Court Declares the Wisdom of the 'Plan Documents Rule'

Knowledge is a process of piling up facts; wisdom lies in their simplification.

' Martin Fischer

What's a plan administrator to do? An ex-spouse of a now-deceased plan participant is the named beneficiary of the decedent's savings and investment plan (SIP) benefit, but the ex-spouse divested herself of all rights to the decedent's SIP benefit in a divorce decree. Should the ex-spouse receive the benefit?

Until Jan. 26, 2009, state and federal courts disagreed on the issue. Now, with the United States Supreme Court's decision, Kennedy v. Plan Administrator for the DuPont Savings & Investment Plan, No. 07-636, we have resolution.

Writing for a unanimous court, Justice Souter declared the triumph of the federal Employee Retirement Income Security Act (“ERISA”) over the federal common law. Out of a pile of facts, the Court fashioned a crystal simplicity: A plan administrator has “a bright-line requirement to follow plan documents in distributing benefits.” Thus, the Court created the “plan documents rule.”

Specifically, where an employment benefit plan specifies a procedure for revoking a beneficiary designation, the impetus is wholly on the plan participant to follow the plan procedures to revoke the beneficiary, even if the beneficiary waived her right to the benefits pursuant to a divorce decree.

Notwithstanding the “plan documents rule,” the Court additionally held that the designated beneficiary (here, the ex-spouse) can disclaim her interest in the benefit, at least where the plan provides for such disclaimer.

Background Facts

In 1974, William Kennedy, an employee of E.I. DuPont de Nemours & Company and a participant in both its ERISA-qualified SIP and its ERISA-qualified pension plan, signed a form designating his wife Liv to take benefits under each plan. Twenty years later, William and Liv divorced, subject to a property settlement agreement divesting Liv of “all right, title, interest, and claim in and to ' any and all sums ' the proceeds [from], and any other rights related to any ' retirement plan, pension plan, or like benefit program existing by reason of [William's] past or present or future employment.” Kennedy, No. 07-636.

Subsequent to his divorce from Liv, William had executed a beneficiary-designation form naming his daughter, Kari Kennedy, as the beneficiary of the pension plan, but he never executed a document removing Liv as the SIP beneficiary. Upon William's death in 2001, Kari, as executrix of William's estate, asked DuPont to distribute the SIP benefit to the estate. DuPont, relying on William's plan documents, paid the $400,000 benefit to Liv instead. The estate then claimed that Liv waived her right to the SIP benefit in the divorce decree and sued the plan sponsor and plan administrator for violations of ERISA.

The District Court and the Fifth Circuit

Granting summary judgment to the estate, the district court held that Liv waived her right to receive the SIP benefit and the estate was the proper party to receive the decedent's benefit pursuant to DuPont plan provisions. The court relied on Manning v. Hayes, 212 F.3d 866 (5th Cir. 2000), and other Fifth Circuit cases holding divorce decrees to be enforceable waivers.

In sum, at the district court level, the federal common law defeated ERISA's statutory requirements.

The common law did not fare so well on appeal. The Fifth Circuit distinguished its prior decisions enforcing common law waivers as waivers, not of employee benefits but of life-insurance policies, which are not subject to ERISA's anti-alienation provision. Under this provision and accompanying exception, a plan participant cannot assign or alienate a SIP benefit without a qualified domestic relations order (QDRO). The Fifth Circuit held that Liv's waiver was an invalid waiver because she assigned or alienated her interest in the SIP benefit but did not satisfy ERISA's anti-alienation provision, as the divorce decree was not an ERISA-recognized QDRO. Score one for ERISA.

Supreme Court's Analysis

ERISA defeated the federal common law a second time before the Supreme Court, but for different reasons.

Disagreeing with the Fifth Circuit, the Court did not find Liv to have assigned or alienated any interest in the SIP benefit when she disclaimed her right to receive William's employee benefits under the divorce decree. She merely waived rights; she did not assign (i.e., transfer) her interest. Moreover, because the waiver was not an assignment, there was no need to satisfy ERISA's anti-alienation provision. To make an even clearer point, a mere waiver of an interest could never satisfy QDRO requirements because a QDRO requires an alternate payee. Because Liv's waiver was not an assignment or alienation and, as a mere waiver, was incapable of satisfying QDRO requirements, the Fifth Circuit's reasoning could not stand.

To arrive at this conclusion, the Court relied on the common law of trusts. Noting the law of trusts “serves as ERISA's backdrop,” the Court likened a plan benefit beneficiary to a spendthrift trust beneficiary. Id. Just as a spendthrift trust beneficiary can disclaim an interest in the trust, so too can a plan benefit beneficiary waive an interest in the plan.

Such a waiver could been given effect by a plan administrator ' were it not for the “plan documents rule.” Under this Court-established ERISA rule, a plan administrator has “a bright-line requirement to follow plan documents in distributing benefits.” No other documents outside of the plan are to be followed.

