When Does a Nonemployee Spouse Have a Right to the Employee's Retirement Accumulation?

The lesson from Kennedy is clear. Once the divorce is settled, and the employee's former spouse has agreed to waive his or her interest in the employee's accumulation in a qualified plan, it is up to the employee to make the necessary change in the beneficiary designation under the plan; the law will not assist the employee's successors in preventing distribution to the former spouse, despite the waiver, if the employee fails to take that additional step. The employee's successors would not be prevented from pursuing the proceeds once distributed to the former spouse in a state law proceeding, as the divorce waiver itself remained enforceable against the distributee. The Court was clear in its opinion that the anti-alienation rule and the QDRO exception to that rule did not invalidate such a waiver, which it concluded was not an assignment or alienation.

Failure to Follow Up

Negotiation of the settlement and the finality of the divorce may often be followed by a sense of relief that the dispute is over, and nothing more need be done. Kennedy and Egelhoff v. Egelhoff, 532 U.S. 141 (2001), illustrates this is not so. Failure to follow up and take the actions necessary to implement an agreement affecting marital rights to accumulations in employee benefit plans invites disputes among successors, and almost always among members of the same family. The decision in Kennedy and the increasing importance of savings in employee plans make consideration of spousal rights to these accumulations timely.

Under ERISA, as subsequently amended by the Retirement Equity Act, the statute creates spousal rights in the benefit provided by an employer plan. When these rights were first enacted, the primary employee plan for most employees was either a defined benefit pension plan or what is known as a “money purchase plan.” For these plans, the primary benefit for a married participant is required to be a qualified joint and survivor annuity (“QJSA”), which is an annuity for the participant with a further annuity for a surviving spouse equal to 50% of the participant's annuity. IRC ' 401(a)(11); 29 U.S.C. ' 1055(a). In addition, the plan is required to provide an annuity benefit for a spouse of a participant who died before the payment of benefits to the participant had begun in the form of an annuity with an actuarial value equal to 50% of the actuarial value of the participant's benefit calculated at the time of death (“QPSA”). These rules apply to a “money purchase plan” even though that plan is a defined contribution plan (an “individual account” plan) under which the primary benefit would be a lump sum payment. The details as to how the amount to which a nonemployee spouse would be entitled is calculated are complex and need not be explained in order to understand how the spousal protections do (or do not) operate. The participant is entitled to elect a different form of benefit, or to designate a beneficiary for the death benefit other than the participant's spouse, but only if the spouse consents
to the election or designation. IRC
' 417; 29 U.S.C. ' 1055(c). The statute specifies how this consent should be made, as explained below.

Spousal protections do not apply to a profit sharing plan if the plan provides that the accumulation in the plan on the death of the participant is payable to his or her spouse, the participant does not elect to receive an annuity as the benefit
under the plan, and, with respect to the amount of the accumulation, the plan is not a “transferee” of another plan to which the spousal protections did apply. IRC ' 401(a)(11)(B)(iii); 29 U.S.C. ' 1055(b)(1)(C). The benefit payable under the plan to the participant, almost always as a lump sum, on retirement or on the occurrence of another event when the benefit would be paid, usually termination of service, is not protected. As contrasted with a money purchase plan, under which the employer would be obligated by the terms of the plan to make contributions based on the participant's compensation, under a profit sharing plan, the employer's contribution was often dependent on an external variable (e.g., profits), and, therefore, might vary from year to year and could be discretionary. Profit sharing plans were originally secondary plans, providing a way to supplement the primary retirement plan. Remember that cash or deferred arrangements (section 401(k) plans) were enacted after ERISA and were viewed initially as secondary plans. Indeed, a section 401(k) plan is defined to be, inter alia, a feature of a profit sharing plan. IRC ' 401(k)(1). Furthermore, it is not necessary for the employer to have “profits” in order to make contributions to a profit-sharing plan. IRC ' 401(a)(27)(A).

