Tax News

CCH (cch.taxgroup.com) reports:

  The Supreme Court has resolved a split among the circuit courts of appeal over a divorced spouse's ability to waive pension plan benefits through a divorce decree not amounting to a qualified domestic relations order (QDRO). An ERISA plan's beneficiary's waiver of her benefits was not a prohibited assignment or alienation. The Court, among other things, looked to IRS regulations to conclude that a benefit in certain circumstances can be disclaimed and disclaimer would not constitute an assignment or alienation.

Designated Beneficiary

  In 1974, a participant in an employer-sponsored retirement savings plan designated his wife as the beneficiary. The participant and his wife divorced in 1994. The divorce decree stated that the wife agreed to forfeit all rights to her ex-husband's retirement plan assets. However, the decedent never replaced his ex-wife as his sole beneficiary. After the participant's death, the plan distributed his retirement savings to the ex-wife pursuant to her designation as beneficiary.

  The decedent's daughter, as executor of her father's estate, asked the ex-wife to forfeit her rights to the funds. The daughter claimed that the ex-wife had waived her rights under the divorce decree. The trial court agreed with the daughter but the Fifth Circuit Court of Appeals reversed.

  The Fifth Circuit found that because no QDRO mechanism was invoked, the ex-wife did not waive her interest. According to the Fifth Circuit, a QDRO supplies the sole exception to the anti-alienation provisions of ERISA in the marital dissolution context.

Supreme Court's Analysis

  Justice David Souter delivered the opinion for a unanimous Supreme Court. The Court affirmed the Fifth Circuit but on different reasoning. The Court observed that, not only were the circuit courts of appeal split on whether a divorce decree not amounting to a QDRO would waive pension rights, the circuit courts also disagreed as to whether a beneficiary's common law waiver of plan benefits would be effective if the waiver is inconsistent with plan documents.

  The Court looked to IRS regulations for guidance on whether the ex-wife's purported waiver violated ERISA's anti-alienation provision.
Reg. §1.401(a)-13(c)(1)(ii) defines an "assignment or alienation" to include "any direct or indirect arrangement...whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant or beneficiary." "The Treasury reads its own regulation to mean that the anti-alientation provision is not violated by a beneficiary's waiver where the beneficiary does not attempt to direct her interest in pension benefits to another person," the Court observed.

  The Court also looked to the law of trusts for guidance. "Although the beneficiary of a spendthrift trust traditionally lacked the means to transfer his beneficial interest to anyone else, he did have the power to disclaim prior to accepting it." When the ex-wife agreed to the waiver, she did not assign or alienate anything to her ex-husband or his estate.

QDRO

  The Court also disagreed with the Fifth Circuit's finding that a QDRO is the sole exception to the anti-alienation provisions of ERISA. A beneficiary seeking only to relinquish her right to benefits cannot do this by a QDRO, for a QDRO, by definition, requires that it be the creation, or recognition of, an alternate payee's right to, or assignment to an alternate payee of, the right to receive all or a portion of the benefits payable with respect to a participant under a plan.

Plan Documents

  The Court concluded that the plan properly distributed the assets to the ex-wife. The plan's documents provided that the plan administrator would pay benefits to a participant's designated beneficiary. Designations and changes had to be made in a particular way. The decedent followed the requirements and designated his ex-wife as beneficiary. "The plan administrator did exactly what [the law] required and paid [the ex-wife] the benefits."

Open Questions

  The Court left for another day the situation in which plan documents provide no means for a beneficiary to renounce an interest in benefits. The Court also did not address the question of whether requiring a plan to distribute benefits in conformity with plan documents would allow a beneficiary who murders a participant to obtain benefits.

  By George L. Yaksick, CCH News Staff

Kennedy v. Plan Administrator for Dupont Savings and Investment Plan et al.