Category Archives: Domestic Relations Order

What Happens After a 401(k) Plan Distributes Dead Participant’s Benefits to Ex-Wife

Just when it looked like the U.S. Supreme Court’s decision in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009) settled disputes over a deceased participant’s account balance where there has been no change of beneficiary designation post-divorce, the Third Circuit comes up with a new twist. (more about Kennedy posted here)

In a case of first impression, the U.S. Court of Appeals for the Third Circuit, in Estate of Kensinger v. URL Pharma Inc., No. 10-4525 (March 20, 2012), addressed the issue of whether, after the plan administrator distributes a deceased participant’s 401(k) account balance to the designated beneficiary, can the deceased participant’s estate bring a lawsuit against the designated beneficiary to recover the account balance where the designated beneficiary waived her right to the account balance as part of a divorce proceeding.

In 2000, William Kensinger was married to Adele Kensinger when he enrolled in URL Pharma’s 401(k) plan. At some point between 2000 and 2008, Mr. Kensinger designated Mrs. Kensinger as his beneficiary for his 401(k) account balance. In 2008, they divorced.

As part of the divorce settlement, Mrs. Kensinger waived her right to Mr. Kensinger’s 401(k) account balance on April 20, 2008. The Court said the relevant language from the Property Settlement Agreement was:

“[T]he parties mutually agree to waive, release, and relinquish any and all right, title and interest either may have in or to the other’s IRA account(s), or any other such retirement benefit and deferred savings plan of like kind and character, and neither shall make any claim to possession of such property as it is presently titled.”

Their divorce was finalized on July 10, 2008.

Nine months later, Mr. Kensinger died intestate without having changed his beneficiary designation. Both Mrs. Kensinger and Mr. Kensinger’s estate claimed his 401(k) account balance. Mrs. Kensinger’s claim was based on the fact that she is the named beneficiary. The estate claimed that because Mrs. Kensinger waived her right to the 401(k) account balance as part of the divorce proceeding, the account balance belongs to Mr. Kensinger’s estate. Mrs. Kensinger refuted the estate’s claim, stating that ERISA, which requires that the proceeds be paid to the beneficiary named in the plan documents, trumps her common law waiver. On Nov. 9, 2009, the estate filed a declaratory action in New Jersey state court against Mrs. Kensinger and URL Pharma’s 401(k) plan, and URL Pharma removed the dispute to federal court.

The U.S. District Court for the District of New Jersey applied the reasoning of the U.S. Supreme Court’s decision in Kennedy, and concluded that, despite Mrs. Kensinger’s waiver, ERISA required URL Pharma to distribute Mr. Kensinger’s 401(k) account balance to Mrs. Kensinger in accordance with the plan documents, since she is the designated beneficiary. In Kennedy, the U.S. Supreme Court determined that an ex-wife who waived her right to a participant’s 401(k) account balance as part of a divorce settlement was still entitled to the account balance where the participant had died without changing his beneficiary designation because the plan administrator is required to distribute the account balance pursuant to last valid beneficiary designation. The Third Circuit notes that, in a footnote in Kennedy, the Supreme Court left open the question of whether the estate could sue the ex-wife to recover the benefits after she receives them from the plan administrator.

The Third Circuit decides that the estate can bring an action directly against Mrs. Kensinger to recover the account balance after URL Pharma distributes it to her, finding that an action brought directly against Mrs. Kensinger after the benefits have been distributed by URL Pharma would in no way complicate URL Pharma’s administration of the plan. In doing so, the Court distinguishes this situation from Kennedy, which the Court said involved a lawsuit against a plan administrator who had yet to distribute the benefits. According to the Third Circuit, once the plan administrator distributes the account balance to Mrs. Kensinger, as required by the plan documents, her right to these funds can be challenged in an ordinary contract action based on her common law waiver contained in the Property Settlement Agreement.

I wonder if the Court’s decision would have been different if URL Pharma’s 401(k) plan document contained this standard plan document language:

“Notwithstanding anything in the plan document to the contrary, if a Participant has designated the spouse as a Beneficiary, then a divorce decree of legal separation that relates to such spouse shall revoke the Participant’s designation of the spouse as a Beneficiary unless the decree or a Code section 414(p) qualified domestic relations order provides otherwise, or a subsequent Beneficiary designation is made.”

