Amicus Curiae Brief — Boggs v. Boggs

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DEC 6 1996

No. 96-79

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In THE 3

Supreme Comt of the United States

OCTOBER TERM, 1996

SANDRA JEAN DALE Boacs,

. Petitioner,

THOMAS F. Boccs, HARRY M. Boas,

AND DAVID B. Boacs,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

BRIEF OF THE EMPLOYERS COUNCIL ON

FLEXIBLE COMPENSATION

AS AMICUS CURIAE SUPPORTING PETITIONER

DANIEL B. STONE

(Counsel of Record)

KEVIN P. O’BRIEN

LAURIE E. KEENAN

ROSINA B. BARKER

IVINS, PHILLIPS & BARKER

1700 Pennsylvania Ave., N.W.

Suite 600

Washington. D.C. 20006

(202) 393-7600

December 6, 1996 Counsel for Amicus Curiae

OOO SSS sss

WILSON - Eres Printinec Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

INTEREST OF THE AMICUS CURIAE |...

SUMMARY OF ARGUMENT ...00.20...222.o..cccccceceeceeeeeees

ARGUMENT .......... shentaeialiiieaetditenianeeiin drendintapacitnnentiianine

II.

III.

BOGGS IS NOT DISTINGUISHABLE FROM

ITT censenicatnsiaeenhistuliiigstiadtipnamasichiimalbihedmsnaniase

A. State Courts Are Not Likely to Limit Boggs

EB Ta AE Pe Oe a

B. The Theory Underlying the Boggs Holding

Does Not Support a Distinction __. al

CONGRESS HAS ALREADY DECIDED THIS

a scesstllcehaseladieitciinidetniniintitetainantances

A. Congress Amended ERISA to Provide a

Comprehensive Scheme of Spousal Rights

in Participants’ Pensions .................... awe

B. ERISA Mandates Survivor Benefits for a

Spouse After a Participant’s Death

C. For Spouses Who Claim Rights Other Than

Survivor Benefits, ERISA Creates a Uniform

Means of Enforcing Those Rights .........._...

BOGGS WOULD PRODUCE SIGNIFICANT

CONFLICTS BETWEEN STATE LAWS AND

SUIIDII Stidinkiictndiabidinaniseanitae tejinsihecibuncthtbicindicotsedcanosbanisen

A. Boggs Would Allow a Wide Variety of State

Law Intrusions on Pension Plans...

B. These State Law Intrusions Would Conflict

IEEE TSAR CEES AMEN 6 ae eT ER

IV. STATE LAW CLAIMS WOULD COMPLICATE

AND BURDEN PLAN ADMINISTRATION...

A. Payments of Pensions Would Be Delayed...

TABLE OF CONTENTS—Continued

. Elaborate Systems Would Be Necessary to

Track Possible Claimants

. Conflicting State Laws Would Force Plan

Administrators to Decide Competing Claims..

. Liquidity Levels Would Be More Difficult to

. Plans Would Require Amendments to Han-

dle New State Law Claims |...

. Exposing Plans to State Law Claims Would

Increase Litigation Costs..............................

iain ee

Page

iii

TABLE OF AUTHORITIES

CASES Page

Ablamis v. Roper, 987 F.2d 1450 (9th Cir. 1991)... 3, 5,6

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

a at nl ER a Ml ana a ame 16

Baker v. Baker, 251 Cal. Rptr. 126 (ist Dist.

| Sena ieee RS ea MS Si aa 4,15

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1

8 Be le a a a a 6

ED De aaa aas 5

Hurwitz v. Sher, 982 F.2d 778 (2d Cir. 1992), cert.

denied, 508 U.S. 912 (1998) vad ~

Ingersoll-Rand v. McClendon, 498 U.S. 133 (1990) .. 6

Karem v. Commissioner, 100 T.C. 521 (1998) ........... 19

EEE eee 6, 24

Powell v. Commissioner, 101 T.C. 489 (1998) .......... 18

Schoonmaker v. Employee Sav. Plan of Amoco

Corp., 987 F.2d 410 (7th Cir. 1998)... 25

Shaw v. Delta Airlines, Inc., 463 U.S. 85 (1983)... 6, 12,

Stone v. Stone, 632 F.2d 740 (9th Cir. 1980), cert.

denied, 453 U.S. 922 (1981). s—s 4

United States v. Mitchell, 408 U.S. 190 (1971)... 18

STATUTES

Employee Retirement Income Security Act of 1974,

P.L. 98-406, 29 U.S.C. § 1001 et seq. passim

Stat. 1436 et seq. (codified as amended in scat-

tered sections of 26 U.S.C. and29U.S.C.) passim

ERISA § 3(7), 29 U.S.C. § 1002(7) LP les eee 11, 15

TABLE OF AUTHORITIES—Continued

Page

ERISA § 3(8), 29 U.S.C. § 1002(8) 11, 15

ERISA § 3(34), 29U.S.C.§1002(34). st ti(i‘iéa

ERISA § 3(35), 29 U.S.C. § 1002(35)... 22

ae ee ESS CUES CNN. fie a. SA 7

ERISA § 205, 29 U.S.C. § 1055 ... seitieaaiatdesiiioes 7

ERISA § 205(d), 29 U.S.C. § 1055(d) _. 8

ERISA § 205(e) (1), 29 U.S.C. § 1055 (e) aed 8

ERISA § 205(e) (1) (B), 29 U.S.C. § 1055(e) (1)

Rete iene tar eee 14

ERISA § 206(d), 29 U.S.C. § 1056(d) 9,12

ERISA §206(d)(3)(A), 29 U.S.C. § 1056

(d) (3) (A) —..... — 9

ERISA § 206(d) (3) (B) (ii) (II), 29 U.S.C.

