A typical divorce is a long, expensive and stressful ordeal. By the end of the process, an exhausted client may have little patience for attending to seemingly insignificant, and what may appear to the client to be unnecessary, details. There usually are, however, important matters left to address before the client can leave a failed marriage in the rear view mirror forever. Among these is changing the beneficiary designation pertaining to a qualified retirement plan if the ex-spouse is named as primary beneficiary. If that beneficiary designation isn’t changed, the ex-spouse may be entitled to receive the participant’s interest in the plan at the participant’s death—even if the ex-spouse waived, by explicit language incorporated into the divorce decree, any and all rights and interests in the plan.
Ex-Wife Gets Plan Benefits
In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan,1 William Kennedy, an employee of DuPont, was a participant in DuPont’s savings and investment plan, which was governed by ERISA.2 ERISA generally obligates plan administrators to manage ERISA plans “in accordance with the documents and instruments governing” them.3 ERISA requires that the governing documents for covered benefit plans provide that benefits under the plan may not be assigned or alienated.4 Any state statute that has a “connection with” an ERISA plan is superseded by ERISA to the extent of any inconsistency between the two.5
Under the DuPont plan, William was authorized to designate individuals who would receive his benefits after his death and to change any previous beneficiary designation. The plan also provided that, on a participant’s death, if there were no surviving spouse and no operative beneficiary designation, the participant’s plan benefits would be distributed to the participant’s executor.
William named his wife, Liv, as primary beneficiary of his plan benefits and didn’t name a contingent beneficiary. William and Liv were divorced thereafter, and the divorce decree specified that Liv was divested of any right to benefits from any retirement plan in which William participated. William, however, never changed or removed his designation of Liv as primary beneficiary.
William predeceased Liv, and the plan administrator, following William’s beneficiary designation form on file with the plan, distributed William’s plan benefits to Liv. William’s executor sued DuPont, claiming distribution of William’s plan benefits to Liv constituted a violation of ERISA since the divorce decree, argued the executor, effectuated a waiver by Liv of those benefits.
The U.S. District Court for the Eastern District of Texas held in favor of William’s executor and ordered DuPont to pay William’s benefits to his estate. On appeal, the U.S. Court of Appeals for the Fifth Circuit reversed the District Court, ruling the divorce decree constituted an invalid assignment or alienation of the plan benefits under ERISA.
The U.S. Supreme Court affirmed the Fifth Circuit’s order but largely rejected the Fifth Circuit’s reasoning. The Fifth Circuit had ruled the divorce decree couldn’t serve as a valid waiver because it wasn’t in the form of a qualified domestic relations order (QDRO) and so wasn’t exempt from the anti-assignment and anti-alienation provisions of ERISA. The Supreme Court pointedly observed the QDRO rules and the anti-assignment and anti-alienation provisions of ERISA weren’t even relevant.
The Supreme Court then turned to the separate issue of whether the plan administrator was required to honor Liv’s waiver and distribute the balance of William’s plan benefits to his estate. The Supreme Court explained that a plan administrator is obligated to act in accordance with the governing documents of the plan,6 that ERISA provides no exception to this duty regarding the distribution of benefits and that one of the policies of ERISA is to establish rules that provide participants and employers with certainty. The governing documents of a plan control the administration and disbursement of benefits, and establishing rules that would allow other documents, such as a divorce decree, to control the disbursement of benefits would be contrary to this policy. Consequently, the Supreme Court ruled that the plan administrator properly distributed William’s plan benefits to Liv.
The Supreme Court’s Kennedy decision appeared to have enshrined a rule allowing a participant’s surviving ex-spouse who remained the named beneficiary of a qualified retirement plan at the participant’s death to receive (and retain) plan benefits despite having waived any rights to such benefits in the divorce decree. Regardless of whether the Supreme Court’s analysis is technically sound, sanctioning an ex-spouse’s claim to benefits under such circumstances seems inherently unjust.
