Pension Survivor Benefits are Marital Property Separate and Distinct from Pension
February 7, 2002

In a divorce action, the court has the power to divide pension benefits and direct payment to someone other than the plan beneficiary. The benefits to the employee spouse are divided with a share paid to the non-employee/former spouse. In a case handled by Warfield Meredith & Darrah, the Court of Special Appeals reviewed claims related to survivor benefits.

When Mr. and Mrs. Potts were granted a judgment of absolute divorce on June 28, 2000, the judgment of divorce provided that the husband's pension "is divided on an if, as when basis." There was also a division of employer sponsored savings plan. In the future when Mr. Potts retired, it was intended that Mrs. Potts, his former spouse, would receive a share of the monthly pension benefit paid to him from his employer.

Fundamentally, the method by which the non-employee spouse receives a share of the pension is accomplished by court order known as a qualified domestic relations order (“QDRO”) or a Domestic Relations Order (“DRO”). The trial court rarely is involved in the actual technical terms made part of the order as this is usually drafted by counsel for the parties. The trial judge determines the substantive provisions such as the percentage of benefits to be shared and any additional provisions which relate directly to the type of benefits available under the plan. The order is then submitted to the judge for signature and thereafter to the pension plan administrator who reviews and approves the terms. The trial court generally retains jurisdiction over the matters of the pension until the QDRO or DRO is approved by the plan administrator. The plan administrator reviews the documents for technical compliance with the plan and applicable IRS provisions. As a matter of practice, the order dividing the pension is usually not part of the judgment of absolute divorce but a separate order.

In the Potts divorce, a major dispute arose during the preparation of the QDRO to implement the “if, as and when” division of Mr. Potts’ employee pension. Months after the divorce was granted, the former wife’s attorney prepared an order that included a requirement that Mr. Potts elect a form of benefits which are known as survivor benefits. This election would allow the former Mrs. Potts to receive a share of Mr. Potts’ pension benefits after his death. The requirement of naming of the former spouse would preclude an election by the employee to name a subsequent spouse to receive this benefit. The election would also have the practical financial effect of reducing the monthly pension benefits paid to the employee. Mr. Potts balked at the language and the parties returned to court.

In its opinion, the trial court pointed out that courts have discretion to decide whether to award survivor benefits when dividing a pension at the time of the divorce, to determine the formula used, and to determine which spouse shall bear the cost of the survivor benefit. However, since Mrs. Potts, at the time of divorce, never requested the survivor benefit before or at the time the judgment of absolute divorce became final, the trial court agreed with Mr. Potts and held that the former spouse was not entitled to survivor benefits. The court also held that if Mr. Potts remarried and elected survivor benefits for his new wife, the monthly benefits would be reduced and Mrs. Potts would only be entitled to one-half of reduced amount. Mrs. Potts appealed to the Court of Special Appeals of Maryland.

There were several issues raised on appeal. First, did the former wife note an appeal in a timely manner regarding the award of pension benefits which award was made in the judgment of divorce? Second, can parties appeal from the judgment of divorce and later appeal from the terms of a QDRO or is the divorce not final until the QDRO is signed? Third, is the survivor benefit a separate property right which must be identified and valued by the litigants at the time of the divorce? And finally, can the husband subsequently make an election for survivor benefits for a new spouse, thereby reducing the pension benefits awarded to his former wife?

With regard to the technical issues of the timing of appeals, the Court of Special Appeals held that the judgment of divorce is final and can be appealed even if the QDRO has not yet been submitted. Thereafter, the QDRO is an order which may be appealed.

The Court of Special Appeals held that a survivor benefit is marital property separate and distinct from the pension itself. The division of the interest “as, if and when” to a former spouse is not broad enough to include the granting of a survivor benefit. As is true with regard to any other disputed item of marital property at a divorce trial, the burden was on the wife to identify and value the survivor benefits separately from the pension benefits. Because the wife did not bring the survivor benefits to the attention of the court, and did not request the benefit be granted to her, the trial court did not have the opportunity to consider the various factors necessary to determine whether to award the survivor benefit and to determine which spouse was to bear the financial burden of the benefit. The Court of Special Appeals stated:

“Here, the court was unable to exercise its discretion as to survivor benefits, because it was presented with no information or alternatives when it decided the marital property issues. Because the existence of survivor benefits was not raised and the benefits were not divided prior to the entry of the judgment for absolute divorce, that judgment is final as to division of marital property and the survivor’s benefit.”

Accordingly, the wife was not entitled to survivor benefits.

On the final issue, the court held that the husband is free to elect survivor benefits for a new wife, but his former wife’s pension benefits shall not be less than she would have received if the election had not been made. The share to the former wife shall be calculated before the reduction in benefits associated with any subsequent survivor benefit.

Potts v. Potts, Court of Special Appeals of Maryland, No. 02833, September Term 2000 (Decided: February 1, 2002); Certiorari denied by Court of Appeals of Maryland, May 9, 2002.

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