Enforcing a Survivor Benefit Election in a Pension in Arizona
A divorced spouse is obviously not a current spouse, but is she necessarily a non-spouse? This issue can be important in the context of division of an interest in Arizona State Retirement System (“ASRS”) retirement benefits. The ASRS limits benefits to certain “non-spouse contingent annuitants.” In Di Giacinto v. Arizona State Retirement System, No. 1 CA-CV 15-0722, decided April 04, 2017, the Arizona Court of Appeals considered this issue.
Facts and Procedure
Ms. Di Giacinto and Mr. Hillis married in 1983. Through his employment, Mr. Hillis had retirement coverage under the Arizona State Retirement System. After 39 years on the job, he retired in 2003. When he retired, he had to choose how to get his retirement payments. He selected an annuity plan that provided a 100% joint and survivor annuity. That means he got lower payments during his lifetime.
However, Ms. Di Giacinto would continue getting those payments if she outlived him. Three years later, Mr. Hillis and Ms. Di Giacinto divorced. He was 69 years old at that time, she was 45 years old. The decree of dissolution ordered that a third party prepare a supplemental Domestic Relations Order dividing the retirement annuity.
The Arizona State Retirement System approved a draft Domestic Relations Order (“DRO”), and, in June 2007, the court issued the final DRO. It gave Ms. Di Giacinto 48.75% of the monthly annuity benefit and 100% survivor benefits as a contingent annuitant. ASRS agreed to comply with the final DRO, designating it a Qualified Domestic Relations Order (“QDRO”.)
In June 2014, Mr. Hillis asked for a review of the final DRO’s distribution allocation. He claimed that the ASRS could review it under its authority to correct errors. ASRS determined that the final DRO was “not acceptable.” It found that the DRO improperly preserved Ms. Di Giacinto’s survivor benefits, which the ASRS now said violated Arizona Administrative Code R2-8-126(H).
The ASRS Board held a hearing on the matter. It decided that when the divorce decree was entered, Ms. Di Giacinto was automatically removed as the contingent annuitant. Ms. Di Giacinto appealed to the superior court, which affirmed the decision. She appealed to the Court of Appeals.
Question on Appeal: Definition of “Non-Spouse”
Arizona law prevents a Domestic Relations Order from requiring that the ARSR Board give someone survivor benefits disallowed by law. The question, the Court said, was whether Ms. Di Giacinto was eligible for a 100% joint-and-survivor option.
Under ASRS regulations, the payment options to a “non-spousal contingent annuitant” are limited. A “non-spouse” more than 10 years younger than the spouse cannot participate in a 100% joint-and-survivor option.
The question the Court addressed on appeal was the definition of “non-spouse.” Does the term include former spouses in the context of this rule?
Definition of “Non-Spousal Contingent Annuitant”
The law limits the distributions that ASRS may make to “non-spousal” beneficiaries. But the term is not defined in the regulation or in the statute. The Court of Appeals considered the rest of the statute to interpret the phrase. The Court said that the term “non-spouse” considered alone might have been interpreted to mean former spouse. But the Court reviewed the rest of the statute [Title 38, Chapter 5, Article 2]. It said that review made clear that the term “non-spouse” does not include a former spouse.
The statute states that all distribution provisions must be interpreted with the relevant provisions of the Internal Revenue Code. Therefore, limitations on non-spousal contingent annuitants must also be interpreted consistently with the Internal Revenue Code.
Section 401(a)(9) of the IRC sets general rules governing how, when, and to whom benefits may be distributed. This includes spousal survivor benefits. The regulations under that section provide:
A former spouse to whom all or a portion of the employee’s benefit is payable pursuant to a QDRO will be treated as a spouse (including a surviving spouse) of the employee for purposes of section 401(a)(9), regardless of whether the QDRO specifically provides that the former spouse is treated as the spouse․
Therefore, this regulation required ASRS to treat Ms. Di Giacinto as a spouse if the decree or final DRO is a QDRO. Therefore, the Arizona Court of Appeals ruled that the ASRS was wrong in equating “non-spouse” with former spouse. The Final DRO was a QDRO for purposes of the federal former spouse exception is a Domestic Relations Order that “recognizes the existence of an alternate payee’s right to receive a portion of the benefits payable with respect to a participant under a plan.”
The term “alternate payee” refers to a spouse or former spouse “who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.”
A valid DRO must specify:
(1) the names and last known mailing addresses of the named participant and alternate payee
(2) the amount or percentage of the benefits to be paid to the alternate payee
(3) “the number of payments or period to which the order applies”
(4) “each plan to which [the DRO] applies.” [26 U.S.C. § 414(p)(2)].
The Court noted that the dissolution decree itself is not a QDRO. It does not list the addresses or last known addresses of Ms. Di Giacinto or Mr. Hillis. But the final DRO meets all of the requirements. By using “any” and “former spouse,” the statute unambiguously allows a QDRO to be issued after a marriage is dissolved. Therefore, the Court held that a QDRO doesn’t have to be entered at the same time as the decree of dissolution. It only needs to include all the elements listed in the code.
Arizona Statutes Did Not Terminate Ms. Di Giacinto’s Benefits
The ASRS also argues that A.R.S. § 38-773(D) automatically terminated Ms. Di Giacinto’s rights to survivor benefits when the couple divorced. However, this ignores the first twelve words of that provision:
“Except as provided by the express terms of a domestic relations order, the divorce or annulment of a member’s marriage revokes any revocable disposition or appointment of benefits made by a divorced member to that member’s former spouse․”
Given that both the order and the DRO expressly provided that the benefits not be revoked, the dissolution did not terminate Ms. Di Giacinto’s rights to survivor benefits.
The Arizona Court of Appeals held that ASRS has no statutory authority to limit a former spouse’s survivor benefits if a qualified domestic relations order preserves them. It reversed and remanded for entry of judgment in favor of Ms. Di Giacinto.