or like benefit program. Following the divorce, William named his - PDF document

VOL. 22, NO. 2 SUMMER 2009 B ENEFITS L AW JOURNAL From the Editor It’s the Plan Document, Stupid: Supreme Court Uses Common Sense to Determine Plan Beneficiary t is an age-old legal problem: Somebody makes a formal plan I designation—naming a beneficiary, electing a benefit, taking out life insurance—and never thinks about it again, even as family cir- cumstances change. When that person dies, there’s then a dispute whether that choice should take precedence over what later circum- stances suggest might instead have been his or her “real” intent. Over the years, many well-intentioned judges have used their powers to “correct” a purported error posthumously. Such judicial interventions may be kind to the worthy widow or orphan in a particular situation but additionally burden the already complex and thankless task of administering an employee benefit plan. Happily, a unanimous Supreme Court now confirms that adminis- trators need look no further than the plan document itself in making plan beneficiary determinations ( Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, No. 07-636 (U.S. Jan. 26, 2009)). The facts in Kennedy are typical. William and Liv Kennedy mar- ried in 1971. William, an employee of DuPont, participated in the company’s pension plan and savings and investment plan, or SIP. In 1974, well before the ERISA spousal rights and qualified domestic relations order (QDRO) rules went into effect, William designated Liv as his beneficiary. Twenty years later, in 1994, William and Liv divorced. The divorce decree stated that Liv “is divested of all right, title, interest and claim to … [William’s] retirement plan, pension plan

From the Editor or like benefit program.” Following the divorce, William named his daughter Kari as his pension beneficiary but, for reasons we’ll never know, left Liv as his SIP beneficiary designation. Like every other qualified defined contribution plan on the planet, the SIP allowed a participant to name one or more beneficiaries “in the manner prescribed by the [administrator.]” DuPont made available a beneficiary designation form for that purpose. The SIP contained standard ERISA anti-alienation and spousal rights language. The Plan also had an unusual feature that allowed a beneficiary to waive his or her rights to a survivor benefit under the estate tax (IRC Section 2518) qualified disclaimer rules. Rounding out the relevant Plan terms, the SIP provided that if an unmarried participant died without a valid beneficiary, the Plan account was paid to the estate. When William died in 2001, Kari—who was William’s executrix— asked the SIP’s administrator, DuPont, to pay the SIP account to the estate. Kari’s reasoning was that although the divorce decree was not a QDRO, it was effectively a waiver by Liv of her interest in her ex-husband’s plan benefits. However, DuPont followed the still- outstanding 1974 SIP beneficiary designation and paid the roughly $400,000 benefit to Liv. Kari then sued DuPont and the Plan for her money, on the ground that Liv’s waiver of her interest in William’s SIP account following the divorce trumped his earlier beneficiary designation. The District Court for Eastern District of Texas, relying on Fifth Circuit precedent, agreed with Kari and ruled that Liv had waived her rights in the divorce decree. The Fifth Circuit reversed, because the decisions cited by the District Court only applied to ERISA welfare plans. As a pension plan, the SIP is covered by the ERISA Section 206(d) anti-alienation rule. Liv’s waiver in the divorce decree, there- fore, was an unlawful attempt to alienate her survivor benefits and must be disregarded. According to the Fifth Circuit, the only way a beneficiary could waive his or her right to a survivor benefit would be through a QDRO. It ruled that William’s designation of his wife as his SIP beneficiary stands. The Fifth Circuit’s reasoning caused a host of problems for plan administrators, among them that it established different rules for resolving messy disputes over beneficiary designations, depend- ing on whether a retirement plan or life insurance/death benefit program was involved. It also essentially forced a beneficiary to accept payment under a plan, even if the beneficiary didn’t want it, need it, desired to pass it to someone else, or had taken a vow of poverty. Worse, the court (similar to several other state and fed- eral rulings) would force plan administrators to pore over divorce decrees, wills, and other legal documents in an effort to ferret out the “true” beneficiary. BENEFITS LAW JOURNAL 2 VOL. 22, NO. 2, SUMMER 2009