There has been a lot of water under the bridge since these provisions were enacted. Defined benefit plans, once the predominant type of employee plan, have faded, and even the larger plans are being frozen or terminated under the stress of current economic conditions. In their place, defined contribution plans have become the primary employee benefit plan maintained by employers who offer retirement plans for their employees, and the principal type of plan is the 401(k) plan. Furthermore, the typical benefit paid from these plans, from money purchase plans and even from plans for which the primary benefit would be an annuity, is a lump sum, which may be transferred to (rolled over into) an individual retirement account (“IRA”). Against this backdrop, what has happened to spousal protections for participant accumulations?

Basic Spousal Protections

As pointed out above, the basic spousal protections (the QPSA and QJSA) do not apply to 401(k) plans. Instead, the plan must provide that the participant's spouse is the beneficiary of the death benefit under the plan, that is, the plan accumulation at the time of the participant's death prior to retirement. When the time comes to pay the benefit to the participant, however, there is no spousal protection; the participant can do what he or she wants with the funds in the account. Moreover, the current rules provide strong incentives for the transfer of the accumulation into another tax-favored retirement vehicle, almost always an IRA. IRA's are individual accounts, not governed by ERISA. The contents of an IRA are exclusively the property of the owner.

Money purchase plans and similar defined contribution plans are subject to these spousal protection rules. Thus, the plan is required to provide a QPSA for the spouse of a participant who dies before his or her benefits commence and a QJSA as the basic benefit whenever the participant may become entitled under the plan to receive a benefit; that is, the plan is required to use the accumulation to purchase annuities unless either or both benefits are waived by the participant. Most defined contribution plans and many defined benefit plans now pay benefits in a lump sum, thus avoiding the annuity requirement. Payment of a lump sum, however, requires the participant to waive the annuity option and his or her spouse to consent to the participant's waiver. Spousal protections do not carry over with the benefit, whether paid in cash or transferred to an IRA. Once again, the participant, absent some arrangement with his or her spouse, may dispose of these funds as he or she might decide.

Obviously, the decision to take benefits from a qualified plan requires planning. Assignments of interests in qualified plans at the time of divorce occur in the context of a legal proceeding which requires (or, at least, should require) professional advice as to the rights of the parties. When retirement plan accumulations are involved in the assessment of who gets what in divorce, there are now many advisors who specialize in valuing interests in plans and in preparing the necessary documentation for effective transfers. Even in this context, however, as has been demonstrated by the dispute in Kennedy, these complicated matters can go awry. Now consider the context under which spousal rights are determined in non-divorce situations, when equivalent professional advice is, in most cases, not present. Principal reliance, instead, rests on information provided by personnel directors for the sponsors of these plans.

Written Explanations

The statute addresses this problem by requiring plans to provide written explanations of the benefit options to the participant at specified times, the rights of the participant's spouse (to withhold consent to the participant's waiver), and the effect of the waiver. IRC ' 417(a)(3); 29 USC ' 1055(c)(3). While there is no requirement that similar explanations be given to the participant's spouse, the required consent is subject to conditions that make it likely that this information is also provided to the spouse, albeit with no assurance that he or she understands the significance of such consent. The consent rules require that it be in writing, that the benefit election to which the consent applies either specify an alternative beneficiary or explicitly permit the participant to designate other beneficiaries without consent, that the terms of the consent acknowledge the effect of the participant's election to waive the survivor annuity, and finally that the consent be witnessed and signed either by a “plan representative” or a notary public. The IRS has issued regulations under ' 417 describing in detail the information to be provided for this election to be effective, and, in addition, published forms for spousal consents both to the QPSA and QJSA. See Notice 97-10, 1997-1 C.B. 370.

The consent form contains specific statements outlining the rights of the consenting spouse. One might think that, when this form is used, and the plan representative is present, the person signing the form would have been well advised and, therefore, is aware of the significance of the consent. The prevalence of elections to take benefits as a lump sum (which necessitates signing the consent) might lead one to doubt this conclusion. Even when an annuity is the chosen benefit, problems can arise. An annuity solely for the life of the participant would provide a larger payment and might seem attractive if the joint annuity option is not well understood.

