Supreme Court OKs Payment Of Pension Benefits To Designated Ex-Spouse Beneficiary Despite Her Waiver Of Rights To Pension In Divorce Judgment

A new Supreme Court decision illustrates the importance of making sure your beneficiary designations are up-to-date.  The Supreme Court has unanimously ruled that a plan administrator properly distributed benefits under an ERISA pension plan to a deceased participant’s ex-spouse, as she was the only designated beneficiary, even though she had waived her interest in plan benefits in a divorce decree. The Court, in Kennedy v. Plan Adm’r for DuPont Sav. and Inv. Plan (2009, S Ct) 2009 WL 160440, affirmed an appellate court decision in favor of the plan.

William Kennedy worked for E. I. DuPont de Nemours & Company and was a participant in its Savings and Investment Plan (SIP), an ERISA employee pension benefit plan. In ’71, William married Liv. In ’74, in accordance with plan requirements, he signed a form designating Liv as his beneficiary under the SIP, naming no contingent beneficiary.

In 1994, William and Liv were divorced, and in the divorce decree, Liv waived any right to benefits under William’s retirement and other employment-related benefit plans. William died in 2001, without having executed any documents removing Liv as his SIP beneficiary (although he did execute a new beneficiary-designation form naming his daughter as his beneficiary of another DuPont retirement plan).

William’s daughter, as executrix of his estate, asked DuPont to distribute the SIP benefits to the estate. However, relying on the beneficiary designation, DuPont paid the $400,000 balance to Liv. The estate sued DuPont and the SIP plan administrator, claiming that the divorce decree amounted to a waiver of the SIP benefits, and that DuPont violated ERISA by paying the benefits to Liv. Although the District Court granted the estate summary judgment, the Fifth Circuit reversed, holding that the waiver constituted an assignment or alienation of Liv’s interest in the benefits to the estate, in violation of ERISA § 1056(d)(1), which requires plans to provide that benefits may not be assigned or alienated. In so holding, the court relied on the exception of ERISA § 1056(d)(3) for qualified domestic relations orders (QDROs), reasoning that the waiver—which was not a QDRO—could not be given effect, since QDROs were the specific mechanism provided by ERISA for the elimination of a spouse’s interest in plan benefits.

The Supreme Court 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. Subsequently, the Court recognized that there was a further split—over whether a beneficiary’s federal common law waiver of plan benefits is effective where that waiver is inconsistent with a beneficiary designation under the plan. The Court affirmed the Fifth Circuit’s decision, but based on the plan designation, rather than the waiver issue.

In deciding that ERISA § 1056(d)(1) did not nullify the waiver, the Supreme Court determined that by executing the waiver, Liv did not assign or alienate anything to William or his estate. Rather, drawing on the common law of spendthrift trusts, the Court followed the general principle that a designated spendthrift can disclaim his trust interest and that it is highly improbable that ERISA, written with an eye to spendthrift trusts, would force a beneficiary to take an interest. Rather, both ERISA, in allowing a spouse to waive a right to a survivor’s annuity, and Code Sec. 2518 , in allowing qualified disclaimers of benefits, demonstrate that waivers are permissible. The Court also rejected the Fifth Circuit’s reliance on the QDRO provisions, finding that there was no QDRO for a simple waiver, since the QDRO provisions require the creation or recognition of an alternate payee’s right to all or a portion of a plan’s benefits.

Although ruling against DuPont and the SIP on the nullity of waiver under the antialienation clause, the Supreme Court upheld the administrator’s decision to pay Liv the SIP benefits. The Court said that the administrator complied with its statutory duty by paying the benefits to Liv in conformity with the plan documents.

ERISA § 404(a)(1)(D) requires a plan administrator to act in accordance with plan documents that are otherwise consistent with ERISA, and ERISA § 502(a)(1)(B) authorizes participants or beneficiaries to bring causes of action to recover benefits due under the terms of the plan. Thus, since the SIP and related documents provided that the plan administrator pay benefits to a participant’s designated beneficiary, with designations and changes to be made in a particular way, the plan administrator did what ERISA required. William’s designation of Liv as his beneficiary was made in the way the plan required. Her waiver, which was made outside of the plan, as part of the divorce decree, was not.

Under New Jersey law, all beneficiary designations to an ex-spouse are revoked after a divorce and treated as though the ex-spouse predeceased the other spouse. However, this law does not overcome ERISA so all divorcing couples must also change their beneficiary designations to ensure that pensions governed by ERISA are also changed. If a QDRO is part of the settlement, both spouses receive beneficiary forms for their respective shares as part of the processing.

To read the full text of the Supreme Court case, click here.

For more on keeping beneficiary designations up to date, click here.

Source:  Federal Tax Updates on Checkpoint Newsstand tab 1/28/09