Poo fg Dae 9

ERISA § 206(d) (3) (E), 29 U.S.C. § 1056(d) (3)

eeettapeinies ba ieee Sates «Malo 14

ERISA § 206(d) (3) (J), 29 U.S.C. § 1056(d) (3)

RR eb ee arn tit 11, 15

ERISA § 403(c), 29 U.S.C. § 1108... 11

ERISA § 404(a), 29 U.S.C.§ 1104(a).. 11

ERISA § 404(a) (1) (A), 29 U.S.C. § 1104(a) (1)

(A). . 11,15

ERISA § 404(a) (1) (B), 29 USC. §1104(a) (1)

RRR Reaches etd: Lt ba 20

ERISA § 404 (a) (1) (D), 29 U.S.C. § 1104(a) (1)

an meinnndinetieninatimeasinmtiiiedetient aeee a 20, 25

ERISA § 502(g), 29 U.S.C. § 1182(g) 25

ERISA § 514(b) (7), 29 U.S.C. § 1144(b) (7)... 9, 12

ki ila a i Me: lie Ae Re 18

| Ret SERA AT Nang, 18

8 | a Et i RR AES its Me re. 16

oR ea aa 17

LR.C. § 401(a) (11) (1983) 00 7

ILR.C. § 401 (a) (11). inaetieanadaaiall 7

iliac ating al ne 9

rat |) |) re 9

i TNS NERS C88 17

8 RE aie Se Tle 18

TABLE OF AUTHORITIES—Continued

Page

Oy Es 9

LR.C. § 414(p) (1) (B) (ii). 9

I 14

LE LAT RA 12,17

EE a a RIOT g 7

ENS SCART PID, LP x

EEL a a 8

ATEN OTE NEG, 14

ES EN SE Tae 17

LR.C. § 4980A(c) (2) (B)..... 18

LR.C. § 4980A(f) (4) (A) 18

REGULATIONS

PBGC Reg. §§ 4050.letseg.. 21

Treas. Reg. § 1.401-1(b) (4)... 17

Treas. Reg. § 1.401(A)-20,Q&A-28.. is x

ADMINISTRATIVE AUTHORITIES

Adv. Op. Dep’t Labor 94-32A (1994). 22

Rev. Rul. 69-493, 1969-2C.B.88. = Cts 18

Rev. Rul. 73-238, 1973-1 C.B. 193 . etek 18

LEGISLATIVE MATERIALS

S. Rep. No. 98-575, 98th Cong., 2d Sess. (Aug. 5,

A eee ee a ee 8, 9, 15

OTHER AUTHORITY

Ian F.G. Baxter, Marital Property §§ 18:1 et seq.,

UY Oe 13

In THE

Supreme Court of the United States

OcToBer TERM, 1996

No. 96-79

SANDRA JEAN DALE BoaGs,

. Petitioner,

THomas F. Boccs, HARRY M. BoaGs,

AND Davin B. Bosccs,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

BRIEF OF THE EMPLOYERS COUNCIL ON

FLEXIBLE COMPENSATION

AS AMICUS CURIAE SUPPORTING PETITIONER

The Employers Council on Flexible Compensation

(“ECFC”) submits this brief amicus curiae supporting

The parties have consented to the filing of this brief.

reflecting the parties’ consent has been

lodged with the Clerk.

INTEREST OF THE AMICUS CURIAE

ECFC is a non-profit membership association committed

to the study and promotion of 401(k) plans,’ cafeteria

1 Plans authorized by section 401(k) of the Internal Revenue

Code. Such plans are tax-qualified and are pension plans of the

defined contribution type under ERISA.

plans and other employee benefit plans. The more than

2,800 members of ECFC are plan sponsors, corporations,

governments, unions, universities, hospitals and clinics and

actuarial, insurance and accounting firms that design,

sponsor and administer plans.

Should the Court uphold the decision of the court below

in this case, pension plans will be subject to a burdensome

and conflicting patchwork of state and federal law.

ECFC’s members have a profound and immediate interest

in the outcome of this case and its effect on their ability

to sponsor and administer pension plans.

SUMMARY OF ARGUMENT

The Court should reverse the court of appeal’s decision

below.

This case is different from the other preemption cases

decided by the Court under ERISA.* This case involves

the narrow question of marital property preemption which

Congress has already addressed in a “comprehensive and

reticulated statute,” * namely ERISA’s provisions creating

and protecting the property interests of spouses in the

event of divorce or death of a pension plan participant.‘

This case does not involve metaphysical speculations

about what it means for 4 state law to “relate to” a pen-

sion plan. Nor have we here an effect which is tenuous,

remote or peripheral. As we will demonstrate below, the

Boggs decision interferes with core ERISA rights." Boggs

further subjects plan administration to the very burdens

and conflicts ERISA was enacted to eliminate.* To demon-

? Employee Retirement Income Security Act of 1974, P.L. 93-406,

29 U.S.C. § 1001 et seq.

* See Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S.

359, 361; reh’g denied, 448 U.S. 908 (1980).

* See Part II below.

5 See Part III below.

* See Part IV below.

strate this, we will describe the practical effects of this

case on plan administrators.’

ERISA’s provisions for the protection of spousal inter-

ests in a pension plan represent a carefully designed bal-

ance between family property interests and the uniform

federal scheme created by ERISA. The Court should hold

that marital property rights to ERISA pensions under

State law are preempted, unless the rights are enforced

within the special framework created for those rights by

ERISA. As the state rights at issue in this case are not

asserted within that ERISA framework, we respectfully

urge that the Court reverse the decision of the court of

appeals.

ARGUMENT

I. BOGGS IS NOT DISTINGUISHABLE FROM

ABLAMIS.

Presumably one of the motivations for reviewing this

case is the conflict between the Fifth Circuit's reasoning

below and the Ninth Circuit's reasoning in Ablamis y.

Roper.” The Boggs decision held that state marital prop-

erty laws as applied to ERISA-covered pensions was not

preempted, while Ab/amis held that it was.

The two cases are at first glance distinguishable in that

Boggs deals with benefits which have already been paid out

of a pension plan, while Ablamis deals with benefits not

yet paid. We nonetheless urge the Court not to distinguish

the cases on that basis. We respectfully urge the Court to

apply the reasoning of Ablamis to the facts in Boggs, and

hold that ERISA preempts state marital property claims

whether addressed to the plan or to the plan beneficiary

after payout.

A. State Courts Are Not Likely to Limit Boggs to

Its Facts.

While the Fifth Circuit based its decision in part on the

idea that the plan in the Boggs case would be unaffected,

7 See Part IV below.

* 937 F.2d 1450 (9th Cir. 1991).

we believe other courts would soon conclude that this as-

pect of the decision was not a crucial one. They would

find that, to make their orders effective, they would have

to direct them to the plans themselves, reaching the money

before it is paid out.