In Canestri v. NYSA-ILA Pension Trust Fund & Plan, 2009 WL 799216 (D.N.J. 2009), a husband applied for pension benefits at a time when he was quite ill. He and his wife, accompanied by their son and in the presence of a plan representative, signed a series of forms acknowledging that they had been fully informed about the various options available to them and apparently electing the single annuity for the life of the husband, to which wife consented on a form signed by the plan representative. He died soon after he retired and began receiving payments from the plan.

When her claim for benefits was denied, the wife sued the plan under a variety of theories including breach of fiduciary duties. The plan took the position that the documents conformed to the statutory requirements, and therefore, her claims should be denied under Kennedy. The court thought otherwise and denied the plan's motion for summary judgment. Here, there was evidence that tended to support the claim that the husband and wife had intended to elect a joint and survivor annuity. The wife conceded that she had not read the documents but signed anyway when the plan representative told her that “everything would be taken care of.” The court thought that the evidence could support the inference that the “plan representative failed to disclose material facts,” knowing about the husband's illness, and that this could lead to the conclusion that wife's consent was not voluntary.

In Canestri, the documents hewed closely to the forms suggested in the IRS Notice. The decision suggests that this might not be enough to satisfy the plan's responsibility to see that the consent to the participant's waiver of the QJSA has been properly executed. The facts in that case, however, would have made the problems with the election that was actually made rather obvious, something that the plan representative should not have overlooked. In the typical case, however, the situation would most likely be less obvious, and the plan representative might be justified in relying on explicit language in the election and consent forms. Moreover, the participant might also have personal objectives which would not be in his or her spouse's best interests, and he or she might then have an interest in making assurances to his or her spouse that consent would be in her or his interest. The participant's spouse might even agree with those objectives at the time.

This situation was apparently presented in Leckey v. Stefano, 501 F.3d 212 (3rd Cir. 2007), cert. denied, 128 S.Ct. 1290 (2008). The trail in this much litigated case began when the employer of William Knapp (“husband”) went into bankruptcy, and he withdrew funds from several qualified plans that had been maintained by his employer. Evelyn Knapp (“wife”) signed a consent to husband's withdrawal of the accumulations as lump sums. These funds were then transferred into a profit-sharing trust created by a corporation husband formed to continue some business operations, although that business never made any profit. Husband was administrator and trustee of the funds. Later, pursuant to winding up the successor business, husband withdrew these funds and rolled them into several IRAs. In his estate plan, the IRAs formed the corpus of a testamentary trust under which wife was given a life estate, and remainders were provided to the children of a former marriage. Payments to wife from the trust pursuant to her life estate were made as the litigation progressed. After his death in 1993, wife asserted that husband's withdrawals from the successor qualified plans, over which he had complete control, were made in violation of the spousal protection provisions of ERISA, a dispute taken up by her daughter after her death.

The wife's claim was based on the inadequacy of her consent to the withdrawal from the original employee plans, many years earlier, and her argument that a transfer from those plans into the successor plans created by husband under his business corporation carried with it the spousal protection that had applied to the original plans in which the fund accumulated. Recall that profit sharing plans are not subject to the QJSA requirement, provided the participant's spouse has the right to the death benefit before the participant retires. However, a transfer of the participant's accumulation from a plan which is subject to spousal protection to a plan which is not, carries with it rights to the QPSA and the QJSA. IRC ' 401(a)(11)(B)(iii)(III); 29 USC ' 1055(b)(1)(C)(iii). IRS regulations interpret this statutory requirement to refer to involuntary transfers, initiated by the employer, and specifically exclude voluntary transfers by a participant who agrees to a transfer of his or her benefit directly into another plan, a “rollover” transaction. Treas. Reg. ' 1.401(a)-20, Q-A 5. Although plan-to-plan transfers are the required default option for rollover transfers (to preserve retirement funds), IRC ' 401(a)(31), these transfers require a spousal consent when made from a plan subject to the spousal protections to a plan or an IRA which is not.

