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Retirement Benefits Planning Update provides information on developments in the field of retirement benefits law. The editors of Probate & Property welcome information and suggestions from readers.
Supreme Court Affirms Payment of Benefits to Divorced Spouse Designated Beneficiary Despite Waiver of Plan Rights
On January 26, 2009, the Supreme Court unanimously held that a plan administrator properly distributed ERISA pension plan benefits to a decedent's divorced spouse who was named on the decedent's beneficiary designation filed with the plan. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan , 129 S. Ct. 865, 868 (2009). The Court also found that the plan administrator had no duty to consider the decedent's estate's claim that the spouse had waived her right to benefits under the plan in a divorce decree. Id. The Court's opinion, written by Justice Souter, states that ERISA § 402(a)(1) requires every employee benefit plan to be established and maintained pursuant to a written document that, under ERISA § 402(b)(4), must specify the basis on which payments are to be made to and from the plan. Justice Souter noted that, under ERISA § 404(a)(1)(D), the plan administrator is obligated to act "'in accordance with the documents and instruments governing the plan insofar as [they] are consistent with the provisions of Title I and Title IV of ERISA'" and that ERISA "provides no exemption from this duty when it comes time to pay plan benefits." Id. at 875. Justice Souter explained: "The Estate's claim therefore stands or falls by 'the terms of the plan,' [ERISA § 502(a)(1)(B)], a straightforward rule of hewing to the directives of the plan documents that lets employers 'establish a uniform administrative scheme, [with] a set of standard procedures to guide processing of claims and disbursement of benefits.'" Id. at 875 (citing Egelhoff v. Egelhoff, 532 U.S. 141 (2001)) (quoting Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 9 (1987)). He continued: "The point is that by giving a plan participant a clear set of instructions for making his own instructions clear, ERISA forecloses any justification for enquiries into nice expressions of intent, in favor of the virtues of adhering to an uncomplicated rule: 'simple administration, avoid[ing] double liability, and ensur[ing] that beneficiaries get what's coming quickly, without the folderol essential under less-certain rules.'" Id. at 875–76 (quoting Fox Valley & Vicinity Const. Workers Pension Fund v. Brown, 897 F.2d, 275, 283 (7th Cir. 1990) (Easterbrook, J., dissenting)).
Justice Souter observed: "The cost of less certain rules would be too plain. Plan administrators would be forced 'to examine a multitude of external documents that might purport to affect the dispensation of benefits' and would be drawn into litigation like this over the meaning and enforceability of purported waivers." Id. at 876 (quoting Estate of Altobelli v. IBM Corp., 77 F.3d 78, 82–83 (4th Cir. 1996) (Wilkinson, C.J., dissenting)). He stated: "These are good and sufficient reasons for holding the line, just as we have done in cases of state laws that might blur the bright-line requirement to follow plan documents in distributing benefits." Id. at 876. He then cited Boggs v. Boggs, 520 U.S. 833 (1997), which held that ERISA preempted a state law permitting the testamentary transfer of a nonparticipant spouse's community property interest in plan benefits that were undistributed at the time of the spouse's death. Justice Souter stated: "We rejected the entreaty to create 'through case law . . . a new class of persons for whom plan assets are to be held and administered,' explaining that '[t]he statute is not amenable to this sweeping extratextual extension.'" Kennedy, 129 S. Ct. at 876–77 (quoting Boggs , 520 U.S. at 850). Justice Souter then discussed Egelhoff , 532 U.S. at 141, in which the conflict was identified as being between the plan documents (which required making payments to the named beneficiary) and the statute (which required making payments to someone else). Justice Souter commented: "We said the law was at fault for standing in the way of making payments 'simply by identifying the beneficiary specified by the plan documents,' and thus for purporting to 'undermine the congressional goal of "minimiz[ing] the administrative and financial burden[s]" on plan administrators.'" Id. at 877 (citing Egelhoff, 532 U.S. at 148 (quoting Ingersoll Rand Co. v McClendon, 498 U.S. 133, 142 (1990)).
Justice Souter concluded:
What goes for inconsistent state law goes for a federal common law of waiver that might obscure a plan administrator's duty to act "in accordance with the documents and instruments." See Mertens v. Hewitt Associates, 508 U.S. 248, 259, 113 S. Ct. 2063, 124 L.Ed. 2d 161 (1993) ("The authority of courts to develop 'a federal common law' under ERISA . . . is not the authority to revise the text of the statute").
Kennedy, 129 S. Ct. at 877.
