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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
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Failure to change beneficiary designation negates waiver in divorce decree, Supreme Court holds

The United States Supreme Court has resolved a split of authority among the Federal Circuit Courts by unanimously concluding that: (1) the waiver by a former spouse of a plan interest in a divorce decree that did not constitute a qualified domestic relations order does not violate ERISA’s anti-alienation rule, and (2) plan administrators are not required to honor waivers expressed in external documents that do not comply with plan terms and procedures governing beneficiary designations. As a consequence of the decision, a former spouse who attempted to waive her rights in a participant’s 401(k) plan remained entitled to the benefits because the participant had not designated a new beneficiary prior to his death.

Spousal waiver of benefits in divorce decree

The employee in Kennedy v. Plan Administrator of the DuPont Savings and Investment Plan was a participant in his employer’s savings and investment plan (SIP). In 1971, he married and signed a beneficiary designation form naming his wife as sole beneficiary of his SIP benefits. No contingent SIP beneficiaries were named. The couple were divorced in 1994. Pursuant to the divorce decree, the ex-wife agreed to be divested of “any rights related to any retirement plan, pension plan, or like benefit program existing by reason of [the husband’s] employment.”

In 1997, a court issued a qualified domestic relations order (QDRO) that provided benefit disbursement instructions for some of her husband’s non-SIP employee benefit plans. However, no QDRO covering the SIP was ever submitted. The husband retired in 1998 and died in 2001. He never executed any documents replacing or removing the ex-wife as the beneficiary of his SIP benefits. However, he did execute a new beneficiary designation form naming his daughter as the beneficiary of his interest in a separate pension plan.

The daughter, as executrix of the estate, subsequently sent a letter to the former employer, alleging that the ex-wife’s designation as beneficiary was invalid and demanding that the SIP funds be distributed to the estate. However, the employer, relying on the SIP beneficiary designation form, paid the SIP benefits to the ex-wife. In a lawsuit filed in the U.S. District Court for the Eastern District of Texas, the daughter sought to recover the SIP benefits on behalf of her father’s estate, claiming that the ex-wife had waived her rights to the SIP benefits through the divorce decree. The district court agreed and granted summary judgment in favor of the estate, holding that it was entitled to the value of the SIP benefits.

The employer appealed, and the Fifth Circuit reversed, ruling that the spouse’s waiver was an assignment or alienation of her interest, in violation of ERISA (see CCH Pension Plan Guide ¶24,000W ). The waiver, the court reasoned, was an assignment or alienation to the decedent’s estate, as the party (absent a designated contingent beneficiary) next in line for benefits. Although ERISA does provide an exception to the anti–alienation rule for QDROs, the court explained, the waiver was not executed pursuant to a QDRO.

Waiver of spousal rights does not require QDRO

The first question addressed by the Supreme Court was whether a spouse may waive plan benefits through a divorce decree that is not a QDRO, without violating ERISA’s anti-alienation rule.

CCH Note: The Fifth Circuit maintained that, in a marital dissolution context, a QDRO provides the sole exception to the anti-alienation rule. The Third Circuit agreed with the view of the Fifth Circuit. However, the Fourth and Seventh Circuits have adopted different positions. The Supreme Court decision resolves the split among the Federal Circuits.

Initially, the Court noted that the traditional meaning and history of the terms “assignment” and “alienation” require a transfer of an interest. In addition, the IRS has interpreted Reg. §1.401(a)-13(c) (1)(ii) (setting forth the anti-alienation rule applicable to tax-qualified plans) to mean that no party acquires an interest enforceable against the plan pursuant to a beneficiary’s waiver of rights when the beneficiary does not attempt to direct his or her interest to another person.

The Supreme Court, emphasizing that the waiver was not an attempt by the former spouse to transfer or direct the plan interest, accordingly ruled that the waiver was not an assignment or alienation of benefits that would violate ERISA. The Court would not view the decedent’s estate as the assignee or transferee of the decedent’s property. In addition, the Fifth Circuit’s interpretation, precluding a waiver of benefits outside of a QDRO was, the Court explained, inconsistent with the general principle of trust law (which underlies ERISA) that a designated spendthrift beneficiary may disclaim a trust interest.

Plan administrator not required to honor waiver contrary to plan terms

The central and determinative issue addressed by the Court was whether the plan administrator was required to honor the waiver and distribute the SIP balance to the estate, although the waiver was not executed pursuant to plan terms and procedures.

Initially, the Court explained that a plan administrator is required by ERISA §404(a)(1)(D) to act in accordance with plan documents. A plan administrator, in order to assure certainty and uniformity in plan administration (especially with respect to the disbursement of benefits) is further allowed to rely on plan documents and records, without being required to examine and interpret external documents, such as divorce decrees.

The governing plan documents in this case, the Court noted, required the administrator to pay benefits to the participant’s designated beneficiary. The plan anticipated circumstances such as divorce and specified procedures by which the beneficiary could be changed. However, the participant did not change the beneficiary designation and the waiver did not warrant deference because it did not adhere to specified procedures. Therefore, the Court concluded that the plan administrator acted properly in relying, pursuant to plan terms, on the unchanged beneficiary designation and distributing the participant’s benefits to his former spouse.

CCH Note: The decision relieves plan administrators of the obligation to examine external documents, such as divorce decrees and property settlements, in distributing benefits. However, the decision may effect what plan participants in divorce situations may view as an injustice or at least a result contrary to the intent of the parties to the divorce decree. Therefore, participants who wish to deny benefits to a former spouse should be certain to comply with procedures specified in the plan for redesignating beneficiaries. Plan sponsors who wish to ease administration and avoid litigation should ensure that their plans provide clear procedures for waiving benefits and changing designated beneficiaries. Towards this end, a plan sponsor may wish to consider implementing terms that automatically revoke a former spouse’s beneficiary status upon divorce.

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