The court of appeals concluded that the IRS regulation is valid, and held that claims stemming from the original transfer, as to which wife had signed a consent, were barred by the statute of limitations. Recall that in Canestri, the district court had concluded that improper or ineffective counseling when the participant makes an election of a benefit option under the plan that requires spousal consent may be subject to the spouse's claim that the plan administrator has violated the fiduciary rules under ERISA and indeed the spousal protection rules are an operational requirement for the plan's qualified status. Even though a claim arising from the original withdrawals may later be barred by the statute of limitations, defective application of the consent rules, under plaintiff's view in Leckey, could require carryover of spousal protection into the successor plan and support a claim that the later withdrawal from the successor plan, without the spouse's consent, was also a violation of these rules. At least, that appears to be the argument. There remained some messy factual issues in Leckey as to whether the profit sharing plan of husband's corporation actually did include the spousal protection provisions, which may explain why the court did not take the case.

The problem in Leckey may stem from husband's intention to divide the benefits provided by the accumulations in the retirement plans among his then current family, wife and their daughter, and the children of a long ago prior marriage, a plan with which wife may not have agreed, or at least so he may have thought. As a result, he implemented an estate plan without consulting wife, or so the facts suggest. Rather than dividing the fund, and properly documenting his decision to do so, he opted to keep the fund intact to pay benefits to his wife, but leave the remainder to his older children. The resulting litigation among family members clearly shows how risky such a decision may be, particularly when the ERISA spousal protection rules may apply.

Conclusion

In a subsequent article, the interplay between the spousal protection rules and estate planning decisions involving divorce and remarriage will be further explored. As we will see, this may well become a much litigated area.

Thomas R. White, 3rd, PhD, a member of this newsletter's Board of Editors, is a John C. Stennis Professor of Law at the University of Virginia Law School.

Retirement accumulations in employer-sponsored qualified plans often represent the principal source of liquid resources for an employee and his or her family. In every state, the non-employee spouse has an interest in the employee's retirement fund, which is usually determined through the judgment of a state court either approving a negotiated settlement or ordering a division of the spouse's marital property. That judgment can then be enforced against the plan as a qualified domestic relations order (QDRO). Usually, when the employee spouse has interests in multiple plans ' a not infrequent situation as the employee benefit landscape shifts in response to economic pressures ' the divorce settlement will also contain a waiver or release by the non-employee spouse of his or her interests in other plans. As we have learned, such a waiver or release, even if effective under state law, does not, by itself, protect the employee's interests and those of the employee's successors.

The Supreme Court Rules

In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan , 129 S.Ct. 865 (2009), the Supreme Court held that the terms of the plan control who is the beneficiary of a death benefit. In that case, the employee and his former spouse reached a marital settlement agreement in which the former spouse was allocated interests in some of his plans and, in a general waiver, released her interests in others. She was the named beneficiary of the death benefit in one such plan, but the employee did not change that designation before his death. Payment of the accumulation to the former spouse as the named beneficiary was upheld by the Court, although the Court also declined to hold that her waiver in the divorce agreement was an “alienation or assignment” invalidated by the anti-assignment rule in ERISA. In paying the death benefit to her, the plan administrator was following the terms of the plan, as ERISA required.

The lesson from Kennedy is clear. Once the divorce is settled, and the employee's former spouse has agreed to waive his or her interest in the employee's accumulation in a qualified plan, it is up to the employee to make the necessary change in the beneficiary designation under the plan; the law will not assist the employee's successors in preventing distribution to the former spouse, despite the waiver, if the employee fails to take that additional step. The employee's successors would not be prevented from pursuing the proceeds once distributed to the former spouse in a state law proceeding, as the divorce waiver itself remained enforceable against the distributee. The Court was clear in its opinion that the anti-alienation rule and the QDRO exception to that rule did not invalidate such a waiver, which it concluded was not an assignment or alienation.

Failure to Follow Up

Negotiation of the settlement and the finality of the divorce may often be followed by a sense of relief that the dispute is over, and nothing more need be done. Kennedy and Egelhoff v. Egelhoff , 532 U.S. 141 (2001), illustrates this is not so. Failure to follow up and take the actions necessary to implement an agreement affecting marital rights to accumulations in employee benefit plans invites disputes among successors, and almost always among members of the same family. The decision in Kennedy and the increasing importance of savings in employee plans make consideration of spousal rights to these accumulations timely.

