VOL. 22, NO. 2
SUMMER 2009
BENEFITS LAW
JOURNAL
From the Editor
It’s the Plan Document, Stupid:
Supreme Court Uses Common Sense
to Determine Plan Beneficiary
I
t is an age-old legal problem: Somebody makes a formal plan
designation—naming a beneficiary, electing a benefit, taking out
life insurance—and never thinks about it again, even as family circumstances change. When that person dies, there’s then a dispute
whether that choice should take precedence over what later circumstances 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 administrators 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 married 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 stilloutstanding 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, therefore, 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, depending 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 federal rulings) would force plan administrators to pore over divorce
decrees, wills, and other legal documents in an effort to ferret out
the “true” beneficiary.
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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, sensible, 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 person 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 benefits. 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 expressions of intent, in favor of … an uncomplicated rule …,” the Court
stated that the plan document governs. The Justices said the administrator 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 completed 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
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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 employees to keep their beneficiary designations current with their circumstances 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
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