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    Wisconsin Lawyer
    September 30, 2006

    When Lovebirds Split: Dividing the Retirement Nest Egg at Divorce - Properly Dividing Pension Benefits

    The impact of an improper pension division can be devastating for clients, because they may lose out on the pension benefits altogether, and for family law practitioners, because they may face a minefield of malpractice claims and disciplinary actions. Learn how federal and state laws intersect with pension plans so you can protect your clients' economic future and avoid malpractice issues.

    Nilesh Patel

    Wisconsin LawyerWisconsin Lawyer
    Vol. 79, No. 10, October 2006

    When Lovebirds Split:
    Dividing the Retirement Nest Egg at Divorce – Properly Dividing Pension Benefits

    The impact of an improper pension division can be devastating for clients, because they may lose out on the pension benefits altogether, and for family law practitioners, because they may face a minefield of malpractice claims and disciplinary actions. Learn how federal and state laws intersect with pension plans so you can protect your clients' economic future and avoid malpractice issues.

    by Nilesh Patel

    Pgolden eggsension benefit issues have been at the forefront of problems facing employees, companies, and U.S. lawmakers. Notable examples are in the airline and automobile industries, with companies such as United Airlines, Delta Airlines, Northwest Airlines, and Delphi dumping their pension plans in bankruptcy proceedings or terminating their pension plans.

    There is, however, another category of pension problems that is not as prominent in the public eye. These problems, improperly dividing pension benefits at divorce, are harder to track because they occur individually and may go unreported by clients. The impact of an improper pension division can be more devastating than that of a pension termination, because in a termination, pension insurance can provide most if not all of the expected benefit amount. With an improper pension division the client may lose out on the pension benefits altogether. For example, in Lee v. Lee, an unpublished Wisconsin Court of Appeals decision, a husband was not able to reopen a divorce decree after realizing that he misunderstood the full scope of the pension division.1 Loss of pension benefits is especially severe for older divorced persons, because pension income often is one of the few financial assets outside of Social Security available to stave off poverty.

    Pension division issues need to be carefully addressed by family law practitioners. Failure to divide a pension properly during a divorce can lead to a minefield of malpractice claims and disciplinary actions.2 Judges also need to be aware of the formal rules for pension division if their property division orders are to be properly enforced and have the desired effect. In addition, judges need to be aware of pension division issues because of the increasing number of pro se divorces, a number that may be as high as 70 percent of all Wisconsin divorces,3 in which the litigants will look to the judge to guide them to an equitable property division.

    Scope of the Article

    Nilesh P. PatelNilesh P. Patel, U.W. 2002, is a former staff member of the Upper Midwest Pension Rights Project (UMPRP), a federally funded nonprofit that provides free pension claims assistance to residents of Wisconsin and four other states. Currently, he is an advisor in the U.W. Law School's Career Services Office and principal attorney in the Mahadev Law Group LLC, Waunakee, which focuses on employment law issues. The author thanks UMPRP attorney Christopher Rendall and law clerks Robert Ellis, Matthew Johnson, and William Roberts for their assistance. Thanks also to attorney John Hotz, deputy director of the Pension Rights Center in Washington, D.C.

    This article describes: how the federal Employee Retirement Income Security Act of 1974 (ERISA) affects the division of pension benefits at divorce, historically an issue governed only by state law; qualified domestic relations orders (QDROs) - the only legal tool for enforcing a pension benefit division; and issues that attorneys need to consider when drafting or submitting QDROs and that judges need to consider when dealing with pro se divorcees.4 The article covers the major legal issues to provide an overview for the occasional family law practitioner and a refresher for the experienced one. This article does not cover specific strategies or drafting techniques for QDROs5 or remedies for improper pension divisions.

    Definition and Types of Pension Benefits

    In this article, the term "pension benefit" refers to any plan sponsored by a private employer or by a labor union that provides: 1) retirement income; or 2) deferred income payable at retirement or after employment has ended.6 All of the pension benefits discussed here are subject to ERISA. There are other pension and retirement benefits, however, that are not covered by ERISA7 and that may have their own pension division rules, such as those set up by federal, state, or local government employers; tax-exempt church plans; plans maintained solely to comply with worker's compensation, unemployment compensation, or disability insurance laws; plans maintained outside the U.S. primarily for nonresident aliens; and excess benefits plans.