Under ERISA, as subsequently amended by the Retirement Equity Act, the statute creates spousal rights in the benefit provided by an employer plan. When these rights were first enacted, the primary employee plan for most employees was either a defined benefit pension plan or what is known as a “money purchase plan.” For these plans, the primary benefit for a married participant is required to be a qualified joint and survivor annuity (“QJSA”), which is an annuity for the participant with a further annuity for a surviving spouse equal to 50% of the participant's annuity. IRC ' 401(a)(11); 29 U.S.C. ' 1055(a). In addition, the plan is required to provide an annuity benefit for a spouse of a participant who died before the payment of benefits to the participant had begun in the form of an annuity with an actuarial value equal to 50% of the actuarial value of the participant's benefit calculated at the time of death (“QPSA”). These rules apply to a “money purchase plan” even though that plan is a defined contribution plan (an “individual account” plan) under which the primary benefit would be a lump sum payment. The details as to how the amount to which a nonemployee spouse would be entitled is calculated are complex and need not be explained in order to understand how the spousal protections do (or do not) operate. The participant is entitled to elect a different form of benefit, or to designate a beneficiary for the death benefit other than the participant's spouse, but only if the spouse consents
to the election or designation. IRC
' 417; 29 U.S.C. ' 1055(c). The statute specifies how this consent should be made, as explained below.

Spousal protections do not apply to a profit sharing plan if the plan provides that the accumulation in the plan on the death of the participant is payable to his or her spouse, the participant does not elect to receive an annuity as the benefit
under the plan, and, with respect to the amount of the accumulation, the plan is not a “transferee” of another plan to which the spousal protections did apply. IRC ' 401(a)(11)(B)(iii); 29 U.S.C. ' 1055(b)(1)(C). The benefit payable under the plan to the participant, almost always as a lump sum, on retirement or on the occurrence of another event when the benefit would be paid, usually termination of service, is not protected. As contrasted with a money purchase plan, under which the employer would be obligated by the terms of the plan to make contributions based on the participant's compensation, under a profit sharing plan, the employer's contribution was often dependent on an external variable (e.g., profits), and, therefore, might vary from year to year and could be discretionary. Profit sharing plans were originally secondary plans, providing a way to supplement the primary retirement plan. Remember that cash or deferred arrangements (section 401(k) plans) were enacted after ERISA and were viewed initially as secondary plans. Indeed, a section 401(k) plan is defined to be, inter alia, a feature of a profit sharing plan. IRC ' 401(k)(1). Furthermore, it is not necessary for the employer to have “profits” in order to make contributions to a profit-sharing plan. IRC ' 401(a)(27)(A).

There has been a lot of water under the bridge since these provisions were enacted. Defined benefit plans, once the predominant type of employee plan, have faded, and even the larger plans are being frozen or terminated under the stress of current economic conditions. In their place, defined contribution plans have become the primary employee benefit plan maintained by employers who offer retirement plans for their employees, and the principal type of plan is the 401(k) plan. Furthermore, the typical benefit paid from these plans, from money purchase plans and even from plans for which the primary benefit would be an annuity, is a lump sum, which may be transferred to (rolled over into) an individual retirement account (“IRA”). Against this backdrop, what has happened to spousal protections for participant accumulations?

Basic Spousal Protections

As pointed out above, the basic spousal protections (the QPSA and QJSA) do not apply to 401(k) plans. Instead, the plan must provide that the participant's spouse is the beneficiary of the death benefit under the plan, that is, the plan accumulation at the time of the participant's death prior to retirement. When the time comes to pay the benefit to the participant, however, there is no spousal protection; the participant can do what he or she wants with the funds in the account. Moreover, the current rules provide strong incentives for the transfer of the accumulation into another tax-favored retirement vehicle, almost always an IRA. IRA's are individual accounts, not governed by ERISA. The contents of an IRA are exclusively the property of the owner.

Money purchase plans and similar defined contribution plans are subject to these spousal protection rules. Thus, the plan is required to provide a QPSA for the spouse of a participant who dies before his or her benefits commence and a QJSA as the basic benefit whenever the participant may become entitled under the plan to receive a benefit; that is, the plan is required to use the accumulation to purchase annuities unless either or both benefits are waived by the participant. Most defined contribution plans and many defined benefit plans now pay benefits in a lump sum, thus avoiding the annuity requirement. Payment of a lump sum, however, requires the participant to waive the annuity option and his or her spouse to consent to the participant's waiver. Spousal protections do not carry over with the benefit, whether paid in cash or transferred to an IRA. Once again, the participant, absent some arrangement with his or her spouse, may dispose of these funds as he or she might decide.

