Analysis: A waiver of benefits that isn’t
The Supreme Court settled two issues of workers’ benefits law on Monday, giving mostly clear directions to employee plan managers on how they are to deal with the consequences of divorce of a worker. In general, the Court said, an administrator must simply ”look at the plan documents and records conforming to them” to find out who is to be paid the benefits; there is no need, it added, to go to court for the answer.
Along the way toward that ruling, the Court made these two rulings, both resolving conflicts that had built up in lower courts over spousal rights once divorce has occurred: first, the Court made clear that a former spouse can give up the right to benefits by agreeing to do so as part of a divorce decree; but, second, the ultimate question of whether the ex-spouse was entitled to the benefits is to be decided by the specific terms of the plan — in short, what the documents say.
The Court, however, did leave open for the future a related question: if an ex-spouse is handed the benefits by a plan manager, might they still have to be surrendered, once the payout was completed? A footnote indicated that the Court on Monday was only resolving how federal benefit law applied to the initial distribution of plan payments, not their subsequent fate.
The case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (07-636) was another in the Court’s ongoing attempts to sort out the sometimes vexing language of the Employee Retirement Income Security Act. Although that law has been in effect for 34 years, not a Term of the Court seems to go by without a new test of what it actually means.
In the Kennedy case, Kari Kennedy. the administrator of her father William’s estate, was trying to recover for the estate some $402,000 that had been paid to Liv Kennedy, the divorced wife, because the ex-spouse had joined in a divorce decree in 1994 giving up all right to any of William’s pension or other work-related benefits. William Kennedy was covered by the savings and investment plan for employees of the DuPont Co.; Kennedy worked for the company in Houston.
Liv Kennedy had been named the beneficiary of William’s investment plan assets, should he die. After the divorce in 1994, William did not remove his former wife as the beneficiary. The plan documents provided an easy way for him to do so, but he did not. Following the plan, the administrator sent the money to Liv. (Liv Kennedy died in 2007, but that did not settle the issue over the proceeds paid to her.)
The husband’s estate sued, claiming that Liv surrendered her rights under the divorce decree. Ultimately, the estate lost in the Fifth Circuit Court. Liv Kennedy’s forfeiture at divorce, the Circuit Court ruled, would have amounted to an illegal diversion of benefits to someone else, in violation of ERISA’s provision against such diversion (or “alienation”). A state court divorce decree, the Circuit Court said, is technically not the kind of paper diversion of plan assets that ERISA allows because it was not a “qualified domestic relations order,” in the phrasing of ERISA.
Other Circuit Courts, however, had ruled that a divorce decree could amount to a waiver of benefits, even if it wasn’t a domestic relations order of a kind specified by ERISA.
The Supreme Court agreed to hear Kari Kennedy’s petition, to sort out that conflict. But, as Justice Souter noted in Monday’s opinion, “we subsequently realized that this case implicates the further split” over who was to be paid the benefits if a divorce decree was “inconsistent with plan documents.” Further briefing was ordered.
Ruling against the estate, the Court first decided that, under ERISA, a divorcing spouse could waive plan benefits through a divorce decree under state law. Consulting the law of trusts, the Justices concluded that an ex-spouse can disclaim an interest in benefits during a divorce proceeding. Disagreeing with the Fifth Circuit, the Court said “we think that the better view is that [Liv's] waiver” was not an alienation or assignment that was illegal under ERISA.
Going on to the post-argument issue it had added, the Court said “the question remains whether the plan administrator was required to honor Liv’s waiver [in the divorce] with the consequence” that the benefits should have been paid to the estate. “We hold that it was not, and that the plan administrator did its statutory ERISA duty by paying the benefits to Liv in conformity with the plan documents.”
Applying “a straightforward rule of hewing to the directives of the plan documents,” the Court found that William’s failure to drop Liz as his beneficiary on the investment plan, as plan documents allowed him to do but which he did not do, ended the matter so far as the plan distribution was concerned. It concluded: “William’s designation of Liv as his beneficiary was made in the way required; Liv’s waiver was not.”
The victory for ex-spouses in Liv Kennedy’s situation, though, may not be complete. The Court said explicitly in footnote 10 that it was leaving open the question of whether the estate could have sued to recover the benefits from Liv after she received them. The footnote mentioned prior rulings that seemed to say that a prior contractual agreement to forfeit funds may be enforceable after the distribution without violating ERISA; once the money is paid out, it loses its ERISA protection, those rulings had indicated.