Litigation

U.S. Supreme Court weighs in on beneficiary designations and ERISA plans

By John Walch

Divorce can be a painful event for retirement plans as well as for the parties involved.  A recent U.S. Supreme Court case illustrates some of the difficulties that Plan administrators face from strict statutory requirements and forgetful plan participants. 

William Kennedy participated in his employer's retirement plan.  Like most plans, it allowed Kennedy to designate a beneficiary who would receive his benefit upon his death.  As many participants do, Kennedy designated his then-spouse.  Several years later, they divorced, and Kennedy's spouse waived her right to the benefit in the divorce decree.  However, Kennedy did not revoke or amend his earlier beneficiary designation on file with the plan before he subsequently died.  The plan, relying on the unrevoked designation, paid the former spouse.  Kennedy's estate, citing the waiver in the divorce decree, filed suit claiming the estate was the correct beneficiary due to the waiver in the decree.

A unanimous Supreme Court in Kennedy v. Plan Administrator upheld the plan's action.  The Court framed the issue as whether the divorce decree waiver superceded the beneficiary designation on file with the plan.  The Court held that ERISA required the plan to operate in accordance with its terms, and those terms were explicit: the plan would pay the designated beneficiary.  The drafters of ERISA decided long ago that they did not want plan administrators to have to make inquiries into participants' intent or investigate outside documents or events.  Doing so would greatly complicate plan administration and increase its cost. 

The message to plan administrators is clear: make sure your plan has a clear beneficiary procedure in place that participants know and understand.  And for participants, make sure you tell the plan who you want to get your benefit by updating your designation form on file.

Full post as published by Northwest Business Litigation Blog on February 07, 2009 (boomark / email).