The reason for this is obvious from Stone v. Stone.’ In

that case, the plan participant was divorced and his wife

obtained a court order directing that a portion of his pen-

sion be paid to her. The participant retired and left the

country, leaving no assets in the United States and refus-

ing to turn over to his former spouse the benefits she was

entitled to by court order. If the court had not applied

its order to the plan itself, the wife would have been unable

to enforce her marital property rights.

Partly in response to Stone v. Stone, Congress amended

ERISA to give state courts the opportunity to divide

ERISA pensions, but within a unifying framework set

forth in ERISA.”” We believe that if state courts are given

the authority to divide ERISA pensions outside of this

framework, they are bound to conclude that they have the

power to make their orders effective. As Stone v. Stone

shows, this will inevitably lead to levying on plans directly.

In fact, it was precisely this reasoning that led the court

in Baker v. Baker™ to require a plan to pay a pension

twice—with interest.

The Baker opinion contains other hints as to why state

courts would have to extend Boggs to orders against the

plans themselves: participants might be judgment proof

for any number of reasons; the participant might take a

complete distribution and abscond with the money; or a

participant might make investment elections or distribu-

tion form elections that would effectively diminish the

* 632 F.2d 740 (9th Cir. 1980), cert. denied, 453 U.S. 922 (1981).

” Legislative history of the Retirement Equity Act (REA) is

quoted fully on this point at page 9.

4 251 Cal. Rptr. 126 (1st Dist. 1988).

value of benefits reachable by his or her spouse. The

courts will not feel they are helpless to prevent such ob-

vious machinations.

Thus, to uphold Boggs, even with a narrow holding

applicable only to payments outside of the plan, would in

the long run fail to relieve plans of the costs and burdens

of coping with a marital property scheme unchecked by

ERISA restraints. And it would not solve the other, more

important part of the problem, which is assuring our em-

ployees that the pensions needed to live on during retire-

ment will be there as promised for both themselves and

their spouses.

B. The Theory Underlying the Boggs Holding Does

Not Support a Distinction.

Because of the distinction in the facts of the two cases

(benefits paid versus benefits payable), the differing out-

comes between Boggs and Ablamis may appear to have a

superficial resemblance to the outcomes of certain cases

involving ERISA preemption of state garnishment laws.

These cases have held that, while ERISA preempts state

garnishment actions applied to assets within a pension

plan, preemption no longer protects the assets once they

have been distributed to the participant.”

This resemblance is superficial only, and should not

serve as the basis for distinguishing Boggs from Ablamis.

In the garnishment cases, creditors’ claims applied gen-

erally to all of a debtor’s assets. That some of those assets

had happened at one time to be in an ERISA plan did not

save them from creditors’ more general claims. In Boggs,

by contrast, respondents have no general! rights to Peti-

tioner’s assets. Their claim to the portion of her assets

at issue in this case has no purported foundation apart

12 See, e.g., Guidry v. Sheet Metal Worke*s Nat’l Pension Fund,

498 U.S. 365 (1990), appeal after remand, ;emanded 10 F.3d 700

(10th Cir. 1993), modified on reh’g and remanded on other grounds,

39 F.3d 1078 (10th Cir. 1994), cert. denied, 115 S.Ct. 1691 (1995).

from the fact that those assets at one time were in an

ERISA plan.

For these reasons, we believe that a distinction between

Boggs and Ablamis is supported neither by its practical

consequences nor by any parallels with the garnishment

cases.

II. CONGRESS HAS ALREADY DECIDED THIS CASE.

We recognize that the Court may be reluctant to permit

federal interference with a time-honored subject of state

law, but this is clearly what Congress intended to do.

A. Congress Amended ERISA to Provide a Compre-

hensive Scheme of Spousal Rights in Participants’

Pensions.

Congress struck a balance between the competing con-

siderations involved in this case in 1984 by enacting the

Retirement Equity Act (“REA”). Amendments to

ERISA ensure spousal rights in an employee’s pension

—property rights that would survive divorce or the death

of the employee. Congress at the same time modified the

income tax rules applicable to pension plans and individ-

uals, to be consistent with the creation of these spousal

rights. By amending ERISA to clarify spousal interests

in a pension, Congress achieved a balance between the

expectations of participant’s spouses to an adequate retire-

ment income in old age, and the interests of pension plans

in national uniformity and the avoidance of conflicting

regulatory schemes and excessive administrative costs.”

13 P.L. 98-397, 98 Stat. 1436 et seq.

14QOne of the fundamental purposes of ERISA repeatedly em-

phasized by this Court’s decisions is the goal of achieving nationa!

uniformity for employee benefit plans and avoiding conflicting state

directives. New York State Conference of Blue Cross & Blue Shield

Plans v. Travelers Ins. Co., 115 §.Ct. 1671 (1995), Ingersoll-Rand

v. McClendon, 498 U.S. 183 (1990), Fort Halifax Packing Co. v.

Coyne, 482 U.S. 1 (1987), Shaw v. Delta Airlines, Inc., 463 U.S. 85

(1983).

REA’s provisions for protection of domestic property

rights in a pension involved two parts: mandatory survivor

benefits for a spouse following the death of the pension

participant, and provisions for the protection of spouses

(and minor children) in the event of a divorce.

B. ERISA Mandates Survivor Benefits for a Spouse

After a Participant’s Death.

To protect surviving spouses who might have been de-

pendent on the earnings or pension of a spouse employed

outside the home, REA provided mandatory survivor bene-

fits." In simple terms, these provisions require payment

of a pension after the death of a married pension plan

participant to the surviving spouse for the spouse’s life-

time. Generally, payments under the survivor pension

must equal at least 50% of those made during the partici-

pant’s lifetime. Such provisions had been optional under

prior law." By making them mandatory, Congress gave

spouses in separate property jurisdictions enforceable

rights to their spouses’ pensions.

We want to stress the magnitude of the property trans-

fer Congress wrought by vesting in spouses an absolute

right to a benefit after the death of a pension plan parti-

cipant. In separate property jurisdictions, REA divested -

participants of previous rights they may have enjoyed un-

der the plan to control the survivor benefits under their

own pension—for example, to designate their children as

sole beneficiaries, or to take their entire pension as a life

interest, with no survivor benefits. After REA, the par-

ticipant may exercise these rights only with the consent

of his or her spouse. Legislative history shows that

Congress thought this transfer of property interests was

LR.C. §§ 401(a) (11), 417 and ERISA § 205, 29 U.S.C. § 1055.