Lori M. McNeely, Esq. argued the case before the Third Circuit on behalf of the estate.

Michael S. Rothmel, Esq., and Daniel J. Bitonti, Esq., represented URL Pharma and Mrs. Kensinger before the Third Circuit with Mr. Rothmel arguing on their behalf.

Supreme Court to Divorced Participants – Check Beneficiary Designations if No Valid QDRO

“ERISA provides no exception to the plan administrator’s duty to act in accordance with plan documents.”

    - Headnote 2, Kennedy v. Plan Administrators for Dupont Savings.

In the game of QDRO beneficiary tug-of-war between an ex-wife and daughter over a deceased participant’s account balance, the U.S. Supreme Court today found in favor of the ex-wife in Kennedy v. Plan Administrators for Dupont Savings, No. 07-636, (Jan. 26, 2009).

In an opinion that will have divorce attorneys and anyone with an ex-spouse double checking their beneficiary forms tomorrow, the Court decided that Mrs. Kennedy was entitled to Mr. Kennedy’s pension because Mr. Kennedy did not change his beneficiary form even though the ex-Mrs. Kennedy had waived her rights to Mr. Kennedy’s pension when they divorced. As summarized by Justice Souter, who authored the Court’s opinion:

    “The question here is whether the terms of the limitation on assignment or alienation invalidated the act of a divorced spouse, the designated beneficiary under her ex-husband’s ERISA pension plan, who purported to waive her entitlement by a federal common law waiver embodied in a divorce decree that was not a QDRO. We hold that such a waiver is not rendered invalid by the text of the antialienation provision, but that the plan administrator properly disregarded the waiver owing to its conflict with the designation made by the former husband in accordance with plan documents”.

The assignment or alienation provision the Court refers to is contained in 29 U.S.C. 1056(d)(1) and Code section 401(a)(13)(A), which provides that benefits under a plan may not be assigned or alienated. 29 U.S.C. 1056(d)(3) and Code section 401(a)(13)(B) permits an exception to this rule for Qualified Domestic Relations Orders (QDRO). Code section 414(p) defines what a QDRO is.

What brought this case to the Court was the combination of love, divorce, lack of a QDRO and and old beneficiary designation form. In 1971, Mr. Kennedy marrried Mrs. Kennedy. Approximately 3 years later, in 1974, he signed a form designating Mrs. Kennedy as his beneficiary for the purposes of his employer’s plan – the DuPont Savings and Investment Plan. 20 years later, they divorced, and the divorce decree divested Mrs. Kennedy of all claims to any of Mr. Kennedy’s benefits under his employer’s retirement or pension plans. Mr. Kennedy then signed a new beneficiary designation form for DuPont’s other retirement plan – the DuPont Pension and Retirement Plan – designating his daughter as his beneficiary but did not sign a new beneficiary designation form for the DuPont Savings and Investment Plan. When Mr. Kennedy died in 2001, the only beneficiary designation for the DuPont Savings and Investment Plan was the beneficiary designation form signed in 1974 naming the now-former Mrs. Kennedy as his beneficiary.

The plan document provided that, “if at the time the participant dies, no surviving spouse exists and no beneficiary designation is in effect, distribution shall be made to, or in accordance with the directions of, the executor or administrator of the decedent’s estate.” When Mr. Kennedy died, his daughter became the executor of his estate, and made a claim for his account balance in the DuPont Savings and Investment Plan. The former Mrs. Kennedy also made a claim for his account balance in the DuPont Savings and Investment Plan pursuant to the 1974 beneficiary designation form. DuPont paid the account balance to the former Mrs. Kennedy pursuant to the beneficiary designation form, and the daughter sued DuPont and the plan’s administrator. The district court granted summary judgment to the daughter on behalf of the estate, and ordered DuPont and the plan’s administrator to pay Mr. Kennedy’s benefits under the plan to the estate. The 5th Circuit Court of Appeals reversed, and found that the account balance should go to the former Mrs. Kennedy as the divorce decree did not rise to the level of a QDRO.

