Tag Archives: URL Pharma

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.