26©L.R.C. §401(a) (11) (1983), ERISA § 205 (1983), 29 U.S.C.

§ 1055 (1983).

appropriate to protect a surviving spouse’s expectations

in pension income after the death of the participant.”

After REA, a spouse’s rights to survivor benefits under

an ERISA pension plan are governed exclusively by fed-

eral law-——whether or not the right arises in a community

property jurisdiction. Spouses in separate property juris-

dictions now have rights similar to those previously en-

joyed only by spouses in community property jurisdictions.

At the same time, REA replaced the rights of spouses in

community property jurisdictions with rights under uni-

form federal law. For example, typical community prop-

erty statutes give a spouse a claim only on those assets

accumulated during marriage. By contrast, the spouse’s

claim to a survivor benefit under ERISA is based on the

deceased participant’s entire pension—including the pen-

sion accrued before marriage.“ The spouse’s REA sur-

vivor rights trump any other rights or provisions of a

pre-nuptial agreement."

C. For Spouses Who Claim Rights Other Than Sur-

vivor Benefits, ERISA Creates a Uniform Means of

Enforcing Those Rights.

REA also provided for protection of rights under state

domestic relations laws within a uniform federal scheme.

In several related provisions, Congress created “qualified

17S. Rep. No. 575, 98th Cong., 2d Sess. 12 (Aug. 5, 1984). “The

Committee believes that present law results in inequitable treatment

of participants in pension plans who die before reaching the normal

retirement age under the employer’s plan . . . in addition, because

the Committee believes that a spouse should be involved in making

choices with respect to retirement income on which the spouse may

also rely, the bill requires spousal consent when a participant elects

not to take a survivor benefit.”

6 LR.C. §§ 417(b); 417(c). ERISA § 205(d); ERISA § 205(e)

(1), 29 U.S.C. $§ 1055(d); 1055(e) (1).

'* Treas. Reg. § 1.401(a)-20, Q&A-28 (prenuptial agreement can-

not waive spouse’s REA survivor rights) ; see, e.g., Hurwitz v. Sher,

982 F.2d 778 (2d Cir. 1992), cert. denied, 508 U.S. 912 (1993).

domestic relation orders” (QDROs).” The QDRO pro-

visions provide a set of rules and procedures for enforcing

marital property claims against ERISA-covered pension

plans. At the same time, Congress amended ERISA’s

spendthrift and preemption rules. The spendthrift and

preemption amendments make clear that QDROs are the

exclusive method of enforcing marital property claims

against ERISA-covered pension plans. Other methods are

preempted.

The amended spendthrift rule is clear that Congress

intended to curb both community property and separate

property rights against an ERISA plan. Generally, the

spendthrift rule prohibits alienation or assignment of an

ERISA plan benefit. REA created an exception to the

spendthrift rule for certain “domestic relations orders.” ”

A “domestic relations order” specifically includes orders

“made pursuant to a State domestic relations law (includ-

ing a community property law) .” *

REA’s legislative history * also makes clear that Con-

gress was contemplating community property along with

separate property:

Several cases have arisen in which courts have been

required to determine whether the ERISA preemption

and spendthrift provisions apply to family support

obligations (e.g., alimony, separate maintenance, and

child support obligations). In some of these cases,

the courts have held that ERISA was not intended to

preempt State domestic relations law permitting the

attachment of vested benefits for the purpose of meet-

2 1.R.C. §§ 401(a) (13) (spendthrift), 414(p) (QDROs), ERISA

8§ 206(d) (spendthrift and QDROs), 514(b)(7) (preemption), 29

U.S.C. §§ 1056 (d), 1144(b) (7).

211.R.C. § 401(a) (13) (B), ERISA § 206(d) (3) (A), 29 U.S.C.

§ 1056 (d) (8) (A) (similar).

22 1.R.C. § 414(p) (1) (B) (ii), ERISA § 206(d) (3) (B) (ii) (II),

29 U.S.C. § 1056 (d) (3) (B) (ii) (IT).

23S. Rep. No. 98-575, 98th Cong., 2d Sess. 18-19 (Aug. 5, 1984).

ing these obligations.** Some courts have held that

the ERISA preemption provision does not prevent

application of State law permitting attachment of

nonvested benefits for the purpose of meeting family

support obligations.** There is a divergence of

opinion among the courts as to whether ERISA pre-

empts State community property laws insofar as they

relate to the rights of a married couple to benefits

under a pension plan, etc.”

22 See, e.g., American Telephone and Telegraph Co. v.

Merry, 592 F.2d 118 (2d Cir. 1979); Cody v. Riecker, 594

F.2d 314 (2d Cir. 1979).

23 See, e.g., Weir v. Weir, 41[3] A.2d 638 (1980) ; Kikkert

v. Kikkert, 427 A.2d 76 (1981).

*4In Stone v. Stone, 63[2] F.2d 740 (9th Cir. 1980), the

Court held that ERISA was not intended to preempt com-

munity property laws and that a court order requiring a

division of retirement benefits did not violate the anti-

assignment provisions. In Francis v. United Technolog|ies |

Corp., 458 F. Supp. 84 (N.D. Cal. 1978), however, the Court

held that ERISA’s preemption provision prevents the applica-

tion of State community property law permitting attachment

of plan benefits for family support purposes.

While clarifying that ERISA’s spendthrift rule preempts

State domestic relations laws generally (including com-

munity property laws), Congress carved out an exception

for state laws enforced through QDROs. As defined by

REA, QDROs are court orders that enforce state domestic

relations laws, and that meet certain substantive and pro-

cedural requirements. These requirements ensure that the

rights of all potential claimants to ERISA pension assets

are protected:

* A QDRO cannot require a plan to provide any

type or form of benefit, or any option, not other-

wise provided under the plan.

* A QDRO cannot require a plan to provide in-

creased benefits (determined on the basis of actu-

arial value).

* A QDRO cannot require the payment of benefits

to one alternate payee which are required to be

paid to another alternate payee under another

QDRO.