The Supreme Court affirmed the 5th Circuit but states that the opinion’s rationale is different than the 5th Circuit’s reasoning. The Court states that under the terms of DuPont’s Savings and Investment Plan, the former Mrs. Kennedy was Mr. Kennedy’s designated beneficiary. The plan provided an easy way for Mr. Kennedy to change the designation but he did not. The plan provided a way for the former Mrs. Kennedy to disclaim her interest in Mr. Kennedy’s benefits via a valid QDRO, but she did not. The plan administrator therefore did what 29 U.S.C. 1104(a)(1)(D) required and paid Mr. Kennedy’s benefits under the plan to the former Mrs. Kennedy.

[tag]pension protection act, ppa, Supreme Court, Kennedy, 1104(a), 1056(d), 414(p), 401(a)(13), DuPont, QDRO, beneficiary, ERISA[/tag]

9th Circuit Decides QJSA Tug of War in Favor of Spouse at Time of Retirement

    “This case requires us to once again navigate the complex statutory scheme set out in the Employee Retirement Income Security Act of 1974….”

        - Judge Clifton, 9th Circuit Court of Appeals

    Yesterday, the 9th Circuit Court of Appeals decided whether or not a participant in a plan with a Qualified Joint and Survivor Annuity (QJSA) may change the surviving spouse beneficiary after the participant has retired and the annuity has become payable. In Caruso v. Caruso, No. 06-15938 (CA9 Sept. 17, 2008), the Court held that the “QJSA surviving spouse benefits irrevocably vest in the participant’s spouse at the time of the annuity start date – in this case the participant’s retirement – and may not be reassigned to a subsequent spouse.”

    How the 9th Circuit reached this holding provides a cautionary tale for both spouses and plan administrators. In 1992, Mr. Caruso retired and began collecting pension benefits from two different pension plans – one sponsored by Hilton and one sponsored by IATSE. At the time of the annuity starting date, Mr. Caruso was married to his 8th wife, Janis Caruso. In 1994, Mr. Caruso and 8th wife decide to divorce, and before the entry of the formal divorce decreee, Mr. Caruso ask to remove 8th wife as his named survivor beneficiary. Both plan administrators refused to remove her as beneficiary since the designation became irrevocable at the time of his retirement and annuity starting date.

    In 1997, their divorce became final. Mr. Caruso was awarded his interests in both pensions as his sole and separate property, and 8th wife was awarded her interests in her pensions as her soel and separate property. Additionally, Mr. Caruso was ordered to pay 8th wife $1,500 as an equalization payment because his pensions had greater value than her pensions.

    Mr. Caruso then married his 9th wife, Judy Caruso, in 1997 and petitioned the domestic relations court for QDROs which would change his beneficiary designation from 8th wife to 9th wife. In 1999, Mr. Caruso died. The day after he died, the domestic relations court ordered the plan administrators to change the beneficiary from 8th wife to 9th wife.

    8th wife then begins a long journey through both state and federal courts seeking to overturn this order, including a trip through the Nevada Supreme Court and a petition to the U.S. Supreme Court seeking certiorari, which the U.S. Supreme Court denied. In 2004, the domestic relations court issued two Qualified Domestic Relations Orders (QDROs), directing each plan to pay survivor benefits to 9th wife or pay the benefits into a constructive trust.

    Normally, the case would have been expected to end at this point because 8th wife had exhausted all judicial avenues by pursuing her cause through both state and federal courts, and exhausted all of her appeals. Unfortunately for 9th wife, 8th wife files one final action in federal court, seeking to “enjoi any act or practice which violates any provision [of ERISA] or the terms of the plan”, and the plan trustees for the IATSE pension plan file a cross-claim against 8th wife. The 9th Circuit determines that the 8th wife may have exhausted all of her legal avenues, but the trustees for the IATSE plan have not exhausted their legal avenues because it was not a party to the prior suits and not in privity with the 8th wife. By filing the cross-claim, the trustees of the IATSE plan breathed new life into 8th wife’s journey through the legal system to obtain benefits payable under both plans.