    There are three types of ERISA-regulated pension benefits. One type is the traditional employer sponsored pension plan, known also as a defined benefit plan, in which an employer promises a predefined monthly benefit amount to the employee. The predefined amount typically is based on a formula, such as the employee's average annual salary over the three highest earning years, times a multiplier (usually between 1 and 2 percent), and multiplied again by the employee's years of service. In defined benefit plans, it is the employer's responsibility to fund the pension plan and to come up with the money to pay the promised benefit amount.

    A second type is the defined contribution plan, in which the employee's benefit is based on contributions by the employer, the employee, or both, to an individual employee account. The benefit, or account balance, is typically paid out in a lump sum. The employee often bears the responsibility of funding the plan and the risk for managing the funds, so that the employee will be provided with a sufficient retirement income. Examples of such plans include 401(k) plans, money purchase pension plans, profit sharing plans, stock bonus plans, and employee stock ownership plans.

    The third type combines features of the first two plans and commonly is referred to as a "hybrid plan." These plans are relatively new and quite controversial because older workers allege the benefits accrual formula discriminates against them.8 Examples of such plans include cash balance plans, pension equity plans, floor-offset plans, age-weighted profit-sharing plans, and target benefit plans.9

    State Law Divides Pensions but the Division Must Comply with ERISA to be Enforced

    During a divorce, pension benefits often are one of the largest divisible assets and probably the largest if the couple does not own a house. The division of property at divorce is governed by Wisconsin's domestic relations law. Currently, Wis. Stat. section 767.255(2)-(3) states that a court shall presume that all property, except property acquired as a gift from someone other than the spouse or by reason of the death of another person, is to be divided equally between the parties.10 As far back as 1958, Wisconsin courts have considered pension benefits as part of the marital estate and either divided them or distributed other assets to mimic a pension division.11

    In Steinke v. Steinke, the Wisconsin Supreme Court ruled that a spouse's interest in a pension plan is part of the marital estate that must be divided at divorce, even if the pension plan funds are unavailable at the time of divorce.12 The court concluded that a pension plan is part of the wealth that accumulates during a marriage and, based on the policy that a marriage is a partnership in which each spouse contributes something valuable, each spouse must equitably share in the accumulated wealth and assets at divorce.

    The Wisconsin Court of Appeals reinforced this policy in Rodak v. Rodak, in which a husband sought to have the premarital portion of his pension contributions excluded as nonmarital property during divorce.13 The court of appeals ruled that the amount of pension benefits earned before marriage may be considered as a factor in how the marital property is divided at divorce under Wis. Stat. section 767.255(2),14 but the pension's full value nevertheless must be included in the couple's marital estate.

    Although a Wisconsin court has the authority to divide a pension at divorce, attorneys and judges should be aware that they must take federal law into account to enforce the division. A judge may issue a simple order stating that each party is to have a 50 percent interest in available pension and retirement plans, but the pension plan may not be bound to honor that order due to ERISA.

    Congress Sets a Federal Standard for Pension Benefits

    The U.S. Congress passed ERISA in 1974 to regulate the administration of private pension plans and to provide, through the Pension Benefit Guaranty Corporation (PBGC), some protection to individuals whose employers are unable to meet their pension obligations.15 ERISA bolstered protections for pension participants and beneficiaries. Employers offer pension benefits in order to take a tax deduction on contributions and to provide a competitive benefit to recruit workers. Before ERISA's enactment, however, there were no standards regarding minimum eligibility periods, vesting periods (length of service before benefits are, for the most part, unforfeitable), and break-in-service penalties, nor any standards regarding what would happen if the employer underfunded the plan and could not pay out the promised benefit. Many plans had 15- or 20-year vesting periods, during which the employee continuously had to work for the company, without a break in service. If employment was terminated before the vesting period was completed, the entire pension benefit was lost. So while the employer gained the benefit of the tax deduction, the employee and family were left with nothing at retirement, even when the employer terminated employment in order to avoid paying pension benefits.16