* A QDRO cannot require a plan to pay benefits to

an alternate payee before the earliest retirement

age under the plan.

In Boggs, the Fifth Circuit recognizes marital property

orders outside of a QDRO. This in essence accords the

order QDRO treatment without any of the QDRO restric-

tions, which is to say, without protection for any of the

other interests Congress tried to safeguard.

In REA, Congress also modified several other provisions

of ERISA (and the Internal Revenue Code) to further

define the rights of QDRO claimants. These provisions

were not modified for takers under non-QDRO orders—

because Congress contemplated that no such takers could

exist.

For example, ERISA creates rights only for “partici-

pants” (the worker who earns the pension), and “benefi-

ciaries.”** In REA, Congress specifically made QDRO

claimants “beneficiaries” under ERISA, entitling them to

ERISA’s fiduciary protections.” Congress enacted no such

provision for non-QDRO claimants.

REA also changed federal tax laws affecting pension

plans. Among other things, these rules place limits on how

early money can come out of a plan. REA created special

* ERISA §§3(7) (defining participant); 3(8) (defining bene-

‘iciary), 403(c) (assets of a plan are held for the exclusive benefit

of participants and beneficiaries) ; 404(a) (fiduciary discharges his

duty for the exclusive benefit of participants and beneficiaries), 29

U.S.C. §§ 1002(7), 1002(8), 1108(c), 1104(a).

* ERISA §§3(8), 206(d)(3)(J), 404(a)(1)(A), 29 U.S.C.

$§ 1002(8), 1056(d) (3) (J), 1104(a) (1) (A).

waivers for these rules in the case of QDROs—but not for

any other kind of marital property order.”

REA also modified the personal income tax. REA

provided that in community property states, the participant

spouse is taxed on the entire pension distribution. REA

simultaneously provided an exception for certain distribu-

tions to the non-participant spouse (thus ensuring that the

tax falls on the individual who receives the distribution )—

but only those enforced under QDROs.*” No such “ration-

alizing” exception was provided for non-QDRO claimants.

In the next section, we set forth in more detail the vastly

complex practical consequences of recognizing state law

claimants who are not QDRO claimants (and thus, as we

have stated, not ERISA “participants” or “beneficiaries,”

nor subject to the federal tax changes enacted by REA).

In this section, we have aimed to demonstrate two more

limited points. First, Congress knew and fully intended

to modify state marital property law.

Second, in creating QDROs, Congress opened the exclu-

sive route for claiming ERISA plan benefits under state

marital property law. As this Court stated in Shaw, “In

deciding whether a federal law preempts a state statute,

our task is to ascertain Congress’ intent in enacting the

federal statute at issue.” The statute here states ex-

pressly that domestic relations orders against ERISA plans,

including orders based on community property law, are

preempted unless they are QDROs.” Moreover, the sur-

rounding statutory tax and ERISA scheme does not appear

even to contemplate claimants under domestic relations

orders other than QDROs.

2% 1.R.C. § 414(p) (10).

27 See discussion in Part III.

28 463 U.S. at 95.

* ERISA §§ 206(d), 514(b)(7), 29 U.S.C. §§ 1066(d), 1144

(b) (7).

Ill. BOGGS WOULD PRODUCE SIGNIFICANT CON-

FLICTS BETWEEN STATE LAWS AND ERISA.

A. Boggs Would Allow a Wide Variety of State Law

Intrusions on Pension Plans.

The reach of the Boggs decision is broader than its

facts suggest:

First, nothing in the Fifth Circuit's reasoning would

restrict its holding to community property. The decision

reaches marital property rights of any sort.

Second, the decision is not confined to the reach of

marital property rights today. If marital property rights

to ERISA pensions outside of QDROs are not preempted,

then state courts and legislatures are free to make such

rights ever more flexible and marital property ever more

tradeable and pension plans will be forc. 4 to deal with

each such change.

Third, the decision is not confined to transfers of marital

property rights in pensions in instances of death. When-

ever such property is transferred, the issues we confront

here would arise.

Fourth, it is not confined to court orders. Whenever

marital property can be conveyed, there will be a change

in ownership of the pension rights.”

Fifth, it is not confined to family members. If a spouse

conveys his or her interest to charity or even to his or her

creditors, the assignee would acquire an enforceable in-

terest under an ERISA-covered plan.

Sixth, for the reasons discussed in Part I of this brief,

we believe state courts will inevitably extend Boggs to

direct levies on pension plans themselves.

* As to the ability of spouses to convey their community property

interests while alive and still married, see, e.g., lan F. G. Baxter,

Marital Property § 18:1 et seq., 20:1 et seq. (1973).

B. These State Law Intrusions Would Conflict With

ERISA.

Boggs will permit claimants to collect against ERISA

plans by enforcing orders that are not QDROs. This pro-

duces a number of conflicts with the ERISA and tax rules

which govern these plans:

1. Boggs strikes at the heart of ERISA as Congress

chose to modify it in REA: the protection of spouses

in their expectations of retirement income, even against

the disruption of divorce or death of the breadwinning

spouse.

REA and its legislative history both show that Congress

believed it was protecting a special kind of property in-

terest; namely, the spouse’s expectations in retirement in-

come. Congress did not seek to create a more general

category of spousal property interests.

A spouse’s survivor interests in an ERISA plan benefit

are not unfettered. Payment of the survivor benefit is not

permitted to begin before the earliest date that the partici-

pant could have begun collecting the benefit as a retire-

ment pension.” Payments under a QDRO are subject to

a similar restriction.” That is, even for plan benefits paid

out under the spouse’s separate right, Congress chose that

the benefits not lose their essential character as retirement

income.

As we have already noted, REA’s survivor benefit pro-

visions created in the spouses of pension participants a

property interest that divested other rights the participant

might have had in the benefit—for example, the right to

S1LR.C. § 417(c)(2)(B), ERISA § 205(e)(1)(B), 29 U.S.C.

§ 1055(e) (1) (B) (survivor benefits cannot begin before participant

would have reached earliest retirement age under the plan).

2 1.R.C. § 414(p) (4), ERISA § 206(d) (3) (E), 29 U.S.C. § 1056

(d)(3)(E) (QDROs cannot be distributed before participant

reaches earliest retirement age under the plan).

provide survivor benefits to his or her own children.