    The 9th Circuit then found that because Mr. Caruso’s retirement created a vested interest in the surviving spouse’s benefits, a domestic relations order issued after Mr. Caruso’s retirement could not alter or assign the 8th wife’s interest to the 9th wife, and that the Nevada domestic relations court’s attempt to transfer those benefits from 8th wife to 9th wife was prohibited.

California Supreme Court’s Decision on Domestic Partnerships May Raise Some Plan Document Issues

Yesterday, in In re Marriage Cases, No. S147999 (May 15, 2008), the California Supreme Court addressed the issue of whether domestic partnership is the same as marriage. As framed by the Court, the issue they addressed in this decision is:

    “Accordingly, the legal issue we must resolve is not whether it would be constitutionally permissible under the California Constitution for the state to limit marriage only to opposite-sex couples while denying same-sex couples any opportunity to enter into an official relationship with all or virtually all of the same substantive attributes, but rather whether our state Constitution prohibits the state from establishing a statutory scheme in which both opposite-sex and same-sex couples are granted the right to enter into an officially recognized family relationship that affords all of the significant legal rights and obligatinos traditionally associated under state law with the institution of marriage, but under which the union of an opposite-sex couple is officially designated a “marriage” whereas the union of a same-sex couple is officially designated a “domestic partnership.” The question we must address is whether, under these circumstances, the failure to designate the official relationship of same-sex couples as marriage violates the California Constitution.”

The Court provides an extensive discussion of this issue, and concludes that:

    “Accordingly, in light of the conclusions we reach concerning the constitutional questions brought to us for resolution, we determine that the language of section 300 limiting the designation of marriage to a union “between a man and a woman” is unconstitutional and must be stricken from the statute, and that the remaining statutory language must be understood as making the designation of marriage available both to opposite-sex and same-sex couples. In addition, because the limitation of marriage to opposite-sex couples imposed by section 308.5 can have no constitutionally permissible effect in light of the constitutional conclusions set forth in this opinion, that provision cannot stand.”

It is the Court’s focus on the term “marriage” which is interesting from a qualified plan perspective. For as long as I can remember, a great debate has been waged over the plan language on “spouse” and “marriage” due to the federal pre-emption of issues involving ERISA. Marriage is one of those plan areas which is State regulated but has plan document implications because there is no federal pre-emption of marriage. It has remained a hybrid between the two worlds of federal pre-emption and State regulation for ERISA issues.

For example, qualified 401(k) plan documents will contain provisions about how a participant’s account balance will be distributed upon their death. Because it is possible, though unlikely, that a participant could die before receiving a full distribution of the vested portion of their account balance, the Internal Revenue Code contains a provision for a qualified preretirement survivor annuity (QPSA). A carefully drafted 401(k) plan will contain information incorporating this Internal Revenue Code provision regarding a QPSA, and may contain plan language something like this:

    “Qualified Preretirement Survivor Annuity. Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, the vested Account Balance of a Participant who dies before the Annuity Starting Date shall be applied toward the purchase of an annuity for the life of his surviving spouse (a QPSA). The surviving spouse may elect to have such annuity distributed within the 90-day period after the Participant’s death. For purposes of a QPSA, the term “spouse” means the current spouse or surviving spouse of a Participant, except that a former spouse will be treated as the spouse or surviving spouse (and a current spouse will not be treated as the spouse or surviving spouse) to the extent provided under a QDRO.”

While “spouse” in an integral part of the QPSA information for most plans, and plans normally contain an extensive definition section for terms used within the plan, the term “spouse” is a sticking point among pension geeks. One theory is that, since marriage, and therefore who is a spouse, is an integral part of several key components of the plan, the term should be defined in the definitions section of the plan document. A competing theory is that the plan document should sidestep the issue of who is a spouse by omitting the definition of spouse, since marriage, and therefore who is a spouse, is governed by State law, and qualified plan documents are required to comply with ERISA, which is federal.

