Not long ago, the Supreme Court decided that administrators of ERISA-covered plans should not have to consult any source other than documents in their possession (such as the terms of the plan, beneficiary designations, and qualified domestic relations orders duly submitted to the plan) to determine who was entitled to benefits upon a participant’s death. Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S. Ct. 865 (2009). Part of the Court’s rationale was the bright-line “plan documents rule” would facilitate plan operations by removing any need to evaluate extrinsic evidence of the participant’s intent. That reasoning was doubtless sound, but making life simpler for plan administrators is not the same as making it simple, as a trio of recent cases illustrate.

  1.  In Boyd v. Metropolitan Life Insurance Company, 2011 U.S. App. LEXIS 6605 (4th Cir., 3/31/11), a participant in her employer’s life insurance plan died while in the midst of divorcing her husband. The two had signed a separation agreement under which he renounced any claim to benefits under the plan. Her death followed shortly thereafter, be she had formally removed him as her beneficiary. Ignoring the separation agreement, he filed a claim for the insurance proceeds and was contested by his almost-ex wife’s heirs.

The only pertinent plan document, namely, the unamended beneficiary designation, was clear. The heirs argued, however, that Kennedy contains a loophole. The case considered by the Supreme Court involved a pension plan, and the spousal claim at issue could have been negated by the filing of a qualified domestic relations order. The Court stated in a footnote that its opinion did not “address a situation in which the plan documents provide no means for a beneficiary to renounce an interest in benefits.” The plan and insurance policy at issue in Boyd set forth no renunciation procedure. Did that mean that Kennedy was not controlling and that Mrs. Boyd’s heirs should be allowed to rely on her husband’s signature on the separation agreement?

The Fourth Circuit thought not. The point of the Kennedy footnote, it suggested, was to head off the absurd situation in which a named beneficiary wanted to renounce his interest and was forced by the plan’s terms to accept it against his will. (An ex-husband might, for instance, wish to give up his rights as beneficiary in favor of his and his ex-wife’s children.) Where the beneficiary asserted his rights, the court thought it undesirable to compel the plan administrator to undertake an investigation into whether an extrinsic waiver was valid and enforceable.

  1. Thomas v. Community Renewal Team, Inc., 2011 U.S. Dist. LEXIS 32097 (D.Conn., 3/24/11) presented another estranged spouse conundrum. The plaintiff, sister of a deceased participant in an ERISA-covered §403(b) plan, contended that she ought to take his account balance in preference to his wife. He had originally named the sister as his beneficiary. Then he got married. As required by ERISA, his wife automatically became his beneficiary. According to the sister (this was a motion for summary judgment, so the allegation must be accepted as true), the wife deserted him. (She wasn’t a party to the case, and it appears that her whereabouts were unknown to the court.) The sister stated her intention to obtain a probate court order affirming the abandonment and stripping the wife of her spousal rights under local law.

The court’s response was that spousal abandonment did nothing more than give the participant (and no one else) the right to choose a different beneficiary. It did not automatically reinstate prior beneficiaries. Therefore, the wife, if she ever appeared, would be entitled to the decedent’s account.

  1. Baldwin v. University of Pittsburgh Medical Center, 2011 U.S. App. LEXIS 6305 (3d Cir., 3/29/11) was one of those difficult cases where the factual circumstances were, if not bizarre, at least atypical. A participant in several employer-provided life insurance plans gave her three children up for adoption to a close friend. Despite having surrendered her parental rights, the biological mother “maintained a parental relationship with the children. They still referred to her as ‘Mom,’” and she “spent all holidays and festivals” with them and their adoptive mother.

The biological mother died in an accident. Her beneficiaries were entitled to $350,000 in insurance proceeds under four different policies. The adoptive mother was the named beneficiary of a $25,000 policy. No beneficiary had been designated under the others. The policies’ default beneficiaries included “children,” which the plan administrator interpreted as excluding biological children who had been adopted by someone else.

When the plan refused to pay the policy proceeds to the biological children, the adoptive mother sued on their behalf. The district court rejected her claim, but the Court of Appeals reversed. Its rationale was that the plan documents were “ambiguous;” the plaintiff should be given the chance to prove that “children” might include children who have been adopted by someone else and with regard to whom the decedent had no parental rights but maintained a parental relationship.

The emotion behind this decision is obvious. The next taker was apparently (the court wasn’t entirely sure) a half-sibling with whom the participant had no personal relationship at all. It’s perfectly plausible that she would have wanted her children to receive the insurance proceeds rather than an almost-stranger.