Obviously, the decision to take benefits from a qualified plan requires planning. Assignments of interests in qualified plans at the time of divorce occur in the context of a legal proceeding which requires (or, at least, should require) professional advice as to the rights of the parties. When retirement plan accumulations are involved in the assessment of who gets what in divorce, there are now many advisors who specialize in valuing interests in plans and in preparing the necessary documentation for effective transfers. Even in this context, however, as has been demonstrated by the dispute in Kennedy, these complicated matters can go awry. Now consider the context under which spousal rights are determined in non-divorce situations, when equivalent professional advice is, in most cases, not present. Principal reliance, instead, rests on information provided by personnel directors for the sponsors of these plans.

Written Explanations

The statute addresses this problem by requiring plans to provide written explanations of the benefit options to the participant at specified times, the rights of the participant's spouse (to withhold consent to the participant's waiver), and the effect of the waiver. IRC ' 417(a)(3); 29 USC ' 1055(c)(3). While there is no requirement that similar explanations be given to the participant's spouse, the required consent is subject to conditions that make it likely that this information is also provided to the spouse, albeit with no assurance that he or she understands the significance of such consent. The consent rules require that it be in writing, that the benefit election to which the consent applies either specify an alternative beneficiary or explicitly permit the participant to designate other beneficiaries without consent, that the terms of the consent acknowledge the effect of the participant's election to waive the survivor annuity, and finally that the consent be witnessed and signed either by a “plan representative” or a notary public. The IRS has issued regulations under ' 417 describing in detail the information to be provided for this election to be effective, and, in addition, published forms for spousal consents both to the QPSA and QJSA. See Notice 97-10, 1997-1 C.B. 370.

The consent form contains specific statements outlining the rights of the consenting spouse. One might think that, when this form is used, and the plan representative is present, the person signing the form would have been well advised and, therefore, is aware of the significance of the consent. The prevalence of elections to take benefits as a lump sum (which necessitates signing the consent) might lead one to doubt this conclusion. Even when an annuity is the chosen benefit, problems can arise. An annuity solely for the life of the participant would provide a larger payment and might seem attractive if the joint annuity option is not well understood.

In Canestri v. NYSA-ILA Pension Trust Fund & Plan, 2009 WL 799216 (D.N.J. 2009), a husband applied for pension benefits at a time when he was quite ill. He and his wife, accompanied by their son and in the presence of a plan representative, signed a series of forms acknowledging that they had been fully informed about the various options available to them and apparently electing the single annuity for the life of the husband, to which wife consented on a form signed by the plan representative. He died soon after he retired and began receiving payments from the plan.

When her claim for benefits was denied, the wife sued the plan under a variety of theories including breach of fiduciary duties. The plan took the position that the documents conformed to the statutory requirements, and therefore, her claims should be denied under Kennedy. The court thought otherwise and denied the plan's motion for summary judgment. Here, there was evidence that tended to support the claim that the husband and wife had intended to elect a joint and survivor annuity. The wife conceded that she had not read the documents but signed anyway when the plan representative told her that “everything would be taken care of.” The court thought that the evidence could support the inference that the “plan representative failed to disclose material facts,” knowing about the husband's illness, and that this could lead to the conclusion that wife's consent was not voluntary.

In Canestri, the documents hewed closely to the forms suggested in the IRS Notice. The decision suggests that this might not be enough to satisfy the plan's responsibility to see that the consent to the participant's waiver of the QJSA has been properly executed. The facts in that case, however, would have made the problems with the election that was actually made rather obvious, something that the plan representative should not have overlooked. In the typical case, however, the situation would most likely be less obvious, and the plan representative might be justified in relying on explicit language in the election and consent forms. Moreover, the participant might also have personal objectives which would not be in his or her spouse's best interests, and he or she might then have an interest in making assurances to his or her spouse that consent would be in her or his interest. The participant's spouse might even agree with those objectives at the time.