One problem with including the definition of spouse within the plan document is that each State has its own laws when it comes to marriage and who is a spouse. Try to write a definition of spouse without using the term “marriage” or “married” and see how difficult it becomes. With the California Supreme Court focusing on what the term “marriage” means under California law, and with so many California employers sponsoring qualified plans, there will be a lot of pension geeks flipping through their plan documents this weekend to see how the plan addresses this issue.

[tags]Pension Protection Act, ppa, marriage, spouse, In re marriage cases, California Supreme Court, domestic partner, ERISA[/tags]

Railroad Retirement and the Pension Protection Act

Tucked away toward the end of the Pension Protection Act are two sections which made changes to Railroad Retirement. Section 1002 and Section 1003 both became effective on August 17, 2007, one year after the date PPA was enacted. Section 1002 is Entitlement of Divorced Spouses to Railroad Retirement Annuities Independent of Actual Entitlement of Employee, and it states:

    (a) IN GENERAL.—Section 2 of the Railroad Retirement Act of 1974 (45 U.S.C. 231a) is amended—
      (1) in subsection (c)(4)(i), by striking ‘‘(A) is entitled to an annuity under subsection(a)(1) and (B)’’; and
      (2) in subsection (e)(5), by striking ‘‘or divorced wife’’ the second place it appears.

Section 1003 is Extension of Tier II Railroad Retirement Benefits to Surviving Former Spouses Pursuant to Divorce Agreements, and it states:

    (a) IN GENERAL.—Section 5 of the Railroad Retirement Act of 1974 (45 U.S.C. 231d) is amended by adding at the end the following:
      ‘‘(d) Notwithstanding any other provision of law, the payment of any portion of an annuity computed under section 3(b) to a surviving former spouse in accordance with a court decree of divorce, annulment, or legal separation or the terms of any court-approved property settlement incident to any such court decree shall not be terminated upon the death of the individual who performed the service with respect to which such annuity is so computed unless such termination is otherwise required by the terms of such court decree.’’

Just as quickly as Congress added subsection (d) to Section 5 of the Railroad Retirement Act, Congress has decided to delete subsection (d) of Section 5. In Section 11 of the Pension Protection Technical Corrections Act, which is currently pending before Congress, it states:

    SEC. 11. AMENDMENTS RELATED TO TITLE X.

      (a) AMENDMENTS TO RAILROAD RETIREMENT ACT.—

      (1) Section 14(b) of the Railroad Retirement Act of 1974 (45 U.S.C. 231m(b)) is amended by adding at the end the following:

        ‘‘(3)(i) Payments made pursuant to paragraph (2) of this subsection shall not require that the employee be entitled to an annuity under section 2(a)(1) of this Act: Provided, however, That where an employee is not entitled to such an annuity, payments made pursuant to paragraph (2) may not begin before the month in which the following three conditions are satisfied:

          ‘‘(A) The employee has completed ten years of service in the railroad industry or, five years of service all of which accrues after December 31, 1995.

          ‘‘(B) The spouse or former spouse attains age 62.

          ‘‘(C) The employee attains age 62 (or if deceased, would have attained age 62).

        ‘‘(ii) Payments made pursuant to paragraph (2) of this subsection shall terminate upon the death of the spouse or former spouse, unless the court document provides for termination at an earlier date. Notwithstanding the language in a court order, that portion of payments made pursuant to paragraph (2) which represents payments computed pursuant to section 3(f)(2) of this Act shall not be paid after the death of the employee.

        ‘‘(iii) If the employee is not entitled to an annuity under section 2(a)(1) of this Act, payments made pursuant to paragraph (2) of this subsection shall be computed as though the employee were entitled to an annuity.’’.

      (2) Subsection (d) of section 5 of the Railroad Retirement Act (45 U.S.C. 231d) is repealed.
    (b) EFFECTIVE DATES.—

      (1) SUBSECTION (a)(1).—The amendment made by subsection (a)(1) shall apply with respect to payments due for months after August 2007. If, prior to the effective date of such amendment, payment pursuant to paragraph (2) of section 14(b) of the Railroad Retirement Act of 1974 (45 U.S.C. 231m(b)) was terminated because of the employee’s death, payment to the former spouse may be reinstated for months after August 2007.