    ERISA imposed minimum standards on pension plan administrators for information disclosure, vesting, eligibility, and fiduciary duties, thereby requiring employers and administrators to act only in the interest of the plan participants and beneficiaries. ERISA also provided an enforcement mechanism by which participants could sue for fiduciary violations, for wrongful denial of benefits, and for a variety of technical and statutory violations, including discrimination, retaliation, and interference with ERISA rights.17

    Congress intended ERISA to be the only standard for pension plans and added a preemption clause stating that ERISA supersedes any and all "state laws" that "relate to" an ERISA-covered pension plan.18 This preemption clause prevents conflicting and inconsistent regulation of pension plans by state and local authorities. The term "state laws" refers to state statutes as well as all laws, decisions, rules, regulations, or other state action having the force of law that directly or indirectly regulate the terms and conditions of an ERISA-covered pension benefit plan.19 State common law and the rules of any political subdivision, agency, or instrumentality also are preempted. Because of ERISA's preemption clause, participants, beneficiaries, and plans are limited to the rights, obligations, and remedies provided by ERISA and a supplementary body of federal common law.20

    Another of Congress's goals when passing ERISA was to ensure that participant benefits were available at retirement. One of the ways ERISA achieved that goal was through an anti-alienation/anti-assignment clause, which prevents a participant from assigning benefits to anyone else and prevents a third party from garnishing or levying the benefits to pay a debt.21 ERISA, however, exempts from the anti-alienation clause collection and enforcement of unpaid federal, state, or local taxes and collection of overpayments by the plan.22

    Judicial Exceptions to ERISA Preemption

    Naturally, the preemption and anti-alienation clauses created a problem for plan administrators in situations in which state courts ordered the division of pension benefits. After ERISA's enactment, plan administrators were placed in the uncomfortable position of either obeying a state court's order to divide a pension or following ERISA's mandate to act in the participant's interests and rejecting any alienation or assignment of plan benefits. Such a situation occurred in Wisconsin in 1979, five years after ERISA's effective date.

    In Savings & Profit Sharing Fund of Sears Employees v. Gago,23 a Wisconsin family court commissioner awarded one-half the value of a husband's pension fund to the divorcing wife. The husband, however, refused to comply with the order and when the wife asked the plan for payment, it refused based on its belief that the division would violate ERISA. The wife then filed an action in circuit court, which ordered the fund to make direct payments to the wife. The fund then filed an action in federal court to stop enforcement of the state court order. The federal district court and ultimately the Seventh Circuit Court of Appeals ordered the fund to comply with the Wisconsin court order.24

    In deciding this case, the Seventh Circuit considered whether ERISA preempted the Wisconsin law and whether the pension division was a prohibited assignment or alienation under ERISA. The court recognized that the Wisconsin order "related to" a pension plan governed by ERISA because, in the normal sense of the phrase, it had a connection or reference to the plan. Nevertheless, the court resolved the preemption issue by citing to the U.S. Supreme Court opinion in Shaw v. Delta Air Lines, in which the Court stated that some state actions, such as pension garnishment to enforce alimony and support orders, are too tenuous, remote, or peripheral to be considered to "relate to" an ERISA plan.25 Because the Shaw child support/alimony order occurred in the context of a divorce, the Seventh Circuit reasoned that a property division in the context of a divorce also was too tenuous to require preemption.

    The Seventh Circuit also rejected the fund's argument that the pension division was an impermissible assignment or alienation under ERISA. If the court had found a conflict between the Wisconsin order and ERISA, the Wisconsin order would have been preempted based on the Supremacy Clause of the U.S. Constitution.26 That being said, federal courts tread lightly in the context of state domestic relations law and will not find a conflict unless state family law and property law do major damage to "clear and substantial" federal interests.27 While the Supreme Court had found a conflict and preempted state laws in cases like McCarty v. McCarty28 and Hisquierdo v. Hisquierdo29 because state courts were dividing federal benefits in a manner contrary to the federal framework, the Seventh Circuit found no such damage to federal interests in Gago. Considering that one of ERISA's goals was to have benefits available for participants and their dependents or beneficiaries, the court reasoned that there was no conflict because Congress had not tried to limit pension divisions at divorce.

