Guest Article

(From the April 9, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Deceased Participant's Estate Can Sue to Recover Benefits Paid to Ex-Spouse

The Third Circuit Court of Appeals ruled that ERISA does not bar the estate of a deceased 401(k) plan participant from suing the participant's ex-spouse to recover benefits distributed to her as the named beneficiary where she previously waived the right to those benefits as part of their divorce decree. The case is the first in which a Federal Court of Appeals has addressed the issue.

A Common Scenario

In the case, the court addressed whether ERISA, which requires benefits to be paid in accordance with the plan documents, also prohibits a direct suit against the named beneficiary after payment of the benefits to enforce a prior waiver by the beneficiary. Under the facts of the case, a 401(k) plan participant and his spouse divorced only months before the participant's death. The ex-spouse waived her rights to the 401(k) plan proceeds under the divorce decree, but the participant failed to remove her as his designated beneficiary under the plan before his death. Both the ex-spouse and the participant's estate claimed entitlement to the benefits under the 401(k) plan.

Supreme Court Has Ruled That Plan Documents Are to Govern

The Court of Appeals cited a 2009 Supreme Court ruling as dispositive of the issue of who should receive the benefits. Under nearly identical facts, the Supreme Court ruled that, despite the fact that the ex-wife had waived her rights to the plan benefits the ERISA plan administrator is obligated to "act in accordance with the documents and instruments governing the plan." Since the ex-spouse remained the named beneficiary, the benefits should be paid to the ex-spouse.

However, the Supreme Court's decision did not address whether the deceased participant's estate could sue the ex-spouse and recover the benefits after she received them from the plan. The Federal district court in the current case ruled it could not, reasoning that it would undermine a key objective of ERISA: to ensure that the named beneficiary actually receives the benefit of ERISA-governed plans.

Direct Suit against the Named Beneficiary Is Not Barred

The Third Circuit Court of Appeals disagreed. It reversed the lower court decision and held that such a suit would not be prohibited by ERISA, explaining that the Supreme Court was concerned with a need for straightforward plan administration and the avoidance of potential double liability when it ruled that ERISA plan administrators are not to look beyond the plan documents in determining the named beneficiary. Neither of these concerns, the Appeals Court reasoned, would be implicated in a direct suit against the named beneficiary to enforce a waiver of benefits after the plan benefits have been distributed. Further, such a holding would be consistent with a line of Federal cases that allows creditors to sue named beneficiaries once the plan benefits have been distributed. The Court of Appeals also cited state cases in Michigan, Oklahoma and Georgia that had considered the identical issue and similarly concluded that an estate may enforce a common law waiver against a designated beneficiary once the funds have been distributed.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte.