Bully Meets Match: ERISA Loses in a Divorce 401(k) Dispute

Despite the brutal and unfair power of the ERISA statute, teaming up with the bully to win your case does not ensure a win. Even bullies can lose (… remember David and Goliath?) In the Alabama case Nord v. Nord, a divorce proceeding, the husband was ordered to transfer $31,000 from his 401(k) account as part of the divorce judgment. However, a qualified domestic relations order (QDRO) was never prepared which is mandated by ERISA. The husband never made the transfer, but also did not appeal the court’s ruling. It appears he thought ERISA would help him, given there was no QDRO. His ex-wife would never be able to touch the 401(k).

About 15 years later, his ex-wife filed a lawsuit over this failure to transfer the 401(k) monies, contending that the transfer should have taken place and that she should now also be entitled to the increase in value achieved in the 401(k) account. At this point in time, that was the equivalent of $81,783.

The ex-husband contended that the court lacked subject matter jurisdiction because there were not 10 years of accumulation of value in the 401(k) account during the previous marriage. Therefore, the court had no subject matter jurisdiction over the funds and could not order the 401(k) transfer. There also was no QDRO. The Tuscaloosa County Circuit Court was not persuaded and ruled in favor of the ex-wife and ordered the ex-husband to withdraw the funds in the amount of $81,783 and provide them to the ex-wife. The ex-husband of course appealed that to the Alabama Court of Civil Appeals.

On appeal, the court noted that while it may have been reversible error for the lower court to order the transfer of the funds without the period of 10 years of accumulation of funds in the 401(k) during the marriage, that did not void the court’s subject matter jurisdiction. Notwithstanding the earlier potential error, the ex-husband did not appeal the order and thus that order became the law of the case. The court saw all of this for what it was – an impermissible collateral attack on a prior divorce judgment and an effort to try to use ERISA to assist in the accomplishment of that.

The hidden downside of this is that IF the wife had never filed her lawsuit and the 401(k) plan administrator had paid the money out to the ex-husband, the ex-wife would not be able to pursue the monies from the fund. She would have to go after the husband’s assets, and he may be difficult to collect from.

Also, IF the ex-husband had died, it is possible that notwithstanding the divorce, if there was never a change of beneficiary, the plan administrator would still pay funds to the spouse designated as the beneficiary. See, Holmes v. Kent, 221 S.W.3d 622 (Tex. 2007).

Finally, there are also all sorts of issues that develop when funds are taken out of a 401(k) before their time. Some issues are easily avoided with a rollover into a traditional IRA, but sometimes the ex-spouse is desperate for money and thus taxes and penalties may be applicable. It can become a challenge as to who pays those. Domestic relations – it is not an easy job, but we are glad you do it! If we can help with any 401(k) or pension issues, give us a call.

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