This meant an immediate defeat for William's estate. The Court found that William's failure to revoke Liv as his SIP beneficiary ended the matter of distribution under ERISA. William could have revoked Liv as his beneficiary, but he did not. The Court stated, “The plan administrator did its statutory ERISA duty by paying the benefits to Liv in conformity with the plan documents.” Ultimately, “William's designation of Liv as his beneficiary was made in the way required; Liv's waiver was not.” Id.

Under the “plan documents rule,” an estate's claim “stands or falls by 'the terms of the plan.'” A plan participant is to have “a clear set of instructions for making his own instructions clear” and thereby preclude a plan administrator from having to make “enquiries into nice expressions of intent, in favor of the virtues of adhering to an uncomplicated rule.” Id.

Implications of the 'Plan Documents Rule'

A plan benefit beneficiary's waiver in a divorce decree or other document will not be recognized by the plan administrator, unless the plan provides for such disclaimer and the waiver meets plan requirements. Moreover, even if a waiver does comply with plan requirements, the disclaimer will not also serve as an assignment of the benefit to an estate or other third party. Plan administrators that previously followed the “waiver” approach must ensure that they adhere solely to plan documents with respect to identification of beneficiaries and disclaimers of benefits.

Also, the Court's decision applies to all pension and welfare benefits ' not just pension benefits subject to the anti-alienation rule. Plan administrators and sponsors should review plan provisions concerning named beneficiaries, beneficiary revocation, default beneficiaries, QDROs, and the effect of divorce upon beneficiary designation with the following question in mind: Do the plan descriptions and materials regarding these provisions provide the average plan participant undergoing a divorce or seeking to change beneficiary designations with clear and straightforward directives?

Finally, a caveat to the plan participant: The impetus is wholly on you to follow plan directives. The divorce decree will not suffice to serve as a waiver or an assignment. You must follow plan procedures to revoke, rename and reclaim control over your plan benefits. Seek the assistance of a plan representative.

Final Thoughts

Liv Kennedy may not be keeping the $400,000 SIP benefit after all. The Court explicitly stated in Footnote 10 of Kennedy, No. 07-636, that it was not addressing the question of whether the estate could have sued to recover the SIP benefits from Liv. Prior rulings seemed to say that a prior contractual agreement to forfeit funds may be enforceable. What is certain is that once a benefit has been properly distributed under ERISA, the funds lose ERISA protection.

Now what will the common law say about that?

William R. Wright, a member of this newsletter's Board of Editors, practices with Wright Law Firm, P.A. in Jackson, MS, where he limits his practice to all areas Family Law with emphases on complex divorce and custody issues and jurisdictional disputes. He is a Fellow in both the American and International Academy of Matrimonial Lawyers. Thresa Barksdale Patterson is an associate at the firm where she focuses her practice on all areas of Family Law.

Knowledge is a process of piling up facts; wisdom lies in their simplification.

' Martin Fischer

What's a plan administrator to do? An ex-spouse of a now-deceased plan participant is the named beneficiary of the decedent's savings and investment plan (SIP) benefit, but the ex-spouse divested herself of all rights to the decedent's SIP benefit in a divorce decree. Should the ex-spouse receive the benefit?

Until Jan. 26, 2009, state and federal courts disagreed on the issue. Now, with the United States Supreme Court's decision, Kennedy v. Plan Administrator for the DuPont Savings & Investment Plan, No. 07-636, we have resolution.

Writing for a unanimous court, Justice Souter declared the triumph of the federal Employee Retirement Income Security Act (“ERISA”) over the federal common law. Out of a pile of facts, the Court fashioned a crystal simplicity: A plan administrator has “a bright-line requirement to follow plan documents in distributing benefits.” Thus, the Court created the “plan documents rule.”

Specifically, where an employment benefit plan specifies a procedure for revoking a beneficiary designation, the impetus is wholly on the plan participant to follow the plan procedures to revoke the beneficiary, even if the beneficiary waived her right to the benefits pursuant to a divorce decree.

Notwithstanding the “plan documents rule,” the Court additionally held that the designated beneficiary (here, the ex-spouse) can disclaim her interest in the benefit, at least where the plan provides for such disclaimer.

Background Facts

In 1974, William Kennedy, an employee of E.I. DuPont de Nemours & Company and a participant in both its ERISA-qualified SIP and its ERISA-qualified pension plan, signed a form designating his wife Liv to take benefits under each plan. Twenty years later, William and Liv divorced, subject to a property settlement agreement divesting Liv of “all right, title, interest, and claim in and to ' any and all sums ' the proceeds [from], and any other rights related to any ' retirement plan, pension plan, or like benefit program existing by reason of [William's] past or present or future employment.” Kennedy, No. 07-636.

Subsequent to his divorce from Liv, William had executed a beneficiary-designation form naming his daughter, Kari Kennedy, as the beneficiary of the pension plan, but he never executed a document removing Liv as the SIP beneficiary. Upon William's death in 2001, Kari, as executrix of William's estate, asked DuPont to distribute the SIP benefit to the estate. DuPont, relying on William's plan documents, paid the $400,000 benefit to Liv instead. The estate then claimed that Liv waived her right to the SIP benefit in the divorce decree and sued the plan sponsor and plan administrator for violations of ERISA.

