Two recent court decisions, one by the U.S. Supreme Court and the other by the Sixth Circuit Court of Appeals, have provided employers, plan sponsors, and plan administrators with valuable guidance regarding two of the pressing issues in benefits: retiree health care and the distribution of death benefits. Both of these cases point to the need for employers and plan sponsors to take care in the design of their plans and the terms of other documents (i.e., collective bargaining agreements) that may have a substantial impact on the administration of benefit plans.

The High Court Adopts an “Uncomplicated Rule”

Plan administrators and employee benefit practitioners everywhere breathed a collective sigh of relief on January 26, 2009, when the U.S. Supreme Court unanimously held that the administrator of a retirement plan sponsored by E.I. DuPont de Nemours & Co. (DuPont) properly paid benefits to the ex-wife of a plan participant who had waived her right to benefits in a divorce agreement, but who was still named as the beneficiary under the terms of the plan at the time of the participant’s death. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, et al., No. 07-636, U.S. Supreme Court (January 26, 2009).

Justice David Souter, writing for the Court, based the decision on what is known as the “plan documents rule” – i.e., under the Employee Retirement Income Security Act (ERISA), plan administrators must act “in accordance with the documents and instruments governing the plan.” According to the Court, “by giving a plan participant a clear set of instructions for making his own instructions clear, ERISA forecloses any justification for enquiries into nice expressions of intent, in favor of the virtues of adhering to an uncomplicated rule.”

William Kennedy married Liv Kennedy in 1971 and designated her as his beneficiary in the DuPont Savings and Investment Plan (SIP) in 1974 with no contingent beneficiary designation. Under the SIP, if at the time the participant died no surviving spouse existed or no beneficiary designation was in place, distribution of SIP benefits was to be made to the executor or administrator of the participant’s estate. In 1994, the Kennedys divorced. In the divorce decree, Liv waived any and all of her interest in William’s pension benefits. William did not, however, change her as the beneficiary of the SIP, though he did change the beneficiary from Liv to his daughter Kari Kennedy under the DuPont Pension and Retirement Plan. No Qualified Domestic Relations Order (QDRO) was submitted to the SIP administrator as a result of the divorce. After William died in 2001, his daughter, as executrix of his estate, demanded that the SIP distribute William’s benefit to the estate in accordance with Liv’s waiver in the divorce decree. The plan administrator paid the SIP funds to Liv, however, finding that she was still the valid beneficiary under the terms of the SIP.

The district court entered summary judgment for the decedent’s estate relying on Fifth Circuit Court of Appeals precedent establishing that a beneficiary can waive his rights to the proceeds of an ERISA plan, “providing that the waiver is explicit, voluntary, and made in good faith.” The Fifth Circuit reversed, citing ERISA’s “anti-assignment” rule, which requires a plan to “provide that benefits provided under the plan may not be assigned or alienated.” The Fifth Circuit held that the waiver in the divorce decree constituted an assignment or alienation of her interest in the SIP benefits to the estate, and so could not be honored. Analyzing the case in light of ERISA’s QDRO provisions, the Fifth Circuit held that a QDRO is the only means by which a plan participant can alienate or assign their benefits as a result of divorce under an ERISA-governed pension plan.

The Supreme Court originally granted certiorari with respect to the issue of whether a QDRO was the sole means by which a pension plan participant can assign his or her benefits in divorce without violating the anti-alienation provisions of ERISA. During oral arguments, however, the Court shifted its focus to the “plan documents rule” to resolve a split at the federal appellate court level regarding whether plan fiduciaries have an obligation to rely only on plan documents when making beneficiary designation decisions.

Although the Court ultimately affirmed the Fifth Circuit’s decision, it rejected the Fifth Circuit’s reasoning that a QDRO is the only means by which a beneficiary may waive a right to plan benefits in a divorce without violating the anti-alienation clause of ERISA. The Court explained that a QDRO cannot waive benefits because a QDRO must designate some alternate payee, therefore, because “Liv [the ex-wife] did not attempt to direct her interest in the SIP benefits to the Estate or any other potential beneficiary, her waiver did not constitute an assignment or alienation rendered void under the terms of [ERISA’s anti-alienation clause]."