Legislative history shows that Congress believed it was the

spouse’s expectations of retirement income that served to

trump these other rights against a pension.”

2. No one would ever ask a court for a QDRO if

Boggs is upheld. QDROs contain numerous protections,

designed to protect not only the claimant seeking to en-

force the order, but all other potential claimants to the

assets (we have outlined these above). Marital property

laws do not contain those protections. Upholding Boggs

would essentially repeal the QDRO statute.

3. The claimants under marital property orders or

conveyances will not be “participants” or “beneficiaries”

within the meaning of ERISA.

An ERISA “participant” is defined as an employee (or

former employee) of the employer.‘ An ERISA “benefi-

ciary” includes only two categories of individuals: (1) “a

person designated by a participant, or by the terms of an

employee benefit plan,”” and (2) a payee under a

QDRO.” But the claimants under non-QDRO orders or

conveyances are not participants or beneficiaries under

any of these rules.*’

This produces a serious anomaly. For instance, ERISA

plan fiduciaries are required to administer plans for the

exclusive benefit of participants and beneficiaries.** Fidu-

ciaries have no obligation to look after the interests of

non-QDRO claimants. Moreover, they would breach their

3S. Rep. No. 575, 98th Cong., 2d Sess. 12 (Aug. 5, 1984).

* ERISA § 3(7), 29 U.S.C. § 1002(7).

% ERISA § 3(8), 29 U.S.C. § 1002(8).

* ERISA § 206(d) (3) (J), 29 U.S.C. § 1056 (d) (8) (J).

*? The point was recognized (with respect to ERISA beneficiary

status) in Baker, supra.

*8 ERISA § 404(a) (1) (A), 29 U.S.C. § 1104(a) (1) (A).

fiduciary duties to the ERISA participants and benefici-

aries if they devoted any plan resources to protecting

those other interests. To require them to act as fiduciaries

with respect to non-QDRO claimants would be to read the

exclusive benefit requirement out of the statute.

As we discussed in Part I, the state courts are unlikely

to conclude that there can be no rights without protections.

Instead, if there is no federal protection for non-QDRO

claimants, the state courts may move to fill the vacuum by

insisting on state protection. They may insist, for instance,

that participants be prevented from withdrawing money

ultimately due other claimants. They may insist that a

participant with investment authority over his or her

account not be permitted to make investments that would

jeopardize the share due other claimants. If the plan

fiduciaries have investment authority, the courts may for-

bid the fiduciaries themselves from making such jeopardiz-

ing investments or hold them liable for damages if they

do. These outcomes are not speculative, but, as we dis-

cussed in Part I, are based on results of pre-REA case law

governing marital rights against pension plans.

These actions would drive a wedge of state authority

into the heart of plans protected by ERISA, which was

supposed to establish the regulation of employee benefit

plans “as exclusively a federal concern.” Once allowed

in, as state laws evolve, their intrusions are bound to

intensify.

4. ERISA pension plans could lose their favorable

tax treatment if non-QDROs could be enforced against

them. Most ERISA pension plans (and the plans at issue

in Boggs) are tax qualified plans. This means that they

(and their participants) receive favorable tax treatment

in return for complying with a set of complex tax rules.“

8° Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523 (1981).

# ERISA pension plans that are “qualified” under I.R.C. § 401

enjoy three tax benefits: (1) income on the trust is exempt from

Among other things, these rules contain strict require-

ments governing the earliest time a distribution can be

made from a plan. Some of these requirements were

waived by REA for distributions made pursuant to

QDROs.” They were not waived for other distributions.

Thus, if non-QDRO marital property orders are not pre-

empted, a court may well order distribution to a non-

QDRO claimant at a time when the tax rules do not permit

distributions. Any distributions made under these circum-

stances will cause the plan—and its participants—to lose

eligibility for favorable tax treatment under the Internal

Revenue Code.

In this instance, we will find ourselves in the posi-

tion of managing pension plans with diametrically op-

posed orders from different parts of the government,”

each threatening the plans with severe penalties for non-

compliance.

5. Non-QDRO orders will threaten the tax qualified

status of plans in a second way. Another of the Internal

Revenue Code’s many requirements for favorable tax treat-

ment is that the pension plan be maintained for the exclu-

sive benefit of employees and their “beneficiaries.” “ (We

have already discussed a similar rule in ERISA.) The

term “beneficiaries” is defined to mean, “the estate of the

employee, dependents of the employee, persons who are the

natural objects of the employee’s bounty, and any person

designated by the employee to share in the benefit of the

plan after the death of the employee.” “

taxation, I.R.C. § 501(a) ; (2) the employer gets a current deduction

for contributions to the trust, I.R.C. § 404(a); and (8) taxation on

participants’ vested rights in their pension benefit is deferred until

the income is distributed, I.R.C. § 402(a).

*1 LR.C. § 414(p) (10).

2 J.e., a state court and the IRS.

#8 I.R.C. § 401 (a) (2).

Treas. Reg. § 1.401-1(b) (4).

Non-QDRO claimants may be none of these. Thus,

allowing them rights will threaten tax-qualified plans with

the enormous penalty of disqualification.”

6. Permitting non-QDROs is inconsistent with sound

tax policy. We have already observed that, under Boggs,

if a spouse conveys his or her interest to charity or

even his or her creditors, the assignee would acquire an

enforceable interest under an ERISA-covered plan. Boggs

thus permits assignees with no conceivable relationship to

the pension plan to enjoy the fruits of the tax-favored

status that Congress conferred for the narrow and express

purpose of promoting pension retirement security.

7. Boggs will also confound the personal income tax

treatment of pension distributions. Generally, a married

taxpayer in a community property state is taxable on only

one-half of his or her income, while the taxpayer’s spouse

is taxable on the other half.” Prior to REA, this same

principle applied to distributions from qualified plans, so

that husbands and wives in community property states

were taxed at the time of distribution only on their respec-

tive community property interest.’

REA made a fundamental change in the tax law regard-

ing taxation of distributions from qualified plans in com-

munity property states. After REA, plan participants bear

the full brunt of income taxation for plan distributions,

except where there is a QDRO. If a former spouse is the

alternate payee under a QDRO, then the alternate payee

is taxed on the amount actually received by him or her.“

* Rev. Rul. 73-238, 1973-1 C.B. 193; Rev. Rul. 69-493, 1969-2 C.B.