The District Court and the Fifth Circuit

Granting summary judgment to the estate, the district court held that Liv waived her right to receive the SIP benefit and the estate was the proper party to receive the decedent's benefit pursuant to DuPont plan provisions. The court relied on Manning v. Hayes , 212 F.3d 866 (5th Cir. 2000), and other Fifth Circuit cases holding divorce decrees to be enforceable waivers.

In sum, at the district court level, the federal common law defeated ERISA's statutory requirements.

The common law did not fare so well on appeal. The Fifth Circuit distinguished its prior decisions enforcing common law waivers as waivers, not of employee benefits but of life-insurance policies, which are not subject to ERISA's anti-alienation provision. Under this provision and accompanying exception, a plan participant cannot assign or alienate a SIP benefit without a qualified domestic relations order (QDRO). The Fifth Circuit held that Liv's waiver was an invalid waiver because she assigned or alienated her interest in the SIP benefit but did not satisfy ERISA's anti-alienation provision, as the divorce decree was not an ERISA-recognized QDRO. Score one for ERISA.

Supreme Court's Analysis

ERISA defeated the federal common law a second time before the Supreme Court, but for different reasons.

Disagreeing with the Fifth Circuit, the Court did not find Liv to have assigned or alienated any interest in the SIP benefit when she disclaimed her right to receive William's employee benefits under the divorce decree. She merely waived rights; she did not assign (i.e., transfer) her interest. Moreover, because the waiver was not an assignment, there was no need to satisfy ERISA's anti-alienation provision. To make an even clearer point, a mere waiver of an interest could never satisfy QDRO requirements because a QDRO requires an alternate payee. Because Liv's waiver was not an assignment or alienation and, as a mere waiver, was incapable of satisfying QDRO requirements, the Fifth Circuit's reasoning could not stand.

To arrive at this conclusion, the Court relied on the common law of trusts. Noting the law of trusts “serves as ERISA's backdrop,” the Court likened a plan benefit beneficiary to a spendthrift trust beneficiary. Id. Just as a spendthrift trust beneficiary can disclaim an interest in the trust, so too can a plan benefit beneficiary waive an interest in the plan.

Such a waiver could been given effect by a plan administrator ' were it not for the “plan documents rule.” Under this Court-established ERISA rule, a plan administrator has “a bright-line requirement to follow plan documents in distributing benefits.” No other documents outside of the plan are to be followed.

This meant an immediate defeat for William's estate. The Court found that William's failure to revoke Liv as his SIP beneficiary ended the matter of distribution under ERISA. William could have revoked Liv as his beneficiary, but he did not. The Court stated, “The plan administrator did its statutory ERISA duty by paying the benefits to Liv in conformity with the plan documents.” Ultimately, “William's designation of Liv as his beneficiary was made in the way required; Liv's waiver was not.” Id.

Under the “plan documents rule,” an estate's claim “stands or falls by 'the terms of the plan.'” A plan participant is to have “a clear set of instructions for making his own instructions clear” and thereby preclude a plan administrator from having to make “enquiries into nice expressions of intent, in favor of the virtues of adhering to an uncomplicated rule.” Id.

Implications of the 'Plan Documents Rule'

A plan benefit beneficiary's waiver in a divorce decree or other document will not be recognized by the plan administrator, unless the plan provides for such disclaimer and the waiver meets plan requirements. Moreover, even if a waiver does comply with plan requirements, the disclaimer will not also serve as an assignment of the benefit to an estate or other third party. Plan administrators that previously followed the “waiver” approach must ensure that they adhere solely to plan documents with respect to identification of beneficiaries and disclaimers of benefits.

Also, the Court's decision applies to all pension and welfare benefits ' not just pension benefits subject to the anti-alienation rule. Plan administrators and sponsors should review plan provisions concerning named beneficiaries, beneficiary revocation, default beneficiaries, QDROs, and the effect of divorce upon beneficiary designation with the following question in mind: Do the plan descriptions and materials regarding these provisions provide the average plan participant undergoing a divorce or seeking to change beneficiary designations with clear and straightforward directives?

Finally, a caveat to the plan participant: The impetus is wholly on you to follow plan directives. The divorce decree will not suffice to serve as a waiver or an assignment. You must follow plan procedures to revoke, rename and reclaim control over your plan benefits. Seek the assistance of a plan representative.

Final Thoughts

Liv Kennedy may not be keeping the $400,000 SIP benefit after all. The Court explicitly stated in Footnote 10 of Kennedy, No. 07-636, that it was not addressing the question of whether the estate could have sued to recover the SIP benefits from Liv. Prior rulings seemed to say that a prior contractual agreement to forfeit funds may be enforceable. What is certain is that once a benefit has been properly distributed under ERISA, the funds lose ERISA protection.

Now what will the common law say about that?

William R. Wright, a member of this newsletter's Board of Editors, practices with Wright Law Firm, P.A. in Jackson, MS, where he limits his practice to all areas Family Law with emphases on complex divorce and custody issues and jurisdictional disputes. He is a Fellow in both the American and International Academy of Matrimonial Lawyers. Thresa Barksdale Patterson is an associate at the firm where she focuses her practice on all areas of Family Law.