Substantial Compliance Not Sufficient to Save QDRO, But Order Correcting Deficiencies After Death Creates a Valid QDRO

In the case of Yale New Haven Hospital v. Nicholls v. Nicholls, No. 13-4725-cv, CA2, reversing in part, revising in part US DC Connecticut, No. 3:12-cv-01319-WWE, the Second Circuit Court of Appeals had to determine if benefits in four plans had been partially assigned to the decedent’s former spouse via Qualified Domestic Relations Order. 

The decedent in this case was a participant in four plans at issue in this case.  He had been married to Claire Nicholls.  When Harold Nicholls and Claire divorced, the divorce decree attempted to assign a portion of the retirement funds to Claire.  However no actual transfer of funds took place at this time.  The following year Harold married Barbara Nicholls and remained married to her until his death three years later.

When Harold died, Claire claimed a right to a share of the balance in the retirement accounts despite the fact that Barbara was the named beneficiary.  Both women submitted claims to the retirement plan leading to the case in question.

Claire’s divorce agreement did not literally follow the requirements found in the Retirement Equity Act of 1984 (REA) which was effective beginning in 1985.  That law amended ERISA at 29 USC §1056(d)(3)(B)(i)(I) to require that, to be treated as a QDRO, the order must clearly specify:

  • The name and mailing address of the participant and of the alternate payee covered by the order (in this case Claire)
  • The percentage or amount to be paid to that payee or information on how that interest is to be determined
  • The number of payments or periods to which the order applies
  • Each plan to which the order applies

The document that covered Harold and Claire’s divorced failed to meet these requirements specifically.  It did not contain the addresses for either party and it did not clearly name the specific plans to which it applied.

After Harold’s death Claire went back to court and had orders issued by the Court that corrected these problems for three plans, though for reasons not mentioned in the opinion did not mention the fourth plan.

Claire claimed that the original order substantially complied with the requirements to be a QDRO and, for that reason, she should receive the specified portion of the proceeds in each of the four plans.  She noted the Second Circuit had recognized the doctrine of substantial compliance with regard to QDROs in the case of Metropolitan Life Insurance Co. v. Bigelow, 283 F.3d 436 (2d Cir. 2002) and argued that the intent of this agreement was clear—no one disputed that the plans that covered Harold at that time were the same ones in dispute now and no party was disadvantaged by not being able to read the mailing addresses in the actual document.

The panel agreed that it had found the order in Bigelow was a QDRO despite its flaws, but pointed out that agreement was entered into before the effective date of REA.  The Court held that REA specifically imposed a strict compliance rule and, therefore, substantial compliance is no longer enough to “save” a flawed QDRO.  The original agreement was not a QDRO and did not serve to transfer rights to Claire due to ERISA pre-emption of state laws to the contrary.

However the Court disagreed with Barbara’s claim that once Harold died that the “flawed” QDRO could not be corrected by a court modification occurring after that date.  The Court found that the order Claire received with regard to three of the plans gave her a QDRO, and that she had a right to the distributions specified for those three plans.  The Pension Protection Act of 2006 Congress had provided that a document will not fail to be a QDRO simply because of the date on which it is issued.

The Department of Labor’s regulations issued to implement that provision contained an example that specifically allowed a revision to the order, first found to be deficient after the death of the employee, which was issued after the employee’s death to be valid so long as the modification took place shortly after the employee’s death.  That was the case in this situation.

There was not unanimity of the panel in this position.  The dissent argued that the right had vested in Barbara immediately upon Harold’s death as the surviving spouse and, thus, it was too late to modify the decree to fix the flawed QDRO.  The dissent complains that such a ruling allows for “time travel” where the court issuing the order can turn back the clock at will.

The majority held, in contrast, that Claire already had a right that was simply confirmed by the order received after Harold’s death and, as well, the plan administrator must take actions following the death of a participant where a QDRO is involved to determine the proper beneficiary for which an 18 month period is specified.  In the view of the majority, Barbara had no vested interest until the QDRO matter was resolved and the 18-month period had run.

Since the fourth plan was not named, she still did not have effective QDRO with regard to that plan and therefore the entire balance of that plan would be distributed to Barbara.