ASRS Lacked Authority to Limit Former Spouse’s QDRO Preserved Survivor Benefit
Former wife’s rights to survivor benefits of retired former husband were preserved by a valid QDRO and Arizona State Retirement System had no statutory authority to limit her rights as a contingent annuitant.
Arizona Divorce Decree with Domestic Relations Order
The spouses were married in 1983. In 2003, the Husband retired as an Arizona State Retirement System (ASRS) employee. During the marriage, Husband elected 100% joint and survivor annuity. He took less money per month in order to continue payments until his wife’s death if she survived him. They divorced in 2006 when she was age 45 and he was age 69, more than ten years her senior.
The decree of dissolution included a domestic relations order (DRO). The ASRS approved the draft-DRO and the court issued a final DRO in June 2007. The final DRO awarded the wife 48.75% of the monthly annuity benefit and 100% of the survivor benefit as a “contingent annuitant.” ASRS agreed to comply with the final DRO, designating it a Qualified Domestic Relations Order (QDRO).
In June 2014, the Husband requested review of the final DRO’s distribution allocation. He invoked ASRS’ authority under ARS § 38-765 to correct errors. The ASRS determined that the final DRO was not acceptable because it preserved survivor benefits to a former spouse in violation of Arizona Administrative Code R2-8-126(H) which provides that a “member who is ten years and one day, or more, older than the member’s non-spousal contingent annuitant is not eligible to participate in a 100% joint-and-survivor option.”
The following month, Wife sought an administrative hearing before an Administrative Law Judge (ALJ). The ALJ’s proposed ruling to the ASRS Board was that the divorced spouse was automatically removed as a contingent annuitant by operation of law. The Board dismissed her appeal.
Wife then appealed the Board’s determination to the Superior Court, which affirmed the Board because ARS § 28-773(D) removed the former Wife as a beneficiary by operation of law.
She sought review by the Arizona Court of Appeals which reversed and remanded the case, and awarded her attorney fees. The former Wife of an ASRS-retiree is treated as a “spouse” for purposes of survivor benefits awarded under a DRO. Furthermore, age limits on non-spousal contingent annuitants set forth in A.A.C. R2-8-126(H) do not apply to a former spouse whose payments are ordered by a QDRO.
Question of Statutory Interpretation
First, the Court of Appeals held that under a valid QDRO, the “former spouse” is not the same as a “nonspouse” when determining limits on contingent annuitants.
When a QDRO recognized a former spouse’s community property interest in survivor benefits, the ASRS has no statutory authority to include the former Wife in the definition of “nonspouse.” Controlling federal law excludes the former spouse whose benefits are subject to a QDRO from the definition of non-spouse and Arizona law must follow accordingly. “Nonspouse” is not based on an individual’s status as a spouse at the time of distribution.
Additionally, interpretation of Arizona’s statutory limitations on non-spousal contingent annuitants per ARS § 38-775 and related regulations must be consistent with the Internal Revenue Code. More specifically, IRC 401(a)(9) treats a former spouse per QDRO as a spouse for purposes of all or a portion of the employee’s benefits. ASRS must treat the ex-Wife as a spouse if the divorce decree or final DRO is a QDRO (referring to the “federal former spouse exception.”)
The appeals court determined that, although the divorce decree was not a QDRO, the final DRO was a QDRO and effective even though entered after the divorce decree. The final DRO met all of the requirements of a QDRO under 26 USC § 414(p); and a QDRO may be issued after the marriage is dissolved.
No Automatic Termination of Survivor Benefit By Operation of Law
Lastly, the Court of Appeals held that no Arizona statute automatically terminated the former Wife’s survivor benefit by operation of law. ARS § 38-773(D) provides an exception preserving the survivor annuity through a DRO:
Except as provided by the express terms of a domestic relations order, the divorce or annulment of a member’s marriage revokes any revocable … [d]isposition or appointment of benefits made by a divorced member to that member’s former spouse. …
Also, ARS § 38-773(H) includes as a DRO any judgment, decree, or order, or approval of a property settlement agreement entered by the court that:
(a) Relates to marital property rights of a spouse or former spouse.
(b) Creates or recognizes in the spouse or former spouse the existence of an alternate payee’s right to severance, survivor or retirement benefits.
(c) Assigns the spouse or former spouse as alternate payee the right to receive all or part of the severance, survivor or retirement benefits payable to the member.
Holding that the ASRS had no statutory authority to limit the former Wife’s survivor benefits when a valid QDRO preserved her rights to them, the court reversed and remanded the case. Holding for the Wife, the decree and final DRO satisfied the requirements of ARS § 38-773(H) and divorce did not automatically defease her rights to survivor benefits.
DiGiacinto v. ASRS, 1 CA-CV 15-0722 (Ariz. Ct. App. April 4, 2017)
For precise language, read the court’s original opinion. Legal citations omitted.
For more information about qualified domestic relations orders in Arizona divorce, visit our discussion about retirement benefits as community property and QDROs.