From the Editor The Supreme Court granted cert believing it was going to resolve the split over when and how a spouse can waive his or her right to a benefit. During oral argument, however, the Justices realized something further was amiss in the dispute. They began looking into the details of the documents and questioned how anyone could presume to know William’s true intent at the time of his death. The Court then asked for further briefing on the matter. By now, there was palpable fear in the benefits community that the Court might fashion a convoluted, unworkable rule that would be worse than the existing confusion caused by sloppy reasoning and the split among the Circuits. After all, a plan can file an interpleader action, dump the benefits with the court, and let the beneficiaries duke it out. (Of course, in an interpleader action, legal fees can take a big bite out of the benefit, but this is not the plan administrator’s concern.) But like the cavalry in an old movie, the Supreme Court saw through the nonsense and came to the rescue with a simple, sen- sible, and user-friendly solution to the problem. It noted that ERISA Section 404(a)(1)(D) requires that administrators follow the plan document and that the SIP document states that the beneficiary named by the participant under the plan rules is entitled to the money (absent the existence of a spouse or QDRO). Since there was no QDRO, William was unmarried when he died and had designated Liv; case closed. However, the Supreme Court was first compelled by the Fifth Circuit’s misguided reasoning to explain how a waiver (“Don’t give it to me.”) differs from an alienation or assignment (“Give it to that per- son instead of me.”). Looking at the law of trusts, which is “ERISA’s backdrop,” it was clear to the Court that spouses can waive their ben- efits. The Treasury filed an amicus brief in the case stating it did not object to allowing beneficiaries to waive. Next, simplicity and reason took charge. Once Liv and William divorced without a QDRO, Liv lost her spousal rights but remained a beneficiary. Since the Plan offered William “a clear set of instructions for making his own instructions clear, ERISA forecloses any justification for enquiries into nice expres- sions of intent, in favor of … an uncomplicated rule …,” the Court stated that the plan document governs. The Justices said the adminis- trator should be able to “look at the plan documents and records” to determine who gets what, “without going into court.” In other words, absent a QDRO (or a spouse), all the administrator needs is a com- pleted beneficiary designation form and a death certificate. If only the Court had stopped there. But it noted that the SIP offered Liv a way she could have disclaimed her right to William’s account, adding in footnote 13, “[w]e do not address a situation in which the plan documents provide no means for a beneficiary to renounce an BENEFITS LAW JOURNAL 3 VOL. 22, NO. 2, SUMMER 2009

From the Editor interest in benefits.” Of course, the Supreme Court had no way of knowing that the vast majority of retirement plan documents lack any formal waiver provisions. In those rare instances when a beneficiary wishes to waive, the lawyers typically prepare a short form for the beneficiary to sign. In my experience, the Internal Revenue Service, Department of Labor, and employers have no problem with such arrangements. Footnote 13 should be viewed as a throwaway that would not affect a dispute, even if the plan in question did not have an express waiver provision. So what do William, Liv, and Kari teach us? First, employers should repeatedly remind and even nag employ- ees to keep their beneficiary designations current with their circum- stances and relationships. Second, employers should consider adding a provision to all plans that if a participant names his or her spouse as beneficiary, the designation is invalidated if they divorce. If the participant still wants the ex-spouse to receive the benefit, a new designation would need to be filed. Such a provision would have worked under Kennedy (assuming William’s failure to act in his daughter’s interest was truly an oversight), and would probably help many a neglectful participant. Third, beware of footnotes. David E. Morse Editor-in-Chief K & L Gates LLP New York, NY Reprinted from Benefits Law Journal Summer 2009, Volume 22, Number 2, pages 1-4, with permission from Aspen Publishers, Inc., Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com BENEFITS LAW JOURNAL 4 VOL. 22, NO. 2, SUMMER 2009