The Supreme Court recently made life a little easier for plan administrators and employee benefit practitioners when it unanimously held that a plan administrator properly relied on plan documents that named the ex-wife of a plan participant as the beneficiary of a savings and investment plan (“SIP”), even though the couple's divorce decree provided that she had waived her interests in the plan. In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, et al., No. 07-636 (U.S. Jan. 26, 2009), the Supreme Court reaffirmed the “plan document rule” and settled a split among the federal circuit courts of appeal over whether a plan beneficiary could waive his rights to ERISA benefits through a divorce decree, even if the decree was not a qualified domestic relations order (“QDRO”). These rulings have important implications for plan sponsors and administrators, who should review the language in their benefit plans to ensure that they are giving plan participants clear instructions for designating beneficiaries and disclaiming benefits that are contemplated by the Kennedy decision.
The Kennedy Decision
In 1974, William Kennedy designated his wife, Liv Kennedy, as the beneficiary under the savings and investment plan (“SIP”) sponsored by his employer, E.I. DuPont de Nemours & Company (“DuPont”). Twenty years later, the couple divorced. The divorce decree provided that Liv had waived her interests in all her former spouse's ERISA plans, including the DuPont SIP plan. Thereafter, William completed the necessary paperwork to name his daughter, Kari Kennedy, as the beneficiary under DuPont's pension and retirement plans. However, William never changed his designation of Liv as beneficiary under the SIP plan. William died in 2001 and Kari, executrix for her father's estate, asked DuPont to distribute the SIP funds to William's estate. DuPont declined to do so. Instead, DuPont paid approximately $400,000 to Liv in accord with the SIP beneficiary designation form that was still on file. The estate sued both DuPont and the SIP plan administrator, arguing that Liv waived her interest in the SIP plan through her divorce decree and that the plan administrator violated ERISA by ignoring that waiver.
The federal trial court granted summary judgment to the estate, ruling that a beneficiary could waive her rights to plan assets “provided that the waiver is explicit, voluntary, and made in good faith.” The Fifth Circuit Court of Appeals reversed, holding that common law waivers of ERISA benefits were unlawful diversions of plan assets that violated ERISA's anti-alienation provisions [29 U.S.C. § 1056(d)(1)]. On appeal, the Supreme Court affirmed the result from the Circuit Court of Appeals, although it rejected the Fifth Circuit's reasoning.
- Waivers of plan benefits in non-QDRO divorce decrees do not violate ERISA's anti-alienation provision.
The Supreme Court began by analyzing the split among the circuit courts and state supreme courts over whether a divorced spouse could waive her pension plan benefits through a divorce decree that did not meet the requirements under ERISA for a Qualified Domestic Relations Order (“QDRO”). Several courts, including the Fifth Circuit, had found that waivers outside of the QDRO context were impermissible diversions of ERISA plan benefits from one person to another. The Kennedy Court was not persuaded by this analysis and, instead, turned to principles of trust law that permit beneficiaries to disclaim their interests in spendthrift trusts. Since ERISA's anti-alienation provisions were drafted with an eye to these principles, the Supreme Court concluded that ERISA could not be read to deny waivers merely because the waiver is not in a QDRO.
- Plan administrators must follow the plan documents terms in making benefit determinations.
The Kennedy Court then turned to what it found to be the most important aspect of the case – the percept that ERISA plans are intended to give “a plan participant a clear set of instructions for making his own instructions clear”. Such clarity is promoted by the “plan document rule,” or the principle that plan administrators are obliged to closely follow the express terms of the plan documents, so long as those documents are consistent with ERISA's statutory framework. In light of this, the Court concluded that “[t]he Estate's claim [ ] stands or falls by 'the terms of the plan'.” DuPont's SIP plan provided clear instructions for the manner in which a plan participant could change his beneficiary designation. William did not follow those instructions with respect to his SIP plan designation. The Kennedy Court refused to punish the plan administrator for distributing plan benefits in accord with the plan documents on file. Notably, the Court wanted to eliminate the need for plan administrators to examine external documents that purportedly affect benefit determinations or be drawn into litigation over the enforceability of waivers other than those explicitly recognized in the plan documents.
The estate countered that the QDRO framework proves that guarantee of simplicity is not absolute, especially in cases involving divorce. However, the Kennedy Court explained that plan administrators who enforce a QDRO are really just enforcing plan documents, since QDROs are an integral part of ERISA. The Court went on to note that the QDRO statute provides a relatively simple checklist for plan administrators to consider, as opposed to complex, subjective determinations involved in a federal common law waiver of benefits.
What the Kennedy Case Means for Plan Sponsors and Administrators
The Kennedy decision underscores the need for plan sponsors to revisit the language of their ERISA-governed plans to ensure that they provide unambiguous procedures for designating and changing plan beneficiaries, especially upon life events such as marriage, divorce or a spouse's death. Plan sponsors also should look at the way in which these procedures are communicated to plan participants (e.g., summary plan descriptions, employee bulletins) to make sure that they are aware of these provisions and their potential impact. Additional steps may be necessary to educate the participants that divorce decrees which are not QDROs will not determine how plan benefits are distributed.
Because the Supreme Court has expressly recognized that waivers of plan benefits are permissible if they do not conflict with the terms of the plan, plan sponsors also may wish to consider the forms of waiver that they want to allow and establish default beneficiaries where such waivers are made. Outside of the context of these waivers and QDROs, if the plan terms are clear and unambiguous, plan sponsors and plan administrators are freed from the necessity of conducting detailed fact-intensive analysis to determine the way in which benefits are to be distributed.