Supreme Court: Divorce Decree not Good Enough to Prevent Distribution to Former Spouse

On Monday, the Supreme Court unanimously ruled that a plan administrator must act in accordance with plan documents in determining who is a proper beneficiary under a plan even though that beneficiary previously waived his/her rights to a benefit under the plan via divorce decree. 

 Kennedy v. Plan Administrator for DuPont Savings and Investment Plan has a fact pattern that is quite common in the HR realm, and a decision that should be heeded by all plan administrators.  Mr. Kennedy was a participant in the DuPont Savings and Investment Plan. Under the plan, Liv Kennedy, his wife at the time, was named beneficiary. The two were later divorced and under the divorce decree Liv waived her rights as beneficiary under the plan. Mr. Kennedy, however, never changed his beneficiary designation under the plan prior to his death. Following his death, Mr. Kennedy’s daughter, as executrix of his estate, requested that the assets of his account under the plan be distributed to the estate. The plan administrator, however, relying on the plan documents and the beneficiary designation thereunder, paid the benefits to Liv. 

The Court held that because a plan administrator has a duty, in accordance with Section 404(a)(1)(D) of ERISA (29 U.S.C. 1104 for you labor people), to administer a benefits plan in accordance with the plan documents, and the plan documents, or Mr. Kennedy’s beneficiary designation, named Liv as his beneficiary, the plan administrator was acting in accordance with the plan documents when it distributed Mr. Kennedy’s assets to Liv, even though they had divorced.  

Although the outcome seems unfair, it is a necessary one to ensure consistent plan interpretation and operation. Mr. Kennedy had every opportunity to change that beneficiary designation. Although the divorce decree may have led him to believe that the beneficiary designation would be voided, the onus of determining proper beneficiaries cannot be put on the plan administrator. To do so would require every plan administrator to shoulder the additional burden of determining a deceased participant’s intent irrespective of his beneficiary designation.

What to Expect in Employee Benefits in ’09

This past weekend I was in New Orleans attending the ABA Tax Section’s midyear meeting (I would have loved to provide an “on the road” update, but I refuse to pay $15 for one night of internet service in a hotel). Due to the deluge of guidance from the IRS and new legislation from Congress, the majority of the seminar focused on providing overviews of the recent changes. However, one discussion, which was appropriate for a January 2009 meeting, focused on potential benefits issues practitioners soon could be seeing coming out of the Obama Administration.

J. Mark Iwry, Of Counsel at Sullivan & Cromwell’s Washington, D.C. office,  led the discussion. Mr. Iwry was clearly qualified to guide us as his impressive resume includes having been, among numerous other highly acclaimed positions, former Benefits Tax Counsel at Treasury and recently a policy adviser to Rahm Emmanuel. I’m going to focus on just two pieces of the presentation.

Executive Compensation

First, Mr. Iwry discussed the near future of executive compensation legislation. After providing the great truism, “it is easier to afflict the comfortable than to comfort the afflicted,” Mr. Iwry explained how it is likely that Congress has yet to finish punishing executives for earning money. While providing no opinion as to whether limiting executive compensation is a laudable goal, Mr. Iwry was simply making the point that it is easier for Congress to hinder the rich through policy changes than it is to make life better for those who struggle. Certainly, it is easier to garner support from their constituents for such work. Therefore, despite the recent effectiveness of the Draconian 409A requirements, more is still to come.

Ironically, around the time Mr. Iwry was talking , Barney Frank was introducing legislation to further limit executive compensation under the Emergency Economic Stabilization Act.

Automatic IRAs

Another possible upcoming change to employee benefits law under the new administration that was touched upon was the introduction of the automatic individual retirement account, or “Automatic IRA”.  This idea has received much attention and commentary as of late. The theory that this arrangement can mend the disaster that is the American retirement system stems from the success of auto-enrollment provisions under 401(k)s. Studies (not cited here) show that the participation in company-provided 401(k) retirement accounts skyrockets when individuals are automatically enrolled at the time they are hired. Clearly, this is a result of our society’s tendency to be complacent.

While auto-enrollment under 401(k) accounts has been working, only around 50% of employers provide retirement savings accounts of any kind, and just a small portion of those provide for auto-enrollment. This is because many employers don’t want to deal with the inherent costs and headaches that accompany a qualified retirement plan.

The Automatic IRA would essentially be just a payroll practice. The idea is that the federal government would implore employers to simply forward on the amounts deferred from individuals’ compensation to the specified IRA, but it does not seem that the plan is to make this practice mandatory. Call me a cynic, but I don’t believe employers who aren’t already sponsoring retirement plans would want to deal with even the miniscule burden of forwarding deferred compensation to an IRA, unless the practice is made mandatory, or there is an incentive to employers for doing so.

Treasury Refuses Required Minimum Distribution Relief for 2008

In a letter dated December 19,  2008, a group of representatives led by Spencer Baucus (R-Alabama) sent a letter to the President demanding that he order the Treasury Department to provide relief from required minimum distribution (“RMD”) requirements under Section 401(a)(9) of the Tax Code for the 2008 calendar year.  The theory underlying the request is that individuals should not be forced to take a distribution from their retirement accounts when the value of that account has plummeted.  However, Treasury believes lifting the RMD requirements for 2008 would cause uneccessary confusion and complications, and has therefore refused to soften the rules pertaining to RMDs for 2008.

The recently passed Worker, Retiree and Employer Recovery Act of 2008 contains a provision that waives the RMD requirements for certain qualified, 403(b) or 457 plans for the 2009 calendar year, but specifically does not waive the requirements for 2008. Treasury has simply reiterated that provision. In other words, individuals who reach age 70 1/2 during 2009 will not be required to take distributions from their retirement accounts, but individuals who do so in 2008 are still subject to the requirement.