88.

# U.S. v. Mitchell, 403 U.S. 190 (1971).

47 Powell v. Commissioner, 101 T.C. 489 (1993).

#8]. R.C. §§$ 72(m) (10), 72(t) (2) (C), 402(e) (1), 4980A(c) (2)

(B) and (f) (4) (A).

Marital property orders that do not fall within the

QDRO rules would not be addressed by these special tax-

shifting rules, an issue which the Tax Court has squarely

addressed in Karem v. Commissioner.” Karem involved

the taxation of a lump sum pension distribution in a com-

munity property state. The Court noted that REA’s

changes to the tax rules shifted the tax on the entire

amount back to the participant, except in cases where the

spouse received payment under a QDRO. But since court

order directing payment to the spouse in Karem on com-

munity property grounds was not a valid QDRO, the

Court held that there was no tax shifting. As a result, the

participant was liable for tax on the entire amount even

though half went to his wife. 100 T.C. at 531.”

In short, Congress’ careful scheme to split the taxes

between a participant and an alternate payee receiving

QDRO benefits would be stymied if non-QDROs orders

were permitted. Benefits might be split, but the participant

would be stuck with the whole tax bill.

IV. STATE LAW CLAIMS WOULD COMPLICATE AND

BURDEN PLAN ADMINISTRATION.

Permitting non-QDRO claimants would also impose an

immense administrative burden.

A. Payments of Pensions Would Be Delayed.

Allowing marital property orders or conveyances to

reach pensions outside of the QDRO context will further

undermine the pension system by causing plan fiduciaries

to delay benefit payments until the possibility of rival

claims has been settled.

#9 100 T.C. 521 (1998).

% Although the holding of Karem applies only to the taxation of

lump sum distributions from qualified plans, the Tax Court notes

they would have reached the same answer for non-lump sums as a

result of the REA QDRO provisions.

ERISA section 404(a)(1)(D)™ requires plan fiduci-

aries to follow the terms of the plan documents. As in the

Boggs case itself, the typical situation will be one where

the plan will direct payment to one individual while marital

property rights may direct the payment of plan benefits to

another.

ERISA section 404(a)(1)(B)™ requires plan fiduci-

aries to act prudently at all times. If marital property

claims are confined to the QDRO context, in the typical

case the fiduciaries can make payment in accordance with

the plan terms until a QDRO comes along. In most cases,

a fiduciary need not fear having to pay more than once,

because the OQDRO rules, as noted above, prevent QDROs

from requiring payments of benefits to one alternate payee

when a prior order requires those benefits to be paid to

another, and prevents a QDRO from directing a plan to

pay increased benefits.

No such safeguards would exist if marital property

claims outside of the QDRO context could be enforced. A

prudent fiduciary would realize there may be multiple

claimants to benefits on multiple occasions: a participant’s

divorce, the participant’s death, the death of a former

spouse, or even a conveyance by a spouse or former spouse

of his or her community property interest in the partici-

pant’s pension. In order to avoid the possibility of having

to pay a pension more than once, a prudent fiduciary

would want to hold up payments until either rival claims

are settled or there is a determination that there are no

rival claims.

B. Elaborate Systems Would Be Necessary to Track

Possible Claimants.

We believe that the prospect of holding up pensions

would be untenable for most employers. They know too

well that their former employees and spouses need the

5. 29 U.S.C. § 1104(a) (1) (D).

82 29 U.S.C. § 1104(a) (1) (B).

money to live on. One option available is to pay without

waiting for rival claims to be settled and so take the risk

of having to pay more than once.

Another option is to set up an administrative super-

structure to try to track the possibility of marital property

claims te eliminate the need to either hold up pensions or

pay more than once. Such an attempt would be extremely

burdensome and would not likely be successful.

First, it would require expertise in the marital property

law of every state and the 50-state overlay of choice of law

jurisprudence.” Second, a plan would have to track the

geographical course of each participant’s marriage as he or

she moves from state to state over the course of a career.

Plans would need copies of participants’ wills, their

spouses’ wills and their former spouses’ wills. They would

have to track probate proceedings for potential claim-

ants. They would have to track conveyances of marital

property. They would have to know the whereabouts of

the beneficiaries of all those wills and the assignees of

those conveyances, whether they were alive or dead, and

what their own wills provided. Prudent fiduciaries would

want to set up a notification system to all these far-flung

claimants and potential claimants to try to get claims

raised and settled in relatively short order.

The Pension Benefit Guaranty Corporation ™ is so con-

cerned with the problem of missing participants that it has

issued regulations on the subject.” The thought that plans

would be able to keep track of this much wider net of

potential claimants, a group of people who will often have

53 And, in today’s world, every country.

54 A federal government insurance corporation which guarantees

qualified defined benefit pensions. It was created by Title IV of

ERISA in 1974. See Nachman Corp. v. Pension Ben. Guaranty

Corp., 446 U.S. 359, reh’g denied, 448 U.S. 908 (1980).

55 PBGC Reg. §§ 4050.1 et seq.

only remote and contingent interests in staying in touch

with the plans, is rather unrealistic.

In any event, these measures would impose an extraordi-

nary and expensive burden. Nor can one simply answer

that “This is just a cost of doing business,” passed

on to the employer and from the employer to its customers.

As this Court recognized in Shaw, additional costs also

lead to reduced benefits.”*

Nor is the reduction of benefits always indirect. Pension

plans come in two different forms. One is “defined bene-

fit,” which means that an employee is promised a specified

benefit and the burden is then on the employer to fund

those benefits. ERISA § 3(35).”

Our association is concerned with the other type of plan,

the “defined contribution” or “individual account plan.”

There, the employer makes contributions into separate

accounts for each participant without promising that the

plan will be able to pay any particular benefit. ERISA

§$ 3(34).°* The employee gets his or her benefits based on

the contributions and the earnings on those contributions,

but minus the plan’s administrative costs.

The Department of Labor has taken the position in the

ODRO context that a plan may not charge a participant’s

individual account for the often substantial administrative

costs of dealing with the participant’s court proceedings

leading up to a QDRO and then with respect to imple-

menting the QDRO itself.” Accordingly, the costs of

dealing with a participant’s marital property issues even in

the relatively circumscribed QDRO context are borne not

by that participant but may be borne by every participant

5€ 463 U.S. at 105, n.25.

