan Administrator
Life insurance proceeds are, of course, typically paid by the life insurance carrier and not the employer. However, the employer or plan administrator may be asked to certify the name of the beneficiary to the carrier. If the employer has in its records a copy of a divorce decree that conflicts with the beneficiary designation, at the minimum the employer should advise the insurer. The insurer can evaluate the potentially competing claims and, if necessary, file an interpleader action in court to have a court determine the proper beneficiary.
Some of the other issues potentially facing the plan administrator include:
- If the plan administrator has received a copy of the divorce decree that contains a required beneficiary for life insurance, does the plan administrator have an affirmative duty to monitor the beneficiary designation and advise the alternate payee if a change has been made? Or prevent the participant from making a change? In these days of paperless administration and electronic beneficiary designations, the plan administrator may not even be aware of a change until the date of death.
- When the plan administrator receives a QDRO for a pension plan, does it have an affirmative duty to ask whether the divorce decree has any provisions regarding life insurance beneficiary designations?
- If the plan administrator receives a divorce decree with a provision regarding a life insurance beneficiary designation, does it have an affirmative obligation to determine whether the domestic relations order is “qualified” and, if not, advise the parties so it can be corrected?
- Does the plan administrator need to revise its QDRO procedures to apply to welfare benefit plans as well as pension plans?
We are not aware of any decisions in the Sixth Circuit imposing these types of duties on plan administrators. Further, most divorce decrees are directed at the parties rather than a plan, and require one or more of the parties to either maintain, or affirmatively designate, an ex-spouse or child as the beneficiary. However, as a divorce decree with the required level of specificity can constitute a QDRO, the plan administrator should take this possibility into consideration and certainly advise the life insurance carrier of the existence of a divorce decree that conflicts with a beneficiary designation.