In a victory for plan sponsors and administrators, the Supreme Court ruled recently in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 129 S.Ct. 865 (2009), that retirement plans may rely on the plan terms and beneficiary designation forms in determining the proper recipient of survivor benefits. The ruling resolves a split among the federal courts, many of which had ruled that plans had to recognize the validity of divorce decrees in which a surviving spouse had purportedly waived her right to a survivor benefit from her ex-spouse’s pension plan, even if she remained the designated beneficiary on plan forms after the divorce. Although the Court’s ruling leaves a number of questions unanswered, it does make clear that, in most situations, a plan administrator may now ignore such a divorce decree and pay out a survivor benefit in accordance with the plan’s terms and beneficiary designation forms on file.
William Kennedy was a DuPont employee and a participant in DuPont’s Savings and Investment Plan (the “SIP”). He designated his wife, Liv Kennedy, as the beneficiary of his SIP benefit on the plan’s prescribed form. When the couple divorced, they entered into a divorce decree in which Liv gave up any right or interest related to any of William’s pension benefits. William did not, however, change his designated beneficiary on the form on file with the SIP. William died in 2001, and his SIP benefit — about $400,000 — was claimed by both his estate and Liv. The plan decided that Liv was still the designated beneficiary, and paid the benefit to her. The estate then sued both DuPont and the SIP plan administrator.
The district court ruled that the divorce decree was a valid waiver of Liv’s rights to the benefit under federal common law, and ordered the SIP to pay the benefit to the estate. The Fifth Circuit Court of Appeals reversed that ruling, however, holding that Liv’s waiver violated ERISA’s antialienation provision, 29 U.S.C. § 1056(d)(1), by indirectly transferring her interest to the ultimate recipient, the estate. The appellate court held that such a transfer could only be accomplished via a QDRO, which Liv’s waiver was not, and ruled that the plan’s payment of the benefit to Liv Kennedy was proper.
The Supreme Court’s Ruling
The Kennedy estate appealed, and the Supreme Court reached the same result as the Fifth Circuit, albeit on an entirely different basis. In a unanimous opinion written by Justice Souter that drew upon basic principles of trust law, the Court held that Liv’s waiver was not an “assignment” or “alienation” of a right or interest in the plan benefit, but that the plan was correct in ignoring it since the plan documents still clearly made Liv the designated beneficiary. Moreover, the Court stated, a QDRO could not be used to waive a benefit, since a QDRO must create or recognize the existence of an alternate payee’s right to benefits — and William Kennedy, the plan participant, could not fit into ERISA’s definition of “alternate payee.”
In ruling that the DuPont plan was correct in strictly adhering to its plan documents, the Court noted the importance of the written plan document in several provisions of ERISA. Every ERISA plan must be “established and maintained pursuant to a written instrument,” 29 U.S.C. § 1102(a)(1), that “specif[ies] the basis on which payments are made to and from the plan,” 29 U.S.C. § 1102(b)(4). Section 1104(a)(1)(D), the Court noted, requires plan administrators to follow the governing plan document and instruments (to the extent they are consistent with ERISA), and the statutory provision permitting participants and beneficiaries to sue for benefits specifically limits relief to benefits or rights that are available “under the terms of [the] plan.” 29 U.S.C. § 1132(a)(1)(B).
Embracing the argument that our firm made in an amicus brief we filed on behalf of one of our clients, the Court emphasized that adhering to the straightforward rule of following the plan documents would provide the greatest degree of predictability and efficiency to all involved — participants, spouses and plan administrators — and would spare plans the burdensome and often costly task of evaluating waivers and initiating interpleader actions to determine the correct beneficiary. If the parties’ intent at the time of divorce was to divest Liv of her rights as potential beneficiary, William could and should have achieved that purpose by simply changing his beneficiary designation in accordance with the terms of the plan — but, for “whatever reason,” in the words of the Court, he did not do so. In addition, Liv could have disclaimed her interest after William’s death, but chose not to do so. Thus, the Court held, the DuPont plan administrator was correct in refusing to go beyond the four corners of the plan documents to determine that Liv was the correct beneficiary.
As is often the case with Supreme Court opinions (particularly involving ERISA), several questions remain unanswered. Specifically, the opinion does not make absolutely clear whether waivers that are consistent with governing plan documents must be recognized (probably yes), or whether the outcome might have been different if the DuPont plan had not provided any opportunity for Liv to disclaim her benefit interest (perhaps). Again referring to longstanding principles of trust law, the Court found it unlikely that ERISA would “effectively force a beneficiary to take an interest” against his or her will.
The Court also suggested, without clearly stating, that the Kennedy estate might have been able to bring an action against Liv under state law once she received the benefits from the plan. While there is some authority suggesting that such actions might be preempted by ERISA, there are also a number of more recent cases suggesting that they are not.
Finally, the Court declined to express any view on whether strict adherence to the plan documents would result in plans having to pay benefits to designated beneficiaries who murder their spouses, stating that such a case was not before it.
How Should Plans React?
We do not see any immediate need for plans to take dramatic action in light of Kennedy. Certainly, plan sponsors would be well-advised to examine their plan provisions regarding beneficiary designations and make sure that they are clear and have been communicated to participants. We are aware of some plans that, even prior to Kennedy, had provisions invalidating beneficiary designations upon divorce, and we imagine that some plans might consider adding such a provision now, although doing so could create new complications. We think that the case is particularly important for family law practitioners, who must now make certain that their clients change existing beneficiary designation forms if the existing forms no longer reflect their clients’ wishes. In any event, the case should be viewed as welcome news by plan administrators, who can now make beneficiary determinations in post-divorce situations with much greater confidence.