He concluded that the plan administrator therefore did exactly what ERISA § 404(a)(1)(D) required and paid the benefits to the ex-wife, citing McMillan v. Parrott, 913 F.2d 310, 312 (6th Cir. 1990). Footnote 5 to the Kennedy opinion indicates that the Court's ruling on this issue resolves the conflict between (1) Altobelli , 77 F.3d at 78 (federal common law waiver controls); Fox Valley , 897 F.2d at 275 (federal common law waiver controls); Mohamed v. Kerr, 53 F.3d 911 (8th Cir. 1995) (common law waiver controls over welfare plan life insurance policy beneficiary designation); Brandon v. Travelers Ins. Co., 18 F.3d 1321 (5th Cir. 1994) (common law waiver controls over welfare plan life insurance policy beneficiary designation); and (2) Metropolitan Life Ins. Co. v. Marsh, 119 F.3d 415 (6th Cir. 1997) (plan documents control over welfare plan life insurance policy); and Krishna v. Colgate Palmolive Co., 7 F.3d 11 (2d Cir. 1993) (plan documents control over welfare plan life insurance policy).
ERISA Antialienation Rule Does Not Bar Federal Common Law Waiver
Although the Court's affirmation of the Fifth Circuit's holding in favor of the plan administrator ultimately was based on the ruling that a waiver of benefits may be disregarded if its recognition would be contrary to plan documents, Justice Souter explained: "We granted certiorari to resolve a split among the Courts of Appeals and state Supreme Courts over a divorced spouse's ability to waive pension plan benefits through a divorce decree not amounting to a QDRO." Kennedy , 129 S. Ct. at 870. ERISA § 206(d)(1) provides that each pension plan shall provide that benefits provided under the plan may not be assigned or alienated. ERISA § 206(d)(3) provides that these restrictions on alienation will not apply to a qualified domestic relations order (QDRO). A "domestic relations order" is any judgment, decree, or order (including approval of a property settlement agreement) that is made under a state domestic relations law (including, for this purpose, a community property law) and provides for child support, alimony payments, or marital property rights by payment to an "alternate payee" (a spouse, former spouse, child, or other dependent of a participant). To be "qualified," the order must specifically identify the alternate payees, the benefits payable to them, the period of payment, and the plan involved and may not require any form or amount of benefit not otherwise provided by the plan.
The Fifth Circuit opinion noted that the pension plan involved was an ERISA "employee pension benefit plan" within the meaning of ERISA § 2(2) and contained an antialienation provision in accordance with ERISA § 206(d)(1). Kennedy v. Plan Administrator for Dupont Savings and Investment Plan, 497 F.3d 426, 427 (5th Cir. 2007). The district court had entered summary judgment for the estate, ordering the plan administrator to pay the value of the pension benefits to the estate, relying on Fifth Circuit precedent establishing that a beneficiary can waive his rights to the proceeds of an ERISA plan "'provided that the waiver is explicit, voluntary, and made in good faith.' App. to Pet. for Cert. 38 (quoting Manning v Hayes, 212 F.3d 866, 874 (5th Cir. 2000))." 129 S. Ct. at 869. The Fifth Circuit reversed the district court, distinguishing prior decisions enforcing federal common law waivers of ERISA benefits because they involved life insurance policies under welfare benefit plans to which the ERISA antialienation provisions do not apply, and held that the divorced spouse's waiver constituted an assignment or alienation of her interest in the plan benefits to the deceased participant's estate. 497 F.3d at 430. The Fifth Circuit opinion noted that the divorce decree that divested the divorced spouse of all right, title, interest, and claim to the decedent's pension plan by reason of past or future employment did not satisfy the requirements of a QDRO.
Justice Souter initially pointed out that ERISA § 206(d)(1) requires that benefits neither be "assigned" nor "alienated" and turned to Black's Law Dictionary to conclude that a transfer or conveyance of property or some interest in property is contemplated by each of these terms. He noted that the Fifth Circuit Court opinion viewed the divorced spouse's waiver as an assignment or alienation to the decedent's estate, the recipient in the absence of a designated contingent beneficiary, relying, in part, on the language of the Treasury Department's regulations under Code § 401(a)(13), Treas. Reg. 1.401(a)-13(c)(1)(ii), which defines the terms "assignment" and "alienation" to include "[a]ny direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant or beneficiary."
Standing back from the Fifth Circuit Court's conclusion, Justice Souter observed:
Casting the alienation net this far, though, raises questions that leave one in doubt. Although it is possible to speak of the waiver as an "arrangement" having the indirect effect of a transfer to the next possible beneficiary, it would be odd usage to speak of an estate as the transferee of its own decedent's property, just as it would be to speak of the decedent in his lifetime as his own transferee. And treating the estate or even the ultimate estate beneficiary as the assignee or transferee would be strange under the terms of the regulation: it would be hard to say the estate or future beneficiary "acquires" a right or interest when at the time of the waiver there was no estate and the beneficiary of a future estate might be anyone's guess.
