How do I complete FL 347?
This is a common and important question posed by family law attorneys with clients seeking a bifurcation and immediate termination of status, or by family law attorneys who are concerned bifurcation will jeopardize their client’s claims to benefits.
Why is this issue important? Termination of marital status eliminates the government code and ERISA protections afforded to spouses in almost all types of retirement plans. (29 U.S.C. §1055.) For example, ERISA requires spousal consent to name a anyone other than a spouse as a beneficiary. (29 U.S.C. § 401(a)(11).) Under federal law, the termination of marital status allows the participant to name a new beneficiary (even if the community interest has not been divided). If the participant dies before the community interest is divided and a post-death QDRO is not immediately served on the Plan Administrator, 100 percent of the benefits will be payable to the non-spouse beneficiary.
For government plans (not regulated by ERISA), survivor benefits can be eliminated upon termination of marital status. For example, the Survivor Benefit Plan for military benefits has two types of survivor benefits: a spouse survivor benefit and a former spouse survivor benefit. The spouse survivor benefit disappears upon termination of marital status and a former spouse survivor benefit must be elected in order for coverage to extend to the non-member former spouse.
A properly completed FL 347 will allow the moving party in a bifurcation proceeding to be successful, and will protect the non-moving party from risk of loss of benefits.
Understanding FL 347:
The court must make an order pertaining to each retirement plan. (Family Law Code § 2337(d).) There are three options for what type of order the court should make: (1) a final QDRO, (2) an interim QDRO, or (3) a notice of adverse interest. Each of these orders has pros and cons.
Option 1—FINAL QDRO: If a final QDRO can be entered dividing the community interest in the retirement benefits, this is the best possible type of order on FL 347 to protect both parties. The non-employee would receive half of the community interest in the benefits and the employee would be left with the remaining benefits in the account allowing the employee to change their beneficiary designation. If either party dies, their benefits are protected. However, a final QDRO may not always be possible. The parties may want to “horse trade” retirement benefits with other assets in a settlement or there may be a separate property claim that is undermined in amount which prevents a final QDRO from being agreed upon by the parties.
Option 2-INTERIM QDRO: An interim QDRO is a good solution if the plan is an ERISA plan and the parties do not trust each other. An interim QDRO prevents the participant from withdrawing benefits and fixes the survivor benefit election at 50 percent for the non-employee spouse. In other words, the participant is allowed to change the beneficiary designation for his benefits to be someone other than the former spouse but only for 50 percent of the account. And, the non-employee spouse is guaranteed to be the survivor beneficiary for 50 percent of the entire account if the participant dies before a final QDRO is entered (and a post-death QDRO is not entered). It is a good placeholder until the final amount of the benefits is determined.
However, interim QDROs can be costly to prepare if an outside service is used and interim QDROs have no legal effect on government plans.
Option 3—NOTICE OF ADVERSE INTEREST. This option offers the least protection for the parties, nevertheless this is by far the most common approach when dealing with retirement benefits in divorce if the parties do not expect the imminent death of either party and the amount of the retirement benefits is not high. The effect of this notice is that the participant is not able to withdraw benefits in ERISA and state and local plans because there is a community property claim on the benefits. The plan is on notice that there is a claim, and if the participant should pass away before a final QDRO is entered, a post-death QDRO can be entered for most ERISA plans to assign the non-employee their half of the community interest. There is virtually no cost to the parties of a notice of adverse interest.
Takeaways From This Article:
1. A final QDRO offers the most protection for both parties.
2. An interim QDRO will preserve the survivor benefits of the parties in ERISA plans.
3. A notice of adverse interest is the most common and least costly selection in bifurcation, but will have no legal effect on government plans.
4. The choice on FL 347 is a cost-benefit analysis for your client. If the value of the retirement benefits is high enough and your client is concerned, then full protection using a final QDRO or interim QDRO is warranted.
Common Questions:
What if there is a military plan? If one of the parties is a retired military member, we recommend that the only acceptable order is a final QDRO which is entered upon termination of marital status. The spouse survivor benefit is cancelled upon termination of marital status and an election for former spouse survivor benefits must be made within one year of the judgment in order for the former spouse to be protected in the event of the member’s death.
What if the parties have approximately equal retirement benefits? Normally a notice of adverse interest is sufficient because each party will have control over the beneficiary designation of their respective accounts and the risk of loss of benefits if the opposing party should die is low given that the parties have equal benefits in their possession.
What if IRA benefits are involved? IRA companies do not recognize the legal effect of an interim QDRO or a notice of adverse interest. The court can order that the IRA account holder name their former spouse as beneficiary for 50 percent of the account upon death in the meantime before the assets are divided. However, such court orders are not effective on IRA companies and the parties would have to trust that the IRA account holder will comply with the court order. A final order assigning half of the community interest in the IRA benefits is the only true legal protection for the spouses in this situation.
This article is intended to provide generalized advice and guidance when termination of marital status is sought prior to the determination of the property rights. Specific plans may have specific requirements, risks, and regulations that require special attention.