      (2) SUBSECTION (a)(2).—The amendment made by subsection (a)(2) shall take effect upon the date of the enactment of this Act.

With the Pension Protection Technical Corrections Act still pending, it is possible that more changes will be made before PPTCA heads to the President for signature.

[tags]Pension Protection Act, ppa, Railroad Retirement, Pension Protection Technical Corrections Act, PPTCA, ERISA[/tags]

Supreme Court May Address QDROs: Petitioner’s Merit Brief Due in Kennedy v. DuPont Savings

Fast on the heels of LaRue and MetLife, the U.S. Supreme Court is taking a look at another ERISA case – Kennedy v. Plan Administrators for DuPont Savings and Investment Plan, No. 07-636. The Petitioner, the estate of the participant, is required to file their merit brief today with the Court.

Kennedy is a case from the 5th Circuit Court of Appeals. In 1971, while employed by DuPont, Kennedy married Mrs. Kennedy. In 1974, Kennedy signed a beneficiary designation form identifying Mrs. Kennedy as his sole beneficiary for plan purposes. Mr. and Mrs. Kennedy divorced in 1994, and Mrs. Kennedy agreed to “be divested of all right, title, interest, and claim in or to … the proceeds therefrom, and any other rights related to any …. retirement plan, pension plan, or like benefit program existing by reason of” Mr. Kennedy’s employment. A QDRO was issued in 1997 providing disbursement instructions for Mr. Kennedy’s employee benefits plans but failed to include disbursement instructions for the DuPont Savings and Retirement Plan.

Mr. Kennedy retired from DuPont in 1998 and died in 2001, without ever executing another beneficiary form replacing Mrs. Kennedy as his beneficiary for purposes of the DuPont Savings and Retirement Plan. Mr. and Mrs. Kennedy’s daughter, Kari, was appointed executrix of Mr. Kennedy’s estate, and sent a letter to DuPont demanding that Mr. Kennedy’s account balance in the DuPont Savings and Retirement Plan be distributed to the estate. Kari Kennedy put DuPont on notice that the estate claimed the funds pursuant to Texas Family Code section 9.302, which generally provides that a spouse’s designation as a retirement plan beneficiary is invalidated by a subsequent divorce. Mrs. Kennedy also made a claim on DuPont for Mr. Kennedy’s account balance, which DuPont paid to her based on the designation of beneficiary signed by Mr. Kennedy. The estate then filed an action to recover Mr. Kennedy’s account balance, and DuPont filed a third-party claim, asserting that if Mrs. Kennedy was not the correct beneficiary, the plan was entitled to have the account balance returned to the plan. The trial court granted summary judgment in favor of the estate, and Mrs. Kennedy appealed.

The 5th Circuit vacated the trial court’s grant of summary judgment in favor of the estate, and rendered judgment for DuPont. The 5th Circuit reasoned that, as a QDRO for the DuPont Savings and Retirement Plan was never submitted to DuPont, and as QDROs are the specific mechanism provided by ERISA for addressing the elimination of a spouse’s interest in plan benefits, and as that mechanism was not invoked, therefore requiring DuPont to recognize the waiver in this situation would conflict with ERISA by determining rights to pension plan benefits in a manner not authorized by the QDRO provisions.

The estate then appealed the 5th Circuit’s decision to the U.S. Supreme Court, and will file their merit brief today. The Court has not set oral argument yet for this case.

Additional Information:

[tags]Pension Protection Act, ppa, Kennedy, DuPont, QDRO, Supreme Court, ERISA[/tags]

EBSA Issues Rules on Domestic Relations Orders

EBSA issued an interim final rule with a request for comments as required by Section 1001 of PPA. The final rule takes effect April 6, 2007. It adds Labor Reg. 2530.206, which includes examples addressing that a domestic relations order (DRO) will not fail as a qualified domestic relations order solely because it is issued after another domestic relations order, or revises another domestic relations order. The examples provided in the reg include a subsequent DRO issued to the same parties, a subsequent DRO issued between different parties, DROs issued after the participant’s death, and DROs issued after the annuity start date. [tags]Pension Protection Act, pension, domestic relations order, DRO, ppa[/tags]