Suit Against Ex-spouse who Waived 401(k) Benefit in Divorce not Foreclosed Even Though Deceased Spouse Failed to Remove her as the Designated Beneficiary
In 2000, William Kensinger, Jr. enrolled in a 401(k) plan sponsored by his employer, URL Pharma, Inc. He named his wife Adele as beneficiary. However, during divorce proceedings in 2008, the two entered into an agreement in which they agreed to waive, release and relinquish any rights they may have to each others’ individual retirement accounts or other retirement benefits or savings plans. Nine months following the divorce, William died without having removed Adele as the designated beneficiary of his plan account. A dispute then arose between William’s estate (who was entitled to the plan account in the absence of a valid beneficiary designation) and Adele regarding distribution of his plan assets.
This is a fact pattern that arises frequently. The United States Supreme Court has held, in a case involving an almost identical fact pattern, that the plan administrator must pay the benefit in accordance with the designation of beneficiary. The rationale for this ruling is twofold. First, it lets employers establish a uniform administrative scheme, with a set of standard procedures to guide processing of claims and disbursement of benefits on the basis of plan documents without having to refer to any extrinsic document. Second, it avoids subjecting the plan to potential double liability. If the plan honored the waiver, it could be sued by the named beneficiary for disregarding the mandate of ERISA (Employee Retirement Income Security Act of 1974, as amended); if it honored the plan documents, it could be sued by the estate for disregarding a valid waiver.
Both the trial court and appellate court in the Kensinger case agreed that plan fiduciaries must abide by a deceased participant’s beneficiary designation form and pay benefits to that beneficiary. That issue was not disputed on appeal. The issue on appeal was whether a state court lawsuit by the estate of the deceased participant to recover benefits paid to his ex-spouse per a common law agreement is permissible under ERISA.
Reversing the trial court, the appellate court found that if, after distribution, the ex-spouse’s right to the funds is challenged because of her common law waiver, that challenge may be litigated as an ordinary contract dispute. Accordingly, the appellate court ruled that permitting suits against beneficiaries after benefits have been paid does not implicate any concern of expeditious payment or undermine any core objective of ERISA.
This case offers two important points: First, waivers of rights to an ERISA plan benefit in a marital settlement agreement are not sufficient under ERISA. The only way to override payment of an ERISA plan benefit to a designated beneficiary is through a Qualified Domestic Relations Order (QDRO). That is a court order that contains information specified by ERISA and assigns all, a portion or none of the benefit to the ex-spouse incident to the divorce. (QDRO’s containing only a waiver of benefit are rare since it is a lot easier to just change one’s beneficiary designation.) Second, in the event a QDRO is not executed and the employee dose not revoke the designation of his ex-spouse as his beneficiary, the Kensinger case offers another remedy to enforce the validly-executed waiver of benefits by the ex-spouse.
One final observation: Some plans now provide that designation of one’s spouse as a beneficiary is deemed to be revoked upon divorce. Whether such a provision should be included is a policy decision for the employer. It could frustrate an employee’s plan to keep his ex-spouse as a beneficiary, although the better way of dealing with this is through a QDRO. Moreover, this “deemed revocation” has not yet been tested in the courts.