The U.S. Supreme Court has unanimously held that the administrator of an ERISA retirement plan properly paid a deceased employee’s account balance to his former spouse. The Court determined that payment to the ex-spouse was appropriate because she was the employee’s designated beneficiary under the plan, even though she had allegedly waived her interest in the plan benefits in the parties’ divorce. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, et al., No. 07-636 (U.S. Jan. 26, 2009).
Employee Names Spouse as Beneficiary, then Fails to Change Beneficiary after Divorce
William Kennedy worked for E. I. du Pont de Nemours & Company (“DuPont”) and participated in its Savings and Investment Plan (“SIP”). Under the SIP, William could designate a beneficiary to receive his SIP benefits upon his death. The SIP states that all beneficiary designations must “be made by employees in the manner prescribed by the [plan administrator].” The SIP further states that a beneficiary may renounce her interest in the plan by submitting a “qualified disclaimer” of benefits as defined under the Internal Revenue Code of 1986, as amended (the “Code”). (Under Section 2518 of the Code, a “qualified disclaimer” allows a beneficiary to refuse an interest in property and thereby avoid federal gift tax.) In the absence of a beneficiary designation, the SIP provides that plan benefits are paid to the decedent’s estate.
In 1974, William designated his wife, Liv, as his beneficiary under the SIP. He named no contingent beneficiary in the event that Liv predeceased him or disclaimed her interest. In 1994, the couple divorced. Although the divorce decree declared that Liv was “divested” of any interest in the SIP benefits, the decree was never submitted to the plan administrator and was not a qualified domestic relations order (“QDRO”).
William never changed his SIP beneficiary designation, and when he died in 2001, Liv remained his named beneficiary. Upon his death, the SIP plan administrator paid the plan benefits to Liv. William’s estate then sued the plan administrator and DuPont, alleging that William’s SIP account should have been paid to the estate because Liv had waived her rights to the benefits.
Plan Documents Govern
The Supreme Court based its decision on the “plan document rule,” holding that because plan administrators are required by ERISA to adhere to plan documents, the plan administrator may ignore a purported waiver if the waiver is executed in a manner inconsistent with the plan documents. See Section 404(a)(10)(D) of ERISA. The Court found that honoring the Kennedys’ divorce decree would be inconsistent with the plan documents because the plan’s “qualified disclaimer” procedure had not been satisfied. In short, the Court has held that plan administrators should follow the terms of the plan in paying benefits.
Waivers May Be Recognized in Other Circumstances
The Court cautioned that ERISA does not bar all waivers and noted that its opinion does “not address a situation in which the plan documents provide no means for a beneficiary to renounce an interest in benefits.” The Court did not rule that Liv’s waiver was invalid, but rather that the SIP could disregard the waiver and follow plan terms in paying benefits. The Court expressly declined to comment upon whether the estate might have a claim for the SIP benefits against Liv. The ruling also seems to leave open the possibility that, if the plan does not contain a specific procedure for waiving plan benefits, the plan administrator might have a duty to consider the divorce decree or another purported form of waiver.
Waiver Not Invalidated by ERISA’s Antialienation Provision
The Supreme Court clearly stated that Section 206(d) of ERISA, its antialienation provision, did not invalidate the waiver that Liv made in the Kennedys’ divorce decree. This waiver was not an “assignment or alienation” of Liv’s interest in the SIP benefits, the Court said, and thus the waiver was not required to be a QDRO to be an effective waiver of SIP benefits.
The Court distinguished an “assignment or alienation” from a waiver on the grounds that an “assignment or alienation” implies that the beneficiary transfers his interest to another party, whereas a waiver merely renounces the beneficiary’s interest. Therefore, the Court held, a mere waiver of pension benefits is not barred by ERISA’s antialienation provision.
Importance of Trust Law in Interpreting ERISA
As it has done in several recent cases, the Supreme Court looked to the common law of trusts in interpreting the ERISA issues in Kennedy. See Metropolitan Life v. Glenn, __ U.S. __, 128 S.Ct. 2343, 2348 (2008) (Court reviewing denial of an ERISA benefit claim should be “guided by principles of trust law” ); Beck v. Pace Int’l Union, 551 U.S. 96, 101 (2007) (The law of trusts “serves as ERISA’s backdrop”). In its trust analysis, the Court found that the antialienation rule of Section 206(d)(1) “is much like a spendthrift trust provision barring assignment or alienation of a benefit.” The Court noted that the beneficiary of a spendthrift trust cannot transfer his interest, but he may waive or disclaim it. The Court applied this same distinction in finding that ERISA’s antialienation rule does not invalidate waivers of ERISA benefits. The Court noted that both the Internal Revenue Service and the U.S. Department of Labor now agree that a beneficiary’s waiver of rights is valid so long as it does not direct pension benefits to another person. See 26 C.F.R. §1.401(a)-13(c)(1)(ii).
Actions for Plan Sponsors
Litigation frequently results when participants die without having updated their beneficiary designations after divorce, widowhood, or remarriage. In light of the Court’s clear statement that some waivers may be valid, plan design changes may minimize the likelihood of lawsuits:
- Retirement plan sponsors should consider introducing a clear procedure for waiving a beneficiary’s interest.
- Sponsors should likewise consider amending plan documents to provide that, in the event of divorce, a participant’s designation of a former spouse as beneficiary will be deemed revoked unless the participant affirmatively elects otherwise.
Plan sponsors should apply these principles to life insurance and death benefit plans, as well as retirement plans.
For additional information, please contact any member of the McGuireWoods Employee Benefits team.