By Mike Beaver
In recent ruling under the Employee Retirement Income Security Act (ERISA), the U.S. Supreme Court held that a plan administrator must follow the requirements contained in a retirement plan for designating and changing beneficiaries, even if it means that an ex-spouse receives retirement benefits because an employee forgot to change beneficiary designations after a divorce. Read on to see how an employee’s error paid big dividends to his ex-spouse.
Background
William Kennedy was a long-time employee of DuPont, where he participated in both a pension plan and a contributory savings plan. Under the plans, a participant had the right to designate and change a beneficiary. The plans also allowed a beneficiary to make a “qualified disclaimer” of benefits under the tax code.
In 1974, Kennedy designated his then-wife as beneficiary. The couple divorced in 1994. The divorce decree provided that the ex-wife was “divested of all right, title, interest, and claim” to any benefits under any type of retirement plan. At the time of the divorce, Kennedy executed a change of beneficiary form designating his daughter as beneficiary with respect to the pension plan, but failed to designate a new beneficiary for the savings plan.
Kennedy died in 2001. His daughter, who was also designated as the administrator of Kennedy’s estate, asked DuPont to distribute $400,000.00 in savings plan funds to Kennedy’s estate. DuPont, relying on the 1974 beneficiary designation, instead paid the funds to Kennedy’s ex-wife. Kennedy’s daughter then sued DuPont and the savings plan administrator, arguing that the funds were improperly paid to Kennedy’s ex-wife because the 1994 divorce decree constituted a waiver of benefits.
Illustrating the peril to employers in situations like this one, the trial court had held that DuPont should have considered the divorce decree to constitute a “waiver” of benefits, and thus ordered DuPont to pay the estate (in other words, to pay the benefits a second time). The Fifth Circuit Court of Appeals reversed that decision. The Supreme Court agreed to hear the case because various Circuit Courts of Appeal around the country had decided the issue inconsistently.
Supreme Court Adopts “Plan Documents” Rule
The Supreme Court adopted what is commonly called the “plan document rule,” meaning that a plan administrator is required to abide by the literal terms of the plan, and cannot recognize the claims of undesignated beneficiaries where those claims are contrary to plan requirements and procedures. The Court further held that only a “qualified domestic relations order,” or QDRO, can effectively overcome a pre-divorce beneficiary designation in favor of an ex-spouse. ERISA expressly requires that plan administrators recognize QDROs, and further requires that every plan must adopt procedures for determining whether a particular court order is in fact a QDRO. The Court held that the 1994 Kennedy divorce decree was not a QDRO, and thus it was ineffective to void the beneficiary designation of Kennedy’s ex-wife. Thus, the Supreme Court found that DuPont had correctly paid the ex-wife.
Employee’s Error Results in Windfall for Ex-Wife
The result in this case may seem harsh, in that it requires payment to an ex-spouse many years after divorce, against the apparent intent of the plan participant, and even though a divorce decree had ordered otherwise. The Supreme Court held, however, that this approach best protects employers and plan administrators by providing for simple and unambiguous plan administration. The Court stated that plan administrators should not have to interpret documents outside of the plan, and be left to determine the intent of a deceased participant based upon often ambiguous and even contradictory evidence. Although a QDRO is not a “plan document,” it is recognized by ERISA, and must meet certain objective requirements. Thus, it is not as burdensome to require plan administrators to abide by QDROs. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. __. 129 S. Ct. 865 (Jan. 26, 2009).
Lessons Learned
There are several lessons an employer can learn from this case. First, every employer sponsoring any kind of retirement plan should be sure that each plan adopts written procedures for determining whether a divorce decree or other court order is a QDRO (which is required by ERISA in any event). Second, even though it may seem inequitable that a benefit should be paid to an ex-spouse, employers are probably wise to draft plans so as to require clear cut procedures for designating and changing beneficiaries, and should avoid plan provisions that might arguably recognize non-QDRO domestic relations order (under the “plan document rule,” an employer could adopt plan language to do this, but it could place the employer in a fact-finding quagmire, resulting in litigation).
In short, the Supreme Court’s decision places virtually all the responsibility for correct beneficiary designation on employees. The employer’s responsibility is limited to drafting plans with clear beneficiary designation procedures. An employer should provide those procedures, and administer the plan accordingly, without creating any additional responsibilities for itself. Although it is certainly unfortunate that some employees will forget to change beneficiaries after a divorce, it is not the responsibility of the employer or the plan administrator to “clean up the mess,” and then be subjected to expensive litigation and possible double liability.
For more information on this case and ERISA issues, contact Mike Beaver (303) 290-1631 or mbeaver@hollandhart.com.
This article is posted with permission from Colorado Employment Law Letter, which is published by M. Lee Smith Publishers LLC. For more information, go to www.hrhero.com.