This situation was apparently presented in Leckey v. Stefano , 501 F.3d 212 (3rd Cir. 2007), cert. denied, 128 S.Ct. 1290 (2008). The trail in this much litigated case began when the employer of William Knapp (“husband”) went into bankruptcy, and he withdrew funds from several qualified plans that had been maintained by his employer. Evelyn Knapp (“wife”) signed a consent to husband's withdrawal of the accumulations as lump sums. These funds were then transferred into a profit-sharing trust created by a corporation husband formed to continue some business operations, although that business never made any profit. Husband was administrator and trustee of the funds. Later, pursuant to winding up the successor business, husband withdrew these funds and rolled them into several IRAs. In his estate plan, the IRAs formed the corpus of a testamentary trust under which wife was given a life estate, and remainders were provided to the children of a former marriage. Payments to wife from the trust pursuant to her life estate were made as the litigation progressed. After his death in 1993, wife asserted that husband's withdrawals from the successor qualified plans, over which he had complete control, were made in violation of the spousal protection provisions of ERISA, a dispute taken up by her daughter after her death.

The wife's claim was based on the inadequacy of her consent to the withdrawal from the original employee plans, many years earlier, and her argument that a transfer from those plans into the successor plans created by husband under his business corporation carried with it the spousal protection that had applied to the original plans in which the fund accumulated. Recall that profit sharing plans are not subject to the QJSA requirement, provided the participant's spouse has the right to the death benefit before the participant retires. However, a transfer of the participant's accumulation from a plan which is subject to spousal protection to a plan which is not, carries with it rights to the QPSA and the QJSA. IRC ' 401(a)(11)(B)(iii)(III); 29 USC ' 1055(b)(1)(C)(iii). IRS regulations interpret this statutory requirement to refer to involuntary transfers, initiated by the employer, and specifically exclude voluntary transfers by a participant who agrees to a transfer of his or her benefit directly into another plan, a “rollover” transaction. Treas. Reg. ' 1.401(a)-20, Q-A 5. Although plan-to-plan transfers are the required default option for rollover transfers (to preserve retirement funds), IRC ' 401(a)(31), these transfers require a spousal consent when made from a plan subject to the spousal protections to a plan or an IRA which is not.

The court of appeals concluded that the IRS regulation is valid, and held that claims stemming from the original transfer, as to which wife had signed a consent, were barred by the statute of limitations. Recall that in Canestri, the district court had concluded that improper or ineffective counseling when the participant makes an election of a benefit option under the plan that requires spousal consent may be subject to the spouse's claim that the plan administrator has violated the fiduciary rules under ERISA and indeed the spousal protection rules are an operational requirement for the plan's qualified status. Even though a claim arising from the original withdrawals may later be barred by the statute of limitations, defective application of the consent rules, under plaintiff's view in Leckey, could require carryover of spousal protection into the successor plan and support a claim that the later withdrawal from the successor plan, without the spouse's consent, was also a violation of these rules. At least, that appears to be the argument. There remained some messy factual issues in Leckey as to whether the profit sharing plan of husband's corporation actually did include the spousal protection provisions, which may explain why the court did not take the case.

The problem in Leckey may stem from husband's intention to divide the benefits provided by the accumulations in the retirement plans among his then current family, wife and their daughter, and the children of a long ago prior marriage, a plan with which wife may not have agreed, or at least so he may have thought. As a result, he implemented an estate plan without consulting wife, or so the facts suggest. Rather than dividing the fund, and properly documenting his decision to do so, he opted to keep the fund intact to pay benefits to his wife, but leave the remainder to his older children. The resulting litigation among family members clearly shows how risky such a decision may be, particularly when the ERISA spousal protection rules may apply.

Conclusion

In a subsequent article, the interplay between the spousal protection rules and estate planning decisions involving divorce and remarriage will be further explored. As we will see, this may well become a much litigated area.

Thomas R. White, 3rd, PhD, a member of this newsletter's Board of Editors, is a John C. Stennis Professor of Law at the University of Virginia Law School.