    Congress Reasserts Federal Supremacy and Increases Protections for Women

    While Wisconsin courts and the Seventh Circuit ruled that ERISA did not preempt state court divisions of pension benefits at divorce, a split occurred among other states and federal circuits.30 A year after Gago was decided, Congress passed an amendment to ERISA, the Retirement Equity Act of 1984 (REA), to address the split among the circuits and to clarify that with limited exceptions, ERISA was to be the controlling law for regulating pension benefit plans.

    The REA also filled certain gaps in ERISA that disadvantaged women, such as service period calculation rules that penalized women (and perhaps men) who took time off for pregnancy and child rearing. Another gap in ERISA allowed the participant spouse (typically, at that time, the husband) to unilaterally take the pension payments in the form of a single life annuity. This single life annuity was paid while the participant was alive and, once the participant died, the hapless widow would not have much income to live on. Even today, many widows face the bleak prospect of having to live solely off Social Security benefits once their husbands' pre-REA pension benefits stop paying.

    In light of the enactment of the REA, decisions like Gago were overruled, and pension division orders would be enforceable only if they were considered to be a qualified domestic relations order (QDRO) under ERISA.31 The next section outlines the formal requirements for a QDRO and issues that practitioners and judges need to be aware of when dealing with a QDRO.

    Enforcing State Court Orders Through Proper Use of QDROs

    As amended by the REA, ERISA currently states that a pension plan may not assign or alienate benefits.32 This prohibition applies to the creation, assignment, or recognition of a right to any benefit stemming from a participant's account made under a domestic relations order (DRO), unless the plan determines that the DRO is a qualified domestic relations order (QDRO).33 A DRO is any judgment, decree, or order made under a state's domestic relations law that relates to the rights of alternate payees (a participant's spouse, former spouse, child, or some other dependent)34 to all or part of the participant's pension benefits.35

    A DRO is considered a QDRO only if:

    1) The order includes the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order;36

    2) The order lists the amount or percentage of the participant's benefits to be paid by the plan to each alternate payee, or the manner in which the payment amount or percentage will be determined;37

    3) The order lists the number of payments or the time period to which the order applies;38

    4) The order lists each plan to which the order applies;39

    5) The order does not require the plan to provide any type or form of benefit, or any option not already provided by the plan.40 There are, however, three exceptions:41

    a) The order may require that the alternate payee's portion be paid before the participant separates from service or on or after the date on which the participant attains or would have attained the earliest retirement age.

    b) The order also may require payment as if the participant had retired on the date on which the payments are to begin, factoring in only the present value of benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement.

    c) Finally, the order may require the plan to provide the benefits to the alternate payee in any form already provided by the plan, except in the form of a joint and survivor annuity for the alternate payee and his or her spouse.

    6) The order does not require the plan to provide increased benefits (determined on the basis of actuarial value);42 and

    7) The order does not require payments to an alternate payee that conflict with payments to another alternate payee under a previous QDRO.43

    QDRO Considerations

    In enacting ERISA, Congress may have met its goal of creating a single standard for regulating pension benefit plans; the standard, however, is not simple. The list of QDRO requirements is just the start of a complex path, which presents many traps for family law practitioners. Because the nonparticipant spouse is typically the one seeking the division of pension benefits, the QDRO drafting burden falls on that spouse's attorney. If both spouses have pension plans that are to be part of the marital estate, then both attorneys (assuming there are two attorneys) will have to play the dual roles of participant's counsel and nonparticipant's counsel. As a result, both attorneys will have to take an active part in drafting QDRO provisions for their client's nonparticipant interests.

    Some of the issues that attorneys for nonparticipant spouses need to keep in mind include:44 making sure all available pension benefits are discovered; determining the appropriate value of each pension plan; determining whether any other QDROs are already recognized by the plan or whether there are beneficiaries other than the nonparticipant spouse listed on the plan documents; understanding the plan's QDRO requirements, benefit payment options, and benefit calculation formulas before drafting a DRO; putting the plan on notice that a divorce is underway and that a DRO is being drafted; working with the plan administrator to get a preapproval on the draft DRO; getting a draft DRO accepted and entered by the circuit court and presenting a copy of the DRO (even if it is not qualified) to the plan; and having the final signed DRO formally recognized as a QDRO.