Kennedy, 129 S. Ct. at 871. He then continued by asserting that the questionability of this broad reading is confirmed by exceptions to it that are "apparent right off the bat"—a surviving spouse's ability to waive the right to a survivor's benefit under ERISA § 205 and qualified disclaimer of an interest in benefits under Code § 2518, neither of which would be permissible under the Fifth Circuit's reading of the statute and regulations. Noting that the law of trusts "serves as ERISA's backdrop," Beck v. Pace Int'l Union, 551 U.S. 96 (2007), Justice Souter stated: "Although the beneficiary of a spendthrift trust traditionally lacked the means to transfer his beneficial interest to anyone else, he did have the power to disclaim prior to accepting it, so long as the disclaimer made no attempt to direct the interest to a beneficiary in his stead. See 2 Restatement (Third) of Trusts § 58(1), Comment c, p. 359 (2001)." Id. at 871–72. Although not implying that the traditional law of spendthrift trusts is to be imported into ERISA § 206(d)(1), Justice Souter noted:
The Treasury . . . reads its . . . regulation [to mean that:] "no party 'acquires from' a beneficiary a 'right or interest enforceable against the plan' pursuant to a beneficiary's waiver of rights where the beneficiary does not attempt to direct her interest in pension benefits to another person."
129 S. Ct. at 872 (citing Brief for United States as Amicus Curiae 18).
The opinion concludes that the divorced spouse did not attempt to direct her interest in the plan benefits to the estate or any other potential beneficiary, "and accordingly we think that the better view is that her waiver did not constitute an assignment or alienation rendered void under the terms of [ERISA § 206(d)(1)]." Id. at 873. Footnote 4 to the opinion indicates that, this conclusion resolves the conflict between the Fourth Circuit in Altobelli , 77 F.3d 78 (4th Cir. 1996) (federal common law waiver in divorce decree does not conflict with antialienation provision), and the Seventh Circuit in Fox Valley , 897 F.2d 275 (7th Cir. 1990) (federal common law waiver in divorce decree does not conflict with antialienation provisions), with the Third Circuit in McGowan v. NJR Serv. Corp. , 423 F.3d 241 (3d Cir. 2005) (federal common law waiver in divorce decree barred by antialienation provision).
Waiver Distinguished from QDRO
Justice Souter commented: "The Fifth Circuit found 'significant support' for its contrary holding in the QDRO subsections, reasoning that '[i]n the marital-dissolution context, the QDRO provisions supply the sole exception to the anti-alienation provision,' 497 F.3d at 430." Kennedy , 129 S. Ct. at 873. But, in fact, he pointed out, "a beneficiary seeking only to relinquish her right to benefits cannot do this by a QDRO, for a QDRO by definition requires that it be 'the creat[ion] or recogni[tion of] the existence of an alternate payee's right to, or assign[ment] to an alternate payee [of] the right to receive all or a portion of the benefits payable with respect to a participant under a plan.'" Id. (citing ERISA § 206(d)(3)(B)(i)(I)). There can be no QDRO for a simple waiver and, as noted in footnote 8 to the opinion, even if the divorced spouse's waiver results in her interest reverting to the decedent, the decedent does not qualify as an "alternate payee," which is defined by statute as "any spouse, former spouse, child, or other dependent of a participant." Id. at 873 n.8 (citing ERISA § 206(d)(3)(K)).
Status of the Enforceability of Spousal Waivers/Agreements Against Distributed Assets
Footnote 10 to the Supreme Court opinion notes that its conclusion that ERISA § 206(d)(1) does not nullify a spousal waiver leaves open questions about a waiver's effect in circumstances in which it is consistent with plan documents. The footnote continues: "Nor do we express any view as to whether the Estate could have brought an action in state or federal court against Liv [the former spouse] to obtain the benefits after they were distributed." Kennedy , 129 S. Ct. at 875 n.10. The footnote states:
Compare Boggs v Boggs, 520 U.S. 833, 853, (1997) ("If state law is not preempted, the diversion of retirement benefits will occur regardless of whether the interest in the pension plan is enforced against the plan or the recipient of the pension benefit"), with Sweebe v Sweebe, 712 N.W.2d 708, 712–13 (2006) (distinguishing Boggs and holding that "while a plan administrator must pay benefits to the named beneficiary as required by ERISA," after the benefits are distributed "the consensual terms of a prior contractual agreement may prevent the named beneficiary from retaining those proceeds"); Pardee v Pardee, 12005 OK Civ App 27 ¶¶ 20, 27, 112 P.3d 308, 313–14, 315–16 (2004) (distinguishing Boggs and holding that ERISA did not preempt enforcement of allocation of ERISA benefits in state-court divorce decree as "the pension plan funds were no longer entitled to ERISA protection once the plan funds were distributed").
