You’ve seen the scenario many times before….William participated in his employer’s ERISA 401(k) Plan and designated his wife Adele as his beneficiary. When they divorced eight years later, Adele agreed to waive any and all rights in the Plan. William died nine months later, never having changed his beneficiary designation.
William’s executor filed a claim for the death benefits, arguing that because Adele had waived her rights to the 401(k) benefits, they should be paid to William’s estate. Adele also claimed the benefits, arguing that ERISA required the Plan to pay benefits to her, as the beneficiary designated in accordance with the terms of the Plan, notwithstanding her common law waiver.
In Estate of William E. Kensinger v. URL Pharma, Inc. and Adele Kensinger, No. 10-4525 (3rd Cir. 2012), the District Court ruled on two issues. First, to whom should the Plan distribute the benefits? Relying on Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), the District Court concluded that ERISA required the Plan to distribute the benefits to Adele, because she was the named beneficiary under the terms of the Plan.
The second issue was whether, once the benefits were distributed to Adele, William’s Estate could pursue a contract claim directly against her to recover the benefits, because of her common law waiver. On this issue, the District Court ruled that the Estate could not file an action against Adele. According to the District Court, if a recipient of ERISA benefits faces the possibility of post-distribution actions by third parties, one of ERISA’s core objectives would be undermined. That objective is to ensure that “beneficiaries get what’s coming quickly, without the folderol essential under less-certain rules.” [Quoting Fox Valley & Vicinity Constr. Workers Pension Fund v. Brown, 897 F. 2d 275, 283 (7th Cir. 1990)].
Certainty in benefit distributions as well as uniformity and efficiency of administration, were and remain key policy considerations behind ERISA. In fact, these policy considerations were factors in the Kennedy decision, where the Supreme Court ruled that a 401(k) plan was required to pay death benefits to a participant’s former spouse under facts almost identical to the present case. The Court of Appeals in Kensinger points out, however, that those policy considerations would not come into play if the Estate were to pursue the 401(k) proceeds directly from Adele.
Ultimately, the Court of Appeals reversed the District Court’s second ruling (the first ruling wasn’t appealed), holding that the Estate could pursue a claim against Adele for the proceeds of the Plan distribution. In support of its decision, the Court cited several state appellate cases in which post-distribution claims against a beneficiary were permitted. The Court of Appeals also cited federal cases in several circuits including the 9th, in which creditors were permitted to sue beneficiaries to recover distributed plan benefits, notwithstanding that ERISA prohibits such actions while the benefits remain in the possession of the Plan Administrator. “[I]f a creditor can enforce its rights against a beneficiary once pension funds have been distributed, we see no reason why the Estate should not be able to enforce its contractual rights against Adele once the Plan disburses the funds.”
The floodgates are open but the issue is not fully resolved. First, Adele argued at the appellate level that because William chose to give her his 401(k) benefits, the District Court ruling should be affirmed. Presumably her rationale was that the Court of Appeals should infer from William’s inaction that he chose not to change his beneficiary designation. Since this argument was not raised at the trial level, however, and did not appear in the District Court opinion, the Court of Appeals declined to address it. Perhaps Adele could have introduced evidence at trial, based on the Plan documents and disclosures to William, that he was aware he would have to change his beneficiary designation to delete Adele.
Second, what if William had remarried before dying? Certainly that would have complicated the analysis, by interjecting the rights of the new spouse under ERISA.
Finally, always consult the plan document, or advise your client to do so, to determine the impact of divorce on existing beneficiary designations. The plan may specify that a beneficiary designation remains in effect notwithstanding divorce. Or it may provide that divorce automatically revokes a beneficiary designation. In any case, what is clear is that the plan must distribute benefits in accordance with the plan documents. What happens after that may be moving beyond ERISA’s reach.