The United States Supreme Court recently resolved a long-standing conflict among the federal appellate courts concerning who is entitled to receive pension, life and other employer provided employee benefits where an ex-spouse agreed to waive any rights to such benefits in a divorce decree, but the employee did not change his or her beneficiary designations in accordance with the plan’s requirements. In Kennedy v. DuPont, 2009 WL 160440 (U.S. 2009), the Supreme Court held that a beneficiary designation form in favor of a deceased participant’s ex-wife was still binding at the participant’s death despite the existence of a divorce decree specifically purporting to divest the former wife of any rights to the participant’s retirement plan benefits, because the participant did not revoke or replace such designation following the divorce in accordance with the plan documents.
The facts of this case are all too common. Mr. Kennedy worked for E.I. DuPont de Nemours & Company and was a participant in its savings and investment plan (the “Plan”). Pursuant to the Plan, Mr. Kennedy had the power to designate any beneficiary or beneficiaries to receive, upon his death, all or part of the funds in the Plan. Yet, the Plan required “all authorizations, designations and requests concerning the plan to be made by employees in the manner prescribed by the [plan administrator].” The Plan made available specific forms for designating or changing the beneficiary.
In 1974, Mr. Kennedy designated his then wife as his beneficiary. Later, in 1994, Mr. Kennedy and his wife separated and entered into a divorce decree that stated “[wife] is . . . divested of all right, title, interest, and claim to . . . [a]ny and all sums . . . the proceeds [from], and any other rights related to any . . . retirement plan, pension plan, or like benefit program existing by reason of [decedent’s] past or present or future employment.” Mr. Kennedy, like many others after a divorce, did not execute any documents removing the wife as the SIP beneficiary following the divorce.
In 2001, when Mr. Kennedy died, the Plan Administrator relying upon the Mr. Kennedy’s original beneficiary designation form (and presumably the lack of any executed beneficiary change forms to the contrary) distributed the funds in the SIP to the wife over the objections of Mr. Kennedy’s daughter and his estate. Mr. Kennedy’s estate sued the Plan and the Plan Administrator alleging a violation of the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ 1001, et seq. (“ERISA”) on grounds that the divorce decree constituted a waiver of the SIP benefits on the ex-wife’s part. While the district court determined that the divorce decree constituted an effective waiver on the part of the ex-wife, the US Court of Appeals for the Fifth Circuit disagreed. The Fifth Circuit concluded that “[i]n the marital dissolution context, the [Qualified Domestic Relations Order (“QDRO”)] provisions supply the sole exception to the anti-alienation provision [applicable to pension plans under ERISA]; they exempt a state domestic-relations order determined to be a QDRO, under the standards set forth in ERISA.”
In agreeing with the results reached by the Fifth Circuit, but rejecting its reliance on the lack of a QDRO, the Court held that the divorce decree and any waiver by the wife contained in the decree to the Plan funds was not controlling and the plan administrator properly distributed the funds to the ex-wife. The Supreme Court determined that the QDRO exception to ERISA’s anti-alienation provision was irrelevant to the facts presented in the case. Specifically, the Court concluded “[i]n fact, a beneficiary seeking only to relinquish her rights 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.’ 29 U.S.C. § 1056(d)(3)(B)(i)(I). There is no QDRO for a simple waiver; there must be some succeeding designation of an alternate payee.”
Instead, the Supreme Court recognized the so-called “plan document rule” that obligates administrators to manage ERISA plans in accordance with the documents and instruments governing them. The purpose of this straight forward rule “establishes a uniform administrative scheme, [with] a set of standard procedures to guide processing of claims and disbursement of benefits.” “By giving a plan participant a clear set of instructions for making his own instructions clear, ERISA forecloses any justification for enquiries into expressions of intent, in favor of the virtues of adhering to an uncomplicated rule.”
In Kennedy, the Plan contained clear instructions on how a Plan participant could replace or revoke the designation of any named beneficiary. Mr. Kennedy failed to revoke the designation of the ex-wife as designee pursuant to the plan documents. The divorce decree was not a legally binding waiver of the wife’s right to take under the Plan. Accordingly, the Plan Administrator was required to follow and enforce the Plan documents. Therefore, the Court ruled that the Plan Administrator properly distributed the Plan funds to the ex-wife, despite the express waiver of any rights to such benefits in the divorce decree.
Significantly, the Supreme Court’s decision in Kennedy leaves open the possibility that the Estate can sue the ex-wife to enforce the terms of the divorce decree once the Plan funds were distributed. In fact, several courts have held that ERISA will not preempt enforcement of contractual terms, such as a marital separation agreement or a divorce decree, once the pension or welfare benefits are distributed because at the moment of distribution, the funds are no longer considered ERISA benefits entitled to protection.
In light of the Court’s decision, practitioners and plan sponsors and administrators may want to adopt the following practices:
- If a non-participant spouse is not supposed to have any post-divorce rights in a participant’s retirement or welfare benefits, practitioners should review any and all pre-divorce beneficiary designations and confirm that all designations are revised in accordance with the divorce decree.
- Practitioners should consider sending a communication to their former divorce clients advising them to confirm that appropriate and necessary steps have been taken to effectuate the parties’ divorce settlements/decrees. In other words, advise the former divorce clients to confirm that all beneficiary designations have been changed in a manner consistent with the divorce decree.
- Plan sponsors and administrators should review the terms of their plan documents to ensure that they contain clear instructions and procedures for participants to designate, change or delete a beneficiary.
If you have any questions about the Kennedy case or its impact on your pension or welfare benefit plans, please contact John M. Scannapieco, 615.252.2352 or Chris Christie, 205.521.8387.