Yet the “ambiguity” discovered by the court, in its effort to evade an unpalatable result, is far-fetched. No one would say that a decedent’s biological children have any claim on benefits in the ordinary case, where they have little or no contact with her. Implicit in the court’s decision is the premise that some degree of relationship effectively undoes the adoption, so far as ERISA is concerned.

Most likely, the district court will hear evidence and conclude that “children” has exactly the meaning that the plan administrator initially gave it, because no other meaning is reasonable.

These cases demonstrate that the plan documents rule, even though it is probably the best rule available, doesn’t necessarily produce intuitively reasonable results. The moral is that participants need to be encouraged to think about their beneficiary designations and change them when circumstances alter. Failing to do so can lead to the disposition of plan assets in ways that participants do not at all intend.

Disloyal trustee loses his pension. ERISA protects pension benefits against assignment or alienation, but not if the participant is a plan fiduciary against whom the plan has obtained a judgment for breach of his duties. Katzenberg v. Lazzari, 2011 U.S. App. LEXIS 1329 (2d Cir., 1/21/11) (unpublished opinion) illustrates how wide this exception can be.

The plaintiff, the former co-owner of a defined benefit plan sponsor, sold his 50% interest in the business and sought payment of his pension. The new management discovered that he had, during his years as effectively the sole trustee of the plan, withdrawn at least $54,000 of plan assets without explanation and had provided false information to the accountants that resulted in a shortfall of at least $150,000 in required contributions. Based on these infractions, the plan refused payment. The participant sued, adding a claim for a $100 a day penalty for the plan administrator’s alleged refusal to give him a summary plan description. By the time the case came to trial, this asserted penalty had reached nearly $150,000.

The defendants argued that the losses to the plan resulting from the plaintiff’s actions should be offset against his benefits but conceded that they were unable to say for certain how large the losses were. Their uncertainty stemmed from the fact that the plaintiff had completely controlled the plan for many years and, they suspected, had successfully concealed other misappropriations. The court helpfully decided that it was not up to the plan to prove how much it had lost but to the plaintiff to prove that the loss was less than the value of his benefit. When he failed to meet that burden of proof, the judge held that he should forfeit his entire pension, declaring,

This forfeiture remedy best serves equity and achieves justice for defendants, who are relieved of the burden to correct the underfunding of the Pension Plan that Katzenberg alone caused. This remedy is also required because Katzenberg failed to prove the precise lump sum payment or monthly payment that he otherwise would have been entitled to receive, after an actuary would take into account the Pension Plan losses caused by Katzenberg's fraudulent conduct.

The claim for recompense for the absence of an SPD was dismissed out of hand: “The record strongly suggest the Pension Plan trustees never prepared an SPD. Whose fault was that? Primarily Katzenberg's own fault from the time he became . . . the principal Plan Trustee to the year 2001 when he resigned as trustee. . . Katzenberg has not proved anyone except Katzenberg himself violated ERISA in that respect.”

The appeals court affirmed in all respects, though it quietly revised some of the trial court’s rationale. The pension forfeiture became an equitable remedy rather than a simple recoupment of the plan’s losses, and the SPD penalty was denied on the ground that the plaintiff, “as the sole trustee with knowledge of the Plan for more than two decades,” could not plausibly claim that the lack of an SPD had done him any harm.

Briefly Noted:

  • Thanks to electronic filing of Form 5500 annual reports, the Pension Benefit Guaranty Corporation (PBGC) can now check employers’ variable rate premium calculations against the plan assets and liabilities reported on Schedule SB. According to PBGC officials speaking at a recent professional conference, a spot check found discrepancies in 40 percent of the filings. In response, the PBGC has launched a broad enforcement project aimed at collecting premium underpayments. Most of the errors are innocent, caused by the fact that data are almost always updated or corrected in the course of an actuarial valuation. The premium and SB calculations often capture the data at different times. Plan sponsors should review their filings to be sure that they are consistent. If not, they should not wait for the PBGC to come calling. The premium underpayment penalty is automatically reduced by 80 percent if the employer comes forward voluntarily. And, of course, some companies will discover that they have overpaid.
  • Notice 2011-28 (3/29/11) offers guidance on how to report the cost of employer-provided medical benefits on Form W-2. Reporting is optional this year. It will be compulsory for 2012 W-2’s issued in January 2013. The most important item in the Notice is an exemption for employers that issued fewer than 250 W-2’s in the preceding year. This relief will continue until revoked or altered by the IRS. The IRS once again reminded everyone that the reported cost of benefits is for information only; medical benefits remain nontaxable except in a few unusual situations.