We were consulted recently by a personal representative of an estate concerning the decedent’s death beneficiary of his 401(K) retirement plan.  The decedent had married before ERISA became law, but executed a beneficiary form shortly afterward naming his then spouse.  Later he divorced that spouse with a property settlement agreement by which spouse waived all rights to his ERISA retirement.  The decree of divorce, naturally terminated her status as a spouse.  But the decedent never bothered to execute a beneficiary designation naming a substitute.  As the reader might suspect, decedent dies with his former wife’s name on the form he executed forty years earlier.

So, the personal representative (e.g., executor) makes claim on the pension as part of the decedent’s estate.  The surviving non-spouse intervenes to say “Not so fast, he named me.” Executor responds “You waived.”  Ex-wife says: “I waived the right to make a claim in an adverse proceeding, but decedent’s failure to act demonstrates that he intended to retain me as beneficiary since he knew of my waiver but never named anyone else including the estate.”

Our client had slightly different facts, but those recited above produced Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285.  The Supreme Court of the United States decided that case in 2009 and held that absent more, the failure to change beneficiary designations after divorce means the designations will remain effective despite the intervening severance of the marital relationship.  The Court’s unanimous ruling states succinctly that while ex-wife waived the right to claim benefits in an adversarial sense that waiver also afforded the decedent the right to name his estate or anyone else in substitution by completing a simple form.  His failure to do so must be given meaning in its own right, absent some document or instrument showing a different intent. Ironically, in this case, the decedent had named a different beneficiary for another ERISA qualified DuPont retirement plan.

Matter resolved, correct?  Well, the Estate of William Kensinger was not taking no as an answer. The facts were essentially the same as in Kennedy except that the Estate waited until the benefits were distributed and then sued to recover the funds on the theory that the waiver of interest in the property settlement was effective as a matter of contract law, even if it was not as a matter of federal pension law.  The District Court of New Jersey dismissed the suit, citing Kennedy, but the Third Circuit Court of Appeals reversed on the basis that Kennedy was intended to prevent pension plans from becoming adjudicators among retirement plan claimants. But it held that the once the plan was distributed, it was subject to claims. Estate of Kensinger v. URL, Inc. 674 F.3d 131 (3d Cir. 2012)

So, for now, the word to clients is, even if you do not draft an alternate estate plan, Pennsylvania law helps you by means of a statute holding that a divorce revokes testamentary provisions to someone who is rendered a former spouse by decree of divorce.  20 Pa.C.S. 2507.  But that protection does not extend to matters governed by federal law and ERISA based pensions are the creature of the Congress, not the General Assembly.  The corollary warning is to attorneys who need to tell their clients the importance of changing these designations where they are ERISA based.

 

Philadelphia based law firm, Cozen O’Connor, has asked the Eastern District of Pennsylvania for guidance as to the validity of a beneficiary designation form submitted by the parents of a deceased partner in their Chicago office. The parents of Ms. Sara Ellyn Farley, Esquire are seeking to receive the proceeds due to their daughter from the firm’s Profit Sharing Plan. Complicating this issue is that Ms. Farley was married to Ms. Jennifer Tobits in Toronto in 2006 and Ms. Tobits has asked that the proceeds be distributed to her as the plan holder’s surviving spouse.

Many plans of this nature have a default distribution provision in that if there is not a named beneficiary, then the proceeds from the plan pass to the surviving spouse, then parents, etc. In this instance, Ms. Farley’s parents presented Cozen with a beneficiary form dated one day before Ms. Farley’s September 2010 death which identifies themselves as the beneficiaries of the Profit Sharing Plan and identifying Ms. Farley as “single”.  This designation form is unsigned by Ms. Farley but purportedly has Ms. Tobits’ signature relinquishing her role as beneficiary.

Under most insurance or retirement/investment plans in which a beneficiary may be designated, it requires the signature of the named beneficiary before beneficiary designations can be changed to another party. The reason for this is, essentially, that the named beneficiary has certain property rights in the asset and cannot knowingly have them removed without their authorization. Much of this restriction is based upon the rules of the Plan, ERISA law, and other state and federal statutes.