57 29 U.S.C. § 1002 (35).

58 29 U.S.C. § 1002 (34).

5® Adv. Op. Dep’t Labor 94-32A (1994).

in the plan, reducing the benefits eventually available to

pay pension benefits. This benefit reduction would be

multiplied many times over if marital property rights out-

side of QDROs were allowed to reach pensions.

As a final note on this aspect, it should be mentioned

that interpleader does not provide a practical solution.

For one thing, interpleader does not solve the most

pressing problem: delays in paying pension benefits. Inter-

pleader proceedings can drag on for years.

Second, interpleader proceedings need monitoring even

by the stakeholder who claims no interest in the disputed

amount. Monitoring means time and expense. The parties

and family property courts are often unfamiliar with the

intricacies of pension law and frequently seek the pension

administrator’s help in understanding the benefits available

and the conditions surrounding them. In trying to fashion

relief, they raise issues which require the pension admin-

istrator to seek legal advice. Parties may want the plan

to pay interest, effectively trying to redesign a plan's

terms.

In other cases, the parties and court may consult the

pension administrator hardly at all. But at the end, they

will devise an inappropriate court order, such as asking a

plan to turn over a portion of participant’s account plus

earnings in a case where a defined benefit plan is involved

so that there are no accounts or “earnings.” The adminis-

trator must then go back to the court to explain that the

order contemplates the wrong kind of plan.

These are the realities of interpleader from our plans’

point of view. They require plans to hire lawyers to moni-

tor and review the proceedings and to respond to what the

plans may view as inappropriate orders. This is no small

expense.

C. Confiicting State Laws Would Force Plan Admin-

istrators to Decide Competing Claims.

Plans will also be exposed to conflicting state regula-

tions, one of the things ERISA preemption was expressly

designed to prevent.” State laws may vary (and could

vary further in the future) as to when marital property

rights attach to pensions. For one, it might be at the

time of benefit accrual, for another, at the time of vesting,

for a third, after some contingency, such as a disability

triggering a disability pension. If a participant has spouses

from two different jurisdictions, they might have equal

rights to the same part of a pension as a result. The

QDRO statute would prevent a plan from having to pay

more than once in such a case, but if non-QDRO claims

are permitted, there would be no such protection. Plans

could easily face conflicting directives from different courts

as to how to parcel out pension benefits.

D. Liquidity Levels Would Be More Difficult to

Manage.

Plans need liquidity to pay benefits, but liquid assets

generally earn lower returns so that keeping too large a

portion of the pension portfolio liquid results in lower

investment returns. That translates into higher benefit

costs or lower benefits.

Confining marital property orders to QDROs keeps

liquidity concerns within bounds, because QDROs cannot

force a plan to pay benefits in a form not contemplated by

the plan nor earlier than the participant’s earliest retire-

ment date. Marital property orders outside of the QDRO

confines would not be subject to any such restrictions.

This would force plans to maintain liquidity at levels

higher than now necessary.

Plans v. Travelers Ins. Co., 115 8.Ct. 1671 (1995).

E. Plans Would Require Amendments to Handle New

State Law Claims.

Plan fiduciaries are required to follow a plan's terms.”

In the QDRO context, for instance, a plan cannot infor-

mally put a hold on a participant's benefits until resolution

of divorce proceedings.“ If Boggs is upheld, every plan

in the country will have to be amended, and procedures

— to provide how to deal with non-QDRO

claims.

F. Exposing Plans to State Law Claims Would In-

crease Litigation Costs.

ERISA permits a prevailing party to recover attorney's

fees.“ On top of all the other burdens of dealing with

non-QDRO claimants, plans will have to fear paying not

just benefits, and a court's determination of appropriate

interest, but potentially attorney fees as well.

Attorney fees can often greatly exceed the amount of

benefits involved because ERISA benefit claims often re-

semble class actions from the plan's point of view. A

particular claimant might be demanding only $10,000, but

the claim might involve an issue which arises for many

other potential claimants, perhaps involving amounts far

in excess of $10,000. If the plan views the claim as put-

ting, say, $10 million at stake for the plan as a whole, it

might be rational for it to put $100,000 in defending a

claim it believes is unfounded. If it loses, it might have

to pay opposing counsel fees far in excess of $10,000.

G. Claims Under Conflicting Laws Would Invite Litiga-

The private pension system has grown so wel! under

ERISA, that for many Americans, their pension is now

* ERISA § 404(a) (1) (D), 29 U.S.C. § 1104(a) (1) (D).

* Schoonmaker v. Empolyee Sav. Plan of Amoco Corp., 987 F.2d

410 (7th Cir. 1998).

® ERISA § 502(g), 29 U.S.C. § 1132(g).

their family’s biggest asset, often more valuable than their

house.’ That, combined with the attractive possibility of

winning attorney fees from a plan, will attract all sorts

of imaginative litigation.

We believe that Congress tried to -rrtail such activity

by preempting marital property claims at did not comply

with the QDRO procedures and restrictions, and we urge

the Court to so hoid.

CONCLUSION

ERISA’s provisions for the protection of spouses in the

event of divorce or death of a pension plan participant

represent a carefully designed balance between family

property interests and the uniform federal scheme created

by ERISA. The Court should hold that marital property

rights to ERISA pensions under state law are preempted

unless they are derived from QDROs. For all the fore-

going reasons, this Court is respectfully urged to reverse

the court of appeals decision.

Respectfully submitted,

DANIEL B. STONE

(Counsel of Record)

KEVIN P. O’BRIEN

LAURIE E. KEENAN

Rostna B. BARKER

IvIns, PHILLIPS & BARKER

1700 Pennsylvania Ave., N.W.

Suite 600

Washington, D.C. 20006

(202) 393-7600

December 6, 1996 Counsel for Amicus Curiae

“Mr. Boggs received a lump sum of about $150,000 plus a

monthly annuity of about $1,777.67. The discounted present value

of the pension annuity would depend on life expectancy and interest

rate assumptions; assuming a 20-year payout and 6% interest, the

annuity and lump sum combined would yield roughly $400,000.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.