Id. at 875 n.10.
Boggs involved an attempted testamentary transfer of the decedent's deceased first spouse's community property interest in the decedent's pension benefits, an IRA (funded by a pension plan lump sum distribution made after the first spouse's death), and stock distributed from an ESOP (after the first spouse's death) that otherwise benefited the decedent's second (and surviving) spouse. The Court's opinion cites the antialienation provisions of ERISA § 206(d) (1) to characterize the first spouse's attempted testamentary transfer to the decedent's surviving sons as a prohibited assignment or alienation, citing the Treasury Regulations cited above regarding direct or indirect arrangements by which a party acquires from a participant or beneficiary an interest enforceable against a plan to all or any part of the participant's benefit. Sweebe, 712 N.W.2d 708 (Mich. 2006), involved the proceeds of an insurance policy paid from the group insurance plan of decedent's employer to the decedent's former spouse. The former spouse had agreed to give up her interest in any insurance contract or policy of her husband. That agreement was reflected in a court order at the time of the parties' divorce. The Michigan Supreme Court found: "[T]he issue in this case solely involves waiver and not ERISA preemption. . . . because the proceeds have been properly distributed under ERISA." Id. at 711. The court specifically noted: "The case before this Court involves a life insurance policy, not pension benefits." Id. at 713.
In Pardee, a divorce decree incorporated a post-nuptial agreement that resolved the couple's property rights and stated that the wife would be entitled to one-half of the decedent's retirement plan benefits. The decedent, with his second spouse's consent, elected to receive a lump sum payment of his pension plan benefits and rolled the amounts received into an IRA, naming his second spouse as beneficiary. In reversing the lower court's grant of summary judgment in favor of the second spouse and in imposing a constructive trust on the second spouse's IRA, which had received the benefits by rollover from the decedent's IRA, the court pointed out that, in Boggs, the facts involved predistribution funds still in control of the plan administrator. The opinion notes that the Boggs court emphasized this distinction by stating:
[T]his case does not present the question whether ERISA would permit a nonparticipant spouse to obtain a devisable community property interest in benefits paid out during the existence of the community between the participant and that spouse.
Boggs , 520 U.S. at 845. The Pardee opinion discusses Hawxhurst v. Hawxhurst, 723 A.2d 58 (N.J. Super Ct. App. Div. 1998), enforcing a prenuptial agreement against the divorced husband's IRA funded by a qualified plan lump sum distribution. In Pardee, the court concluded: "'[E]stablished authority in analogous situations supports the conclusion that once distributed, the ERISA anti-alienation provision does not shelter this asset.'" Pardee v. Pardee , 112 P.3d 308, 314 (Okla. Ct. App. 2004). The Pardee opinion also discusses Guidry v. Sheet Metal Workers Nat'l Pension Fund, 39 F.3d 1078 (10th Cir. 1994), involving the garnishment of distributed pension benefits. In Guidry, the court held that ERISA did not extend to protect private pension benefits once paid to and received by the beneficiary. Citing the Treasury Regulations quoted above, the Guidry court concluded:
The terms "alienation" and "assignment" are meant only to cover those arrangements that generate a right enforceable against a plan. Therefore, "benefits" are protected by the anti-alienation provision of [the antialienation clause] only so long as they are within the fiduciary responsibility of private plan managers. Following distribution of benefits to the plan participant or beneficiary, a creditor no longer has a right against the plan.
Id. at 1082–83 (emphasis added.).
By establishing a firm rule that the plan administrators of ERISA plans can pay plan benefits in accordance with beneficiary designations filed in accordance with plan procedures, the Supreme Court's opinion in Kennedy eliminates the exposure of ERISA plan fiduciaries to benefit disputes when benefits are payable to a deceased participant's former spouse. Perhaps the enunciation of this rule will cause participants and their divorce counsel to follow through after the entry of a divorce judgment in which a spouse has waived rights to pension or welfare plan benefits to change the beneficiary designation on file with the plans involved. The number of cases cited, however, suggests that this failure to change plan beneficiary designations to conform to divorce decrees will continue to occur. As the focus shifts to the enforcement of spousal waivers and asset agreements incorporated in divorce judgments against distributed ERISA plan assets, the Court's conclusions and observations about the potential enforceability of spousal waivers, the application of antialienation rules, and QDROs will undoubtedly inform the development of the law going forward.Return to Probate & Property Magazine