Possible Workaround
A case decided less than three years ago by the Illinois Appellate Court points the way to a Kennedy workaround. Hebert v. Cunningham7 involved spouses, Kevin and Betty Cunningham. Kevin was employed by Loparex LLC, and he participated in the Loparex Internal Revenue Code Section 401(k) (401(k)) plan. Kevin designated Betty as primary beneficiary of his Loparex 401(k) account. Kevin and Betty’s marriage was later dissolved by the Circuit Court of Cook County, Ill. Paragraph 5 of the divorce decree provided that “each party shall retain sole ownership of their separate retirement assets, free and clear from any claim of the other party, as follows:…[Kevin] shall retain sole ownership of his…401(k) account…”
The divorce decree contained the following additional language:
Except as otherwise provided herein, each of the parties hereto does hereby forever relinquish, release, waive, and quitclaim to the other party hereto all property rights and claims which he or she now has or may hereafter have, as husband, wife, widow, widower or otherwise, or by reason of the marital relations now existing between the parties hereto or by virtue of any present or future law of any state or of the United States of America or any other country, in or to or against the property of the other party or his or her estate, whether now owned or hereafter acquired by such other party. Each of the parties hereto further covenants and agrees for himself and herself and his or her heirs, executors, administrators and assigns, that he or she will never at any time hereafter sue the other party or his or her heirs, executors, administrators and assigns, for the purpose of enforcing any of the rights relinquished under this paragraph.
Kevin died several years later. He hadn’t changed his designation of Betty as primary beneficiary of his 401(k) account.
Kevin’s executor, appointed by the Probate Division of the Circuit Court of Cook County, informed the 401(k) plan trustee that Kevin’s 401(k) account proceeds should be paid over to Kevin’s estate. The plan administrator and the trustee concurred and transferred Kevin’s 401(k) funds to a separate account for the benefit of Kevin’s estate. Betty then filed, in the Circuit Court of Cook County, a complaint for declaratory judgment asserting she was the rightful beneficiary of Kevin’s 401(k) account. The plan administrator removed the case to the U.S. District Court for the Northern District of Illinois. The District Court entered an order to the effect that Betty was the rightful beneficiary under ERISA but, explicitly declining to address the executor’s claim against Betty under Illinois law that Betty was in breach of the divorce decree, dismissed that claim “without prejudice to refiling in the Circuit Court of Cook County.”8
The executor took the not-so-subtle hint and filed her own complaint for declaratory judgment and other relief in the Cook County Circuit Court. The Circuit Court entered its order imposing a constructive trust on the 401(k) funds and requiring Betty to turn over the funds to the executor.
The Illinois Appellate Court affirmed the Cook County Circuit Court’s order. In so doing, it first rejected Betty’s claim that the Circuit Court’s order was barred by the doctrine of res judicata, noting that the order of the District Court was clearly limited to determination of Betty’s ERISA-based claim and specifically avoided making any ruling or pronouncement on the Illinois law issue addressed by the Circuit Court.
Next, the Appellate Court distinguished Kennedy,9 which Betty had claimed was dispositive. As discussed above, in Kennedy, the Supreme Court held that the “plan administrator did its statutory ERISA duty by paying the benefits to [the decedent’s former spouse] in conformity with the plan documents,” notwithstanding the divorce decree. However, Kennedy expressly declined to determine whether a named beneficiary is entitled to retain funds after their initial distribution to the beneficiary by an ERISA plan administrator. Indeed, in footnote 10, the Supreme Court refused to “express any view as to whether the Estate could have brought an action in state or federal court against [the decedent’s former spouse] to obtain the benefits after they were distributed.”
Finally, the Appellate Court summarily disposed of Betty’s argument that the divorce decree didn’t clearly enough reflect an intention on the part of Betty to waive any interest in Kevin’s 401(k) account. In so doing, the court stated: “We find that th[e] broad waiver language unequivocally encompassed all property rights of any nature, including the beneficial property interest in the 401(k) at issue in this case. Indeed, it is hard to imagine how the waiver could have been worded more broadly” (emphasis in original).
Endnotes
1. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009), aff’g 497 F.3d 426 (5th Cir. 2007).
2. The Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001, et. seq.
3. 29 U.S.C. Section 1104(a)(1)(D).
4. 29 U.S.C. Section 1056(d)(1); see also Internal Revenue Code Section 401(a)(13)(A).
5. Egelhoff v. Egelhoff, 532 U.S. 141 (2001).
6. 29 U.S.C. Section 1104(a)(1)(D).
7. Hebert v. Cunningham, 2018 IL App (1st) 172135, 129 N.E.3d 539 (2018).
8. Cunningham v. Hebert, No. 9292, 2016 WL 6442180 (N.D. Ill. 2016).
9. Supra note 1.