Even though the waiver was not nullified by ERISA’s anti-alienation rule, the Court found that the plan administrator fulfilled its fiduciary duty under ERISA by paying the ex-wife the benefits in accordance with the beneficiary designation it had on file. The Court reiterated that ERISA requires “[e]very employee benefit plan [to] be established and maintained pursuant to a written instrument,” “specify[ing] the basis on which payments are made to and from the plan.”

The Kennedy decision demonstrates once again that plan sponsors should ensure that they include unambiguous plan provisions for designating beneficiaries and specific procedures for plan participants to change beneficiary designations, especially upon a life change such as marriage, divorce or widowhood. Also, to minimize litigation in the context of a divorce, employers should consider amending their plans to provide that beneficiary designations of a spouse automatically become null and void upon divorce. The Court’s decision in Kennedy also noted that its reasoning may not be applicable to plans whose documents “provide no means for a beneficiary to renounce an interest in benefits.” Therefore, plan administrators should review their plan provisions to ensure they can take advantage of this “uncomplicated rule.”

The Sixth Circuit Reins In Retiree Health Vesting

The Internal Revenue Code and ERISA both impose substantial vesting requirements on pension plans, but generally do not impose any such requirements on group health plans. In 1983, however, the Sixth Circuit Court of Appeals adopted a novel analysis with respect to the right of retirees to lifetime health coverage. In UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), the court held that retirees may become vested in post-employment health care coverage, if the intent to vest those benefits is inferable from the terms of the collective bargaining agreement governing their employment, and the retirees retired while the terms of that agreement were in effect. The court described retiree health coverage in Yard-Man as a so-called “status benefit,” in which retirees can vest by attaining (and maintaining) the requisite status.

In a pleasant turn, the Sixth Circuit recently refused to expand the application of its prior rulings regarding the vesting of retiree health benefits. In Winnett v. Caterpillar, Inc., 2009 W.L. 170598 (6th Cir. January 27, 2009), the court ruled that, to the extent retiree health benefits may vest under the terms of a collective bargaining agreement, they will vest only in those employees who actually retire during the effective period of that agreement.

The plaintiffs in Winnett were employed by Caterpillar under a series of collective bargaining agreements, including a 1988 agreement (that expired in 1991) which provided that Caterpillar would provide retiree health coverage at no cost to the retiree. Subsequent collective bargaining agreements imposed limits on the amount of benefits payable for retiree coverage and required contributions by the employee-retiree toward the cost of that coverage. The plaintiffs in Winnett contended that they were entitled to the free retiree coverage according to the terms of the 1988 collective bargaining agreement, notwithstanding the fact that they had not retired during the effective dates of that agreement, and had continued to work under the subsequent agreements.

The Winnett plaintiffs brought suit in the U.S. District Court for the Middle District of Tennessee, seeking to expand the analysis of Yard-Man. The plaintiffs sought a ruling that they had vested in the retiree health coverage provisions of the expired 1988 agreement because they had met the age and service requirements for retiree health coverage (though they had not actually retired).

Caterpillar moved to dismiss the plaintiffs’ claims, arguing (among other reasons) that there was no basis for such an extension of the Yard-Man analysis; employees who continue to work after the expiration of a collective bargaining agreement should not be entitled to enforce the terms of an expired agreement to vest them in free, life-long health care coverage.

The district court denied Caterpillar’s motion to dismiss, finding that the plaintiffs’ rights to the retiree medical coverage “vested when the employees attained retirement or pension eligibility,” even for the employees who continued working beyond that point. Recognizing the significance of its ruling, however, the district court certified the question for interlocutory appeal to the Sixth Circuit.

On appeal, the Sixth Circuit reversed. The court noted that “it makes little sense to apply Yard-Man to a contract that expired while workers were still represented by their union.” Because the 1988 agreement contained “no inference that the benefits described in it would last beyond its expiration for workers who chose to continue to work[, it] cannot reasonably be interpreted to mean that retiree medical benefits vested before a worker became a ‘retired employee’.”

Good Guidance

While these rulings address very different benefit considerations, both decisions stress a recurring theme in the implementation and administration of benefit plans. Both decisions ultimately turn in large part on the terms of the relevant documents. Kennedy highlights the necessity for care in designing and drafting plan provisions. And Winnett demonstrates the enormous impact that documents other than the plan document may have on an employer’s benefit burden.