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.