What makes this situation interesting is that it appears that Ms. Farley had not filed a valid designation form with Cozen O’Connor prior to her death. The subsequent form which was provided by her parents, contained conflicting information of Ms. Farley being “single” but also purportedly has the signature of Ms. Tobits relinquishing her claim as beneficiary. Finally, we have the parents’ position, as articulated by their counsel, that under the Defense of Marriage Act, Ms. Farley and Ms. Tobit’s marriage is not valid. The Defense of Marriage Act essentially permits states to refuse to offer a legal same-sex marriage in one state the “full faith and credit” of validity in another state. Worth noting, however, is that in July 2010 a U.S. District Court Judge found that Section 3 of the Defense of Marriage Act, which defines “marriage” and “spouse”, violated the Equal Protection Laws guaranteed by the Fifth Amendment of the U. S. Constitution. This ruling was appealed by the U.S. Department of Justice in October 2010 and the appeal will eventually be heard by the First U.S. Circuit Court of Appeals located in Boston, Massachusetts. 

For Cozen O’Connor’s part, they are not asking the Eastern District to determine whether or not Ms. Tobits’ and Ms. Farley’s marriage was valid, but for Ms. Tobits and Ms. Farley’s parents to be compelled to litigate their dispute between each other and that Cozen undertake to distribute the Profit Sharing Plan proceeds to the appropriate party.

When you consider the facts thus far presented, you have Ms. Farley’s parents offering an unsigned designation form identifying her as “single,” pre-dates her death by a day, and lists her same-sex spouse as agreeing to relinquish a right in the plan which she may not have based on a Federal law currently under appeal. This is shaping up to be quite a case.

Although it is unlikely the Eastern District of Pennsylvania will touch the marriage issue, issues such as the right to designate a same sex spouse as beneficiary or for a same-sex spouse to claim default spousal benefits under the terms of the plan may ultimately be the context in which same sex marriage is dealt with judicially and legislatively in Pennsylvania.  Having already seen some Pennsylvania municipalities such as Allentown extend medical benefits to same sex partners, the extension of employment benefits may be the vanguard issue for addressing same sex marriage in Pennsylvania.   

If you are interested in reading the full article, it can be found in the January 7, 2011 issue of the Legal Intelligencer, Vol. 243, No. 5, and is written by Gina Passarella.

It is a common scenario. When a couple divorces, one or both spouses may have a retirement plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). The most common ERISA retirement plan is the 401(k). As with other assets, those ERISA retirement plans must be divided and/or distributed between the spouses. It is easy to assume that the distribution of an ERISA retirement plan is addressed in a property settlement agreement or divorce decree, no further action is needed. However, ERISA contains strict rules regarding how a participant can change a beneficiary, and includes a strict “anti-alienation” provision that prohibits benefits under a plan from being “assigned” or “alienated.” ERISA sets forth specific requirements that must be followed when changing a beneficiary or during the one exception to the anti-alienation provision: divorce. 

The Supreme Court of the United States issued an Opinion on January 26, 2009 addressing this issue. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan et al., 555 U.S. ___ (2009), a husband named his wife as the beneficiary to his employer’s savings and investment plan (SIP) during the parties’ marriage. The parties later separated and the divorce decree stated that the wife was “divested of all right, title, interest, and claim in and to . . . any and all sums . . . the proceeds [from], and any other rights related to and . . . retirement plan, pension plan, or like benefit program existing by reason of [the husband’s] past, present or future employment.” The husband never executed a form to remove the wife as his beneficiary of the plan.

 

The husband passed away and the parties’ daughter asked the husband’s employer to pay the benefits to the husband’s estate. The employer refused, citing the beneficiary designation form completed by the husband, and paid the benefits to the wife. The daughter sued the employer. The District Court found for the daughter. The Fifth Circuit reversed. The Supreme Court affirmed the holding of the Fifth Circuit, albeit using different reasoning than the Fifth Circuit.

 

The Supreme Court’s rationale was essentially that the plan documents set forth explicit directions regarding how to set and change a beneficiary. The husband followed the procedures to list the wife as his beneficiary, but neither the husband nor the wife followed the proper protocol to change the beneficiary to the husband’s estate. The language contained in the divorce decree did not follow the requirements of the plan and was, therefore, not an effective change of beneficiary.

 

The moral of this story is that when a retirement plan is being divided, the rules of the plan itself as well as the requirements of ERISA must be followed very carefully. In the Kennedy matter, the husband’s pension benefit was awarded to his ex-wife despite an order of court because of a failure to follow plan rules. Other possible implications include unintended tax consequences and penalties, waiver of benefits.  So when in doubt, call the plan administrator to ensure you are following all of the rules correctly.