    While a plan may offer a model QDRO, attorneys are under no obligation to use it and likely will need to amend it because a model QDRO is written from the plan's perspective. The model document may contain terms that are convenient for the plan administrator but that hurt the client. For example, a model QDRO might not provide payment options, such as death benefits, because they are expensive for the plan to administer.45

    When drafting the DRO, an attorney should pay special attention to the time period at which the nonparticipant spouse obtains the right to control and have access to the benefits. To avoid post-divorce disputes regarding how the pension benefits are managed or whether the participant is intentionally diminishing the value of the pension benefits, the DRO or QDRO should be drafted to divide the control and access of the benefits, between the parties, as of the divorce date. If the participant intentionally diminished benefits before the DRO's entry, the court should be informed so that the court takes such misconduct into account when deciding how to divide the marital estate.46

    Other considerations include whether the DRO accounts for dividing future increases to the participant's benefits through cost of living increases or incentives for the participant to retire early; whether the DRO provides for continuing and undiminished benefits if the participant dies or remarries; the tax impact of benefit distributions; and who will bear the costs of any reductions in benefits if the pension plan is terminated and benefits are reduced by the PBGC. Given the complexity and range of issues, an attorney unfamiliar with ERISA should contact a QDRO expert and an actuary to assist with drafting and understanding the plan's financial information.

    Attorneys who represent plan participant spouses are spared the trouble of setting up the groundwork for a QDRO and can play a spoiler role by identifying ERISA issues that prevent a DRO from becoming a QDRO. Many times, this task will be made easier by plan administrators who will reject a DRO that does not conform to the plan's QDRO requirements. Participants' attorneys will, however, need to play a much larger role in negotiating the terms of the DRO so that the participant retains the maximum possible portion of the benefits, captures future increases, and is able to provide the largest benefit amount to a future spouse or other beneficiary. Other issues include making sure that the client understands the responsibilities and impact of the QDRO47 and that the nonparticipant spouse does not double dip by receiving both a percentage of the pension and a death benefit from the participant's share after the participant's death.48

    Lastly, judges face a unique problem when dealing with QDRO issues in pro se divorces. Pro se divorces are on the rise in Wisconsin, with approximately 70 percent of all divorce actions being pro se. Without attorneys to help the court understand ERISA and QDROs, judges must be aware of ERISA rules and must manage the QDRO process by instructing litigants to produce all relevant employment and pension plan information and imposing a duty on one of the parties to produce a draft DRO. Without the benefit of adversarial counsel to negotiate the key DRO terms, however, the judge now faces a dilemma in how to produce an equitable marital division while also remaining neutral.49

    A judge who remains completely impartial could leave it to the parties to decide how the pension benefits will be divided and let the parties live with their choices, especially in instances when a client can afford an attorney but chooses not to use one. However, self representation is a Constitutional right50 and taking a buyer beware approach with pro se litigants is hardly fair to low income divorcees (especially those who fall just outside the income eligibility guidelines for free legal services through organizations such as Legal Action of Wisconsin) or unsophisticated parties who do not understand the legal impact of their choices. For instance, if a court intended a true 50 percent pension division, it would be unfortunate if the QDRO failed to include a provision taking into account future cost of living increases or early retirement subsidies that do not flow to the nonparticipant spouse.


    ERISA limits enforcement of state court orders dividing pension benefits at divorce to orders that are determined to be a QDRO. In order to properly draft and implement the terms of a pension division, family law practitioners, in addition to being familiar with Wisconsin rules, must factor in ERISA's QDRO rules, the rules and features of each pension plan to be divided, and federal cases dealing with QDROs. State court judges also must be familiar with these additional rules and cases in pro se divorces to ensure their orders can be properly enforced and executed.


    1Lee v. Lee, No. 93-0480, 1993 WL 517012, at *2 (Wis. Ct. App. Dec. 14, 1993) (unpublished limited precedent decision).

    2Thomas J. Watson, Avoid Pitfalls When Dividing Marital Assets, 79 Wis. Law. 21 (March 2006).

    3Wis. Ct. Sys., New Self-help Family Web Site Helps People Without Attorneys, Mar. 10, 2006 <>.

    4The article does not cover any changes to law as a result of the recent Pension Protection Act of 2006. The author believes that Act does not impact the analysis for this article.

