On January 26, 2009, the Supreme Court of the United States issued a decision in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, in which the Supreme Court clarified that plan administrators have a duty under the Employee Retirement Income Security Act of 1974 (ERISA) to follow the directives of a plan document in distributing benefits. In a unanimous opinion, the Supreme Court held that a former spouse’s waiver of her interest in a participant’s pension benefits through a divorce decree was not effective where the plan’s terms required the participant separately to revoke a beneficiary designation made for the former spouse.
William Kennedy participated in his employer’s savings and investment plan (SIP), an ERISA-governed employee pension benefit plan. Under the SIP terms, William could both designate a beneficiary to receive funds upon his death, and replace or revoke that designation according to the plan administrator’s prescribed method. The SIP specifically provided that if there was no surviving spouse or designated beneficiary at the time of a participant’s death, benefits were to be distributed as directed by the estate’s executor or administrator. William originally designated Liv Kennedy, his wife, as his SIP beneficiary and named no contingent beneficiary. Subsequently, William and Liv divorced. Through the couple’s divorce decree, Liv waived her interest in the SIP benefits. However, William never removed Liv as his designated beneficiary under the SIP. Upon William’s death, the plan administrator, relying on William’s unrevoked beneficiary designation, paid William’s SIP benefits to Liv, rather than to William’s estate. The estate sued, alleging that, because Liv waived her rights to SIP benefits through the divorce decree, the plan administrator’s decision to distribute the benefits to Liv violated ERISA.
The U.S. District Court for the Eastern District of Texas granted summary judgment for the estate, ordering the plan administrator to pay the value of the SIP benefits to the estate. The district court relied on precedent establishing that a beneficiary’s waiver to proceeds of an ERISA plan was valid, as long as the waiver was “explicit, voluntary, and made in good faith.” On appeal, the U.S. Court of Appeals for the Fifth Circuit reversed the decision, holding that Liv’s waiver constituted an assignment or alienation of her interest in the SIP benefits to the estate and thus could not be recognized. The Fifth Circuit concluded that because the divorce decree was not a Qualified Domestic Relations Order (QDRO), ERISA’s sole mechanism to address the elimination of a spouse’s interest in benefits, the waiver incorporated in the divorce decree could not take effect.
Supreme Court’s Opinion
The Supreme Court affirmed the Fifth Circuit’s decision that the benefits were correctly paid to Liv, but relied on a different rationale to do so.
Writing for a unanimous Supreme Court, Justice David Souter explained that the decisive question did not concern alienability or assignment, but rather hinged on whether the plan administrator was required to honor Liv’s waiver through the divorce decree. The Supreme Court held that the plan administrator was not so required, and that the plan administrator therefore fulfilled its ERISA duty by paying the SIP benefits to Liv according to the plan’s express terms. The Supreme Court relied on ERISA’s mandate that a plan administrator must act solely in accordance with the plan documents and stressed that by providing “a plan participant a clear set of instructions for making his own instructions clear,” ERISA allows plan administrators to avoid enquiries into expressions of intent and outside documents (like the waiver in this case) to determine the meaning and enforceability of plan provisions. While the Supreme Court allowed that absolute simplicity of administration was not always possible, the present case highlighted the wisdom of allowing the terms of a plan’s governing documents to rule. Here, William designated Liv as his beneficiary according to the SIP’s terms, and he never changed this designation after his divorce, even though the SIP’s terms provided him with an opportunity to do so. The plan administrator therefore fulfilled his duties under ERISA when distributing benefits to Liv.
One question specifically left open by the Supreme Court was whether a former spouse, like Liv, may still be required to turn the distributed funds over to the estate through a state law action based on her prior waiver. The Supreme Court left that question for state courts to decide. The Supreme Court also left open the question of whether certain state laws, like slayer statutes which prevent a killer from being a pension plan beneficiary, constitute an implied exception to ERISA’s preemption rules and cause an intended beneficiary to lose his or her rights under the plan.
Impact on Plan Administrators
The Kennedy decision clarifies that plan administrators are required only to follow the express plan terms. They are not forced to investigate issues outside the plan and weigh the implications of external events, such as a divorce proceeding, when deciding how to distribute benefits under the plan. The Kennedy decision also clarifies that a former spouse can give up the right to pension plan benefits by agreeing to do so in a divorce decree, but only so long as the waiver is done in a manner that is compliant with the governing plan document’s express language. Going forward, in the absence of a valid QDRO, plan administrators will not be required to undergo lengthy and complicated investigations of outside events—for example, a divorce action—to determine whether the events may have an impact on how benefits are paid. Instead, if a plan’s terms are unambiguous, the plan administrator may follow them and pay benefits accordingly.
To assist plan administrators and employers in utilizing the Kennedy decision to make benefit administration less complicated, employers need to review the terms of their benefit plans to ensure that the benefit distribution rules and beneficiary designation provisions are clear and unambiguous. Also, other important plan-related forms, such as beneficiary designation forms, should be reviewed to insure that they are clear and properly notify participants of the decisions they are undertaking. In addition, plan administrators may wish to amend plan summary plan descriptions to advise participants directly that they must submit a new beneficiary designation if they seek to exclude a former spouse from receiving benefits. In sum, proper drafting of plan provisions related to benefit distributions will allow a plan administrator to rely on the Kennedy decision to make benefit determinations more streamlined in accordance with a plan’s express terms and, hopefully, will allow a plan administrator to avoid litigating the provisions and related background events to determine if a distribution was proper.