Pension Trends Newsletter
May, 2011 Adobe Acrobat Version | Author Profile | Pension Trends ArchiveThinking About…Retirement Plan Benefits & Beneficiary Designation Forms
When was the last time you discussed beneficiary designation forms for a defined contribution (401(k) or profit sharing) plan with your client? When should a defined contribution plan participant complete a new beneficiary designation form?
Consider the following situation – William and Liv, once happily married, cannot work out their differences and obtain a divorce. During the better years of their marriage, William had completed a beneficiary designation form naming Liv as the beneficiary of his defined contribution plan benefits upon his death. Their court ordered divorce settlement, however, divested Liv of all interest in William’s plan benefits. The plan document was silent as to the effect of a divorce decree on any previously filed beneficiary designation form.
What interest does Liv have in William’s retirement benefit upon his death? The terms of the retirement plan require the plan administrator to pay the benefit to William’s designated beneficiary. Liv is entitled to William’s plan benefits unless William completed a subsequent beneficiary designation form naming someone other than Liv as his beneficiary.
Does the result above seem a bit counterintuitive to you? It may be, but it was the result reached by the Supreme Court in 2009 when faced with the same situation in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan¹. The result, though perhaps counterintuitive, should not be totally surprising to ERISA experts. ERISA, as the Kennedy Court noted, requires such plans be “maintained pursuant to a written instrument” that “specif[ies] the basis on which payment are made to and from the plan,” and that plan administrators act “in accordance with the documents…governing the plan insofar as such documents…are consistent” with ERISA². The Supreme Court has been fairly consistent in its application of the written document and adherence requirements³. In Kennedy, the plan document set out that the plan administrator was required to pay benefits to a participant’s designated beneficiary and that changes to the designation must be made according to the process outlined in the document.
The moral of Kennedy is that participants (and their advisors) should frequently review the contents of their defined contribution plan document provisions and beneficiary designation forms in light of changing life circumstances. A divorce is such a change. Here are some other situations in which reviewing the plan document and beneficiary designation form is warranted:
Participant gets married. Under ERISA, a participant’s spouse is generally entitled to certain plan benefits unless the spouse voluntarily waives his/her right to such a benefit (i.e., if a participant designates someone other than a spouse, this designation would not be fully effective without the spouse’s consent). However, a plan’s terms may require that participants be married for up to one year before a participant’s spouse is treated as a spouse for ERISA purposes4. Under such plans, if a participant dies during the first twelve months of his/her marriage, the new spouse might not be entitled to the participant’s benefit unless a beneficiary designation form was completed by the participant. Also, regarding the spousal waiver of benefits, note that a participant’s fiancé cannot waive such rights until he/she becomes a spouse. As such, even the most carefully drafted prenuptial agreement may not encroach on a spouse’s ERISA rights once married5.
The Plan Document Includes QJSA Provisions and the Participant is Married. Some defined contribution (and all defined benefit) plans include Qualified Joint and Survivor Annuity (QJSA) provisions. Just like plans without a QJSA provision, if a participant names someone other than his or her spouse as the designated beneficiary to the survivor benefits, spousal consent is required. However, under plans with QJSA provisions spousal consent is void on the first day of the plan year in which the participant attains 35 years of age6. This means that spousal consent must be obtained again if it remains the participant’s and spouse’s intent to name a non-spouse as a beneficiary.
Participant Becomes a Parent. A participant’s spouse is generally entitled to the participant’s benefit upon the participant’s death. However, for income tax and other purposes, it may be advisable to name the participant’s children (or a trust with the children as beneficiaries under the trust instrument) as the beneficiaries to a participant’s retirement plan benefit and for the participant to care for the spouse with other assets. Any time a participant has a child (including adoption), his/her beneficiary designation form should be revisited.
A Designated Beneficiary or Contingent Beneficiary Has Died or No Longer Exists. It is not uncommon for participants to name a charity or other organization as a beneficiary and it is not uncommon for such entities to dissolve. Upon the participant’s death, if there are no then living/existing beneficiaries or contingent beneficiaries, the participant’s benefit will pass according to the plan’s terms. This would likely result in a distribution to the participant’s estate—a result that may or may not meet the participant’s intentions.
Participant Declares a Will or Updates His/Her Estate Plan. A beneficiary designation form will generally trump any demands made by the participant in his/her will because, as discussed above, a plan administrator is required under ERISA to follow the plan document’s terms. Any time the participant updates his or her estate plan or declares a will, it is a good idea to take a look at the beneficiary designation form to see if it conforms to the new estate plan or will.
Several Years Have Passed Since Participant Reviewed His/Her Beneficiary Designation Forms. It is not uncommon for long-time participants to forget who was named as the beneficiary of his or her designation ten, twenty or thirty years ago. Furthermore, there are several cases where participants failed to complete or deliver beneficiary designation forms according to the requirements of ERISA or the plan document. If several years have passed since these forms were reviewed, or the participant cannot remember who was named, or if there is any doubt that the forms may have been completed adequately, then it is a good idea to review these forms.
(1) 129 S. Ct. 865 (2009).
(2) The Kennedy Court quotes were taken directly from ERISA §§402(a)(1), 402(b)(3)(4), and 404(a)(1)(D).
(3) The Kennedy Court cites as examples, Egelhoff v. Egelhoff, 532 U.S. 141 (2001), Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), and Curtiss Wright Corp. v. Schoonejongen, 514 U.S. 73 (1995).
(4) See IRC §417(d)(1) and Treas. Reg. §1.401(a)-20, A-26.
(5) See IRS Notice 97-10 for sample language regarding spousal consent.
(6) See IRS §417(a)(6)(B) and Treas. Reg. §1.401(a)-20, A-33(b).
This article was written by Jason W. Douthit, J.D. Jason’s work focuses on defined contribution plans and executive deferred compensation plans. He also represents employers in matters related to IRS and Department of Labor qualified plan correction programs. Jason holds a B.A. in Labor Studies and Philosophy, a J.D. from University of California at Davis School of Law, and is a member of the Oregon State Bar.
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