    5See Hilary Greer Fike, QDROs: The High Price of Poor Drafting, Part I, 28 Col. Law. 79 (July 1999) <>, and Hilary Greer Fike, QDROs: The High Price of Poor Drafting, Part II, 28 Col. Law. 89 (Sept. 1999) <>, for a review of issues related to drafting and submitting a QDRO.

    6Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1002(2)(A) (2006).

    729 U.S.C. § 1003(b)(1)-(b)(5).

    8Cooper v. IBM Personal Pension Plan, 57 F.3d 636 (7th Cir. 2006).

    9David Clayton Carrad, The Complete QDRO Handbook: Dividing ERISA, Military, and Civil Service Pensions and Collecting Child Support from Employee Benefit Plans, 17 (2d ed. 2004).

    10See 2005 Wis. Act 443, 8 Wis. Legis. Serv. (West) 2019 (effective Jan. 1, 2007, Wis. Stat. § 767.255 is renumbered and substantially amended to Wis. Stat. § 767.61)

    11See Steinke v. Steinke, 126 Wis.2d 372, 379-80, 376 N.W.2d 839 (1985).

    12Id. at 381-82.

    13Rodak v. Rodak, 150 Wis. 2d 624, 442 N.W.2d 489 (Ct. App. 1989).

    14Wis. Stat. § 767.255(3)(m) (amended and renumbered as Wis. Stat. § 767.61(3)(m), effective Jan. 1, 2007).

    1529 U.S.C. § 1302.

    16West v. Butler, 621 F.2d 240, 245 (6th Cir. 1980).

    1729 U.S.C. § 1140.

    1829 U.S.C. § 1144(a).

    1929 U.S.C. § 1144(c).

    20Steven J. Sacher, Employee Benefits Law 775, 877, n. 8 (2d ed. 2000).

    2129 U.S.C. § 1056(d)(1).

    22Sacher, supra note 20, at 266 (citing Treas. Reg. Sec. 1.40(a)-13(b)(2)).

    23Savings & Profit Sharing Fund of Sears Employees v. Gago, 717 F.2d 1038 (7th Cir. 1983).


    25Id. at 1040.

    26Id. at 1041-42.

    27Id. at 1042.

    28McCarty v. McCarty, 453 U.S. 210 (1981).

    29Hisquierdo v. Hisquierdo, 437 U.S. 572 (1979).

    30Metropolitan Life Ins. Co. v. Wheaton, 42 F.2d 1080, 1082-83 (7th Cir. 1994).


    3229 U.S.C. § 1056(d)(1).

    3329 U.S.C. § 1056(d)(3)(A).

    3429 U.S.C. § 1056(d)(3)(B).

    3529 U.S.C. § 1056(d)(3)(K).

    3629 U.S.C. § 1056(d)(3)(C)(i).

    3729 U.S.C. § 1056(d)(3)(C)(ii).

    3829 U.S.C. § 1056(d)(3)(C)(iii).

    3929 U.S.C. § 1056(d)(3)(C)(iv).

    4029 U.S.C. § 1056(d)(3)(D)(i).

    4129 U.S.C. § 1056(d)(3)(E)(i)(I)-(III).

    4229 U.S.C. § 1056(d)(3)(D)(ii).

    4329 U.S.C. § 1056(d)(3)(c)(iii).

    44See Carrad, supra note 9.

    45Fike, 28 Col. Law. at 81 (July 1999).

    46See Wis. Stat. § 767.255(3)(m) (amended and renumbered as Wis. Stat. § 767.61, effective Jan. 1, 2007).

    47See Lee v. Lee, 1993 WL 517012 (participant's mistaken belief about impact or scope of QDRO does not qualify as justifiable or excusable basis to reopen property division order under Wis. Stat. section 806.07).

    48Fike, 28 Col. Law. at 90 (Sept. 1999).

    49Wis. Ct. Sys., Meeting the Challenges of Self-Represented Litigants in Wisconsin: Report to Chief Justice Shirley Abrahamson by the Wisconsin Pro Se Working Group 9 (Dec. 2000) <>. The Milwaukee Bar Association, working in conjunction with Legal Action of Wisconsin, recruits volunteer employee benefits attorneys who could assist with QDRO issues <>.

    50Meeting the Challenges of Self-Represented Litigants in Wisconsin, supra note 49, at 5.

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