Most qualified domestic relations order (QDRO) cases are fights that affect the formerly married spouses and the plan sponsor or plan administrator. They do not typically affect the other participants in the plan. The case of Milgram v. Orthopedic Associates Defined Contribution Pension Plan (No. 10-862-cv. 2d Cir. Nov. 29, 2011) is different. In that case, plan participants may be adversely affected by the QDRO.
In Milgram, the employer sponsored two defined contributions plans. In connection with their 1996 divorce, the former husband (Robert) and former wife (Norah) agreed that Norah would receive one half of Robert’s account in one of the plans and a fixed sum, plus earnings, from the other plan. Due to a clerical error, one-half of Robert’s accounts in both plans was transferred to Norah, resulting in an overpayment to her of approximately $764,000. Norah withdrew her accounts in 1998. Robert had retired in 1991, but kept his accounts in the employer’s plans until 1996 when he moved his accounts into an IRA.
Robert was not paying close attention to his finances and failed to notice the missing $764,000 until 1999. Robert then asked the plan for the missing money, which asked Norah for the money and sued when she failed to pay. After two years of litigation, the plan had not recovered the money from Norah so Robert sued the employer, the plan, the trustees, the third party administrator (who had made the error) and Norah. Fifteen years after the erroneous transfer, the case wound up in front of the Second Circuit Court of Appeals with Robert trying to enforce a judgment against the plan for approximately $1.5 million (his original $764,000 plus about $736,000 of earnings) and the plan saying that it should not have to pay Robert until it has received repayment from Norah – who had been ordered to repay the plan $1.5 million but had failed to do so.
The Second Circuit upheld the judgment against the plan and affirmed the order that the plan pay Robert $1.5 million. On the one hand, it is appropriate that Robert should receive his $764,000 from the plan since the plan erroneously paid his account to Norah. And since the money was improperly transferred fifteen years ago, it may also be appropriate for Robert to receive earnings on the money. However, since the plan had not yet recovered the overpayment from Norah, satisfying the judgment will require the plan to take the money from the accounts of the other participants. In other words, the other participants will bear the burden of this error.
The court did not seem troubled by this fact. In the court’s view, the risk that litigation will deplete a participant’s account is inherent in a defined contribution plan, where participants bear investment and other risks. The court also noted that the plan had a judgment against Norah, enforceable through a constructive trust, giving the court “some confidence that no innocent party will suffer in the long run.”
If I were one of the participants, I might be worried about Norah’s repaying the $1.5 million. During the years of litigation, she has yet to repay the amount. Because of some ERISA technicalities, the courts have generally not allowed claims against participants for overpayments unless the overpaid amount can be traced to a specific account under the participant’s control. Money damages against plan fiduciaries (often including plan sponsors and plan administrators) have also been restricted. The Supreme Court has recently started to allow such claims against plan fiduciaries, but at the time of the Second Circuit’s opinion, there was no lawsuit pending against the employer or third party administrator who had actually made the mistake. It would seem more appropriate for one of those entities to bear this expense than for the other plan participants, who had nothing to do with the error, to have their accounts reduced to pay Robert. Of course, in light of the more recent Supreme Court decisions, perhaps the participants whose accounts are reduced to pay Robert will bring their own lawsuit against the plan fiduciaries for reimbursement. If the participants are lucky, it will not take another fifteen years to resolve the matter.