Court: QDRO Takes Precedent Over IRS Tax Lien

August 4, 2003 ( - The right of a participant's former spouse under a qualified domestic relations order (QDRO) to retirement plan benefits takes priority over a federal government's tax lien on the same benefits.

>The US 8th Circuit Court of Appeals determined that even if the QDRO was not qualified by the plan sponsor until after the federal government filed its tax lien, the spouse’s interest in the plan proceeds “related back” to the date that a state court issued a QDRO, which came before the government filed its lien, according to Washington-based legal publisher BNA.

>Thus, with the certification of an initial domestic relations order (DRO), the court found the participant’s former spouse became a “judgment lien creditor” within the meaning of Treasury regulations when she obtained the initial order.   In the reversal of a lower court’s opinion, the appellate court determined the former spouse was not required to perfect her interest in order to establish her priority right to the benefits. Requiring the spouse “to satisfy state law perfection requirements would conflict with [the Employee Retirement Income Security Act’s] policy of ensuring that plan sponsors are subject to a uniform body of law,” Circuit Judge William Jay Riley said in writing for the majority.

“[The participant] was not required to comply with any state law requirements for purposes of establishing lien priority over the IRS’s interest in the plan proceeds. ERISA provides a mechanism for enforcing QDROs, and this mechanism supersedes any contrary state law,” the court said.


>In 1994, Francis and Mary Taylor divorced shortly after Francis retired from Northwest Airlines, where Francis had participated in the company’s retirement plan, stock plan, and savings plan. One month after the couple filed for divorce, a tax court determined that Francis had failed to file tax returns for the years 1981 through 1985, and in May 1995, the Internal Revenue Service (IRS) determined that Francis owed $984,310 in back taxes.

>The couple’s divorce became final in July 1995 and a Texas state court entered a DRO that provided that Mary would receive a 90% interest in Francis’s Northwest employee benefit plan proceeds. However, in October 1995, Northwest informed the two that the DRO did not qualify as a QDRO within the meaning of ERISA.

>Two months later the IRS filed a lien against the plan proceeds. On two occasions, Mary went back to the state court seeking reformation of the DRO to satisfy the requirements of a QDRO.   Northwest pronounced the DRO a QDRO in January 1997.

>Northwest filed an interpleader action to determine whether Mary or the IRS had priority to Francis’s benefits. A judge in the US District Court for the District of Minnesota found that IRS’s tax lien took priority over Mary’s rights under the QDRO.


>In a dissenting opinion, Circuit Judge James Loken rejected the majority’s conclusion that the spouse’s interest related back to the date the initial DRO was entered. Loken noted that the spouse did not qualify as a judgment lien holder because on three occasions the plan sponsor had refused to qualify the domestic relations order (DRO) as a QDRO within the meaning of ERISA.

The case is United States v. Taylor, 8th Cir., No. 01-2874, 7/31/03.