§35.12 Miscellaneous

• Jurisdiction: Washington

§ 35.12 MISCELLANEOUS

Litigation has resulted from distribution of plan benefits to a former spouse pursuant to a beneficiary designation dated prior to a divorce, as well as from waivers of pension rights in a divorce decree without a change in the beneficiary designation.

[1] Waiver of Pension Rights

Can pension rights be waived by agreement outside the QDRO?

[a] Separation Agreement or Divorce Decree

A number of courts have ruled on the effectiveness of a beneficiary designation by a participant that names a former spouse as beneficiary under circumstances in which benefits were previously awarded to the participant in the marital separation agreement or divorce decree. In Estate of Altobelli v. International Business Machines, 77 F.3d 78 (4th Cir. 1996), a dispute arose as to whether death benefits in the decedent's plan should be paid to his estate or to his former spouse, when the decedent did not properly designate a beneficiary. The plan provided that if the participant did not designate a beneficiary, the default beneficiary would be the beneficiary named in the decedent's life insurance policy. The decedent had named his ex-wife as the beneficiary to the life insurance. In the divorce decree, the participant/decedent and his ex-wife waived any interest they had in the other spouse's IBM retirement plan. The plan administrator argued that (1) the plan must be administered in accordance with its terms, and (2) the anti-alienation clause prohibits a beneficiary from waiving benefits. The court cited a split in the circuits with respect to this issue but agreed with the Seventh Circuit. See Fox Valley & Vicinity Constr. Workers Pension Fund v. Brown, 897 F.2d 275 (7th Cir.) (en banc), cert. denied, 498 U.S. 820 (1990) (nonparticipant beneficiary can waive her benefits through specific language in the divorce decree); see also Mohamed v. Kerr, 53 F.3d 911 (8th Cir.), cert. denied, 516 U.S. 868 (1995); Metro. Life Ins. Co. v. Hanslip, 939 F.2d 904 (10th Cir. 1991) (beneficiary designation controls absent a decree dictating otherwise); Lyman Lumber Co. v. Hill, 877 F.2d 692 (8th Cir. 1989) (ex-spouse can waive pension benefits in a divorce decree if the waiver specifically refers to and modifies the beneficiary interest). The Altobelli court went on to note that the Sixth Circuit and Second Circuit followed the rule that a plan administrator is to consider only the beneficiary designation on file, because the duty to look at other documents is too burdensome. Krishna v. Colgate Palmolive Co., 7 F.3d 11 (2d Cir. 1993); McMillan v. Parrott, 913 F.2d 310 (6th Cir. 1990).

Under 29 U.S.C. § 1055(c)(2), the waiver of the QPSA is effective only if "the spouse consents in writing to the designation of another beneficiary, which designation cannot be changed without further spousal consent, witnessed by a plan representative or notary public." Boggs v. Boggs, 520 U.S. 833, 842, 117 S. Ct. 1754, 138 L. Ed. 2d 45 (1997). See § 35.06[2][e], above.

In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285, 129 S. Ct. 865, 172 L. Ed. 2d 662 (2009), the Supreme Court resolved a split among the lower courts in holding that the plan administrator correctly paid benefits to the ex-wife of a participant, even though she had waived her right to such benefits in a divorce decree, because she was still named as the participant's beneficiary at the time of his death. The Court based its decision on the "plan document rule" under 29 U.S.C § 1104(a)(1)(D), which requires that a plan be administered "in accordance with the documents and instruments governing" plans. Id. at 304.

Prior to Kennedy a majority of the federal circuit courts had followed the federal common-law approach and found that a waiver of rights in a divorce decree or DRO was sufficient to waive the spouse's interest in the plan and override a contrary beneficiary designation, provided that the elements of waiver were satisfied (i.e., the waiver must (1) be explicit, voluntary, and made in good faith, Manning v. Hayes, 212 F.3d 866, 874 (5th Cir. 2000); and/or (2) be specific enough that a reasonable person upon reading the divorce decree would understand that the person was waiving that person's interest in the plan. Clift v. Clift, 210 F.3d 268, 271 (5th Cir. 2000)).

In Kennedy the divorce decree disclaimed the former spouse's interest in the participant's plan benefits, but the participant failed to change his beneficiary form, which continued to designate his former spouse. 555 U.S. at 289-90. When the participant died the children claimed that the benefits should go to his estate, but the plan administrator awarded the benefits to the former spouse. The district court entered judgment for the estate, finding that under federal common law the former spouse's waiver was explicit, voluntary, made in good faith, and should be given effect. The Fifth Circuit reversed, stating that the waiver acted as an assignment to any succeeding beneficiaries and should be treated as an order subject to review as a QDRO. Because it did not satisfy the QDRO requirements, it could not be given effect. Thus, the plan administrator had to look to the beneficiary designation on file.

The Supreme Court affirmed the Fifth Circuit's ruling but on different grounds. First, the Court concluded that the divorce decree waiving the spouse's interest in the participant's benefits was valid, but it was not a QDRO, nor could it be treated as a QDRO, stating, "There is no QDRO for a simple waiver; there must be some succeeding designation of an alternate payee." Id. at 297. Second, the Court held that even if there were a valid waiver, the plan administrator was required under the "plan document rule" to pay benefits in accordance with the terms of the plan, namely, the participant's beneficiary designation.

It should be noted that the plan in Kennedy permitted a beneficiary to waive the beneficiary's interest under the plan by completing a waiver form, but the ex-spouse failed to do so. The Court stated by footnote, "We do not address a situation in which the plan documents provide no means for a beneficiary to renounce an interest in benefits." Id. at 304 n.13.

Practice Tip: Always review the plan documents regarding the effect of divorce on the participant's beneficiary designation. Frequently, a plan will provide that the participant's beneficiary designation becomes void upon divorce (at least with respect to the former spouse). The participant should always complete a new beneficiary designation following divorce.

[b] Prenuptial Agreement

Treasury Regulations provide that the survivorship protections for a surviving spouse (QJSA/QPSA) may not be waived by a fiancee in a prenuptial agreement. Treas. Reg. § 1.401(a)-20, Q & A 28. In National Automobile Dealers and Associates Retirement Trust v. Arbeitman, 89 F.3d 496 (8th Cir. 1996), the court addressed the issue of whether the first spouse's (Patricia's) waiver of her survivorship benefits had been effective in a property settlement agreement, and whether the second spouse's (Donna's) waiver of her survivorship benefits had been effective in the prenuptial agreement. Both Donna and Patricia claimed all benefits from two plans in which the decedent (Harold) was a participant. Plan 1 and Plan 2 both provided for a 50 percent survivor annuity to the surviving spouse, unless waived with spousal consent, with the remainder of the benefit to be paid in accordance with the beneficiary designation. The decedent had named Patricia as the designated beneficiary for Plan 1 but did not designate a beneficiary for Plan 2. In the separation agreement, Patricia and Harold agreed to relinquish "any right, title or interest in and to any earnings, accumulations, in any pension plans, profit sharing plans, future investments, money or property of the other." Donna and Harold had agreed in their prenuptial agreement that each party would retain sole ownership of their "listed" property "free and clear of any title, interest, rights, or claims of the other." Id. at 498. However, Harold's retirement plans were not listed as his separate property in the prenuptial agreement. Id. at 498. As to the 50 percent survivor interest in each plan, the court concluded that Donna should be awarded the interest because the prenuptial agreement did not effectively waive the interest. Without reference to...