Participant's Lie Results in No Spousal Consent

[Scott]

A 401(k) plan (not subject to the QJSA rules) provides that if a participant's account is greater than $5,000, both the participant and his or her spouse must consent to a distribution. A participant terminated employment and falsely certified that he was not married, and the plan distributed his account. A few weeks later, the plan administrator learned of the participant's lie when the participant's spouse contacted the plan administrator to ask why the account had been distributed.

Is this an operational failure for which corrective action must be taken? If so, what?

[E as in ERISA]

In general, when a distribution is made without required spousal consent, the spouse's portion of the benefit must be restored to the plan. It depends on age and other factors, but it wouldn't be surprising for the spouse's portion to be in the range of 10% or so (assuming a 50% benefit paid for a limited number of years after the participants death). Then you go after the participant separately.

[Scott]

Thanks for the input. Is there no defense in that the plan administrator relied on a false certification by the participant? Also, there is no j&s annuity available under the plan, so how would the spouse's portion be calculated?

[E as in ERISA]

I think that you have mitigating considerations. I would ask legal counsel what you should do in this specific instance.

[jpod]

1. Why spousal consent in a 401(k) plan if it is not subject to the j&s requirement? I'm confused.

2. Assuming the plan was written to require spousal consent, you have both a liability issue and a tax-qualification issue (i.e., an operational defect).

3. The first course of action is to pursue the participant to get the money back into the plan; threaten to sue him if you have to resort to that. If that doesn't work, try to get the spouse to consent after the fact, and to give the plan a release, perhaps in exchange for a few dollars. Otherwise, when the participant eventually dies, the spouse (if then living) would have a claim against the plan for an amount equal to what the account balance would have been worth had their been no distribution, or at least that's what I would argue if I were the spouse.

[MGB]

If you get a spouse that refuses to consent for whatever reason, how do you ever make a distribution if there is no J&S default?

[RTK]

The 401(a)(9) rules should trump the regular distribution rules, including the spousal consent requirement. I have seen one (non-qjsa) profit sharing plan that requires spousal consent for distributions in excess of $5,000, and that was the case for that plan.

[jpod]

Hold it a minute!

If there is no j&s option, what does the plan say if there is no spousal consent? Do you hold the account until the participant reaches normal retirement age or dies, whichever comes first?

I've been doing this type of work for more than a couple of days and I've never seen a plan like that.

[RTK]

Well, I have seen one plan. Without spousal consent, account would be held until required beginning date or death.

[david rigby]

Does the plan sponsor have any other reasonable knowledge of whether the participant was married, such as beneficiary designation for group life insurance? If so, it would seem that the sponsor's ability to rely on the "lie" may be diminished.

But the advice to get legal counsel is best, preferably an attorney familiar with ERISA matters.

[Mike Preston]

I guess I'm the only hardliner here. Somebody said to look to other plans, personnel records to see if the individual was married. That seems reasonable, but I somehow doubt it is required. The Plan Administrator needs to follow its procedures. If the participant filled out the forms fraudulently then the Plan Administrator should be absolved. Unless the Plan Administrator had some reason to doubt the way the forms were filled out, I doubt that ERISA would provide anything to the spouse.

Of course, that might not stop an attorney from trying to get something for the spouse and the costs involved in defending the Plan Administrator's actions would likely exceed restoring the benefit lost to the spouse. But if it is a big enough plan and it believes in its procedures (like union plans do - just try getting an extra nickel from one of them based on this theory....HAH!), it should be willing to fight so that it doesn't create a situation where it can be easily defrauded.

I agree that getting an attorney's advice is best.

[mal]

I think it is section 205 that speaks to spousal consent.

It is my understanding that spousal consent is not

required where a participant can reasonably establish that

he is unmarried or that the spouse has abandoned him.

This arose in one of our plans a couple of years ago.

I believe plan was in the clear so long as the administrator

required an affidavit or other satisfactory proof. (Which ours did.)

However, once the plan learns of the problem (and assuming

any monies remain in the possession of the participant)

I think the plan fiduciaries would have a duty to seek a constructive trust through the courts.

[jpod]

If this plan is not subject to the j&s requirements, but it has spousal consent by design, Section 205 of ERISA and all other authorities relating to the j&s rules are basically irrelevant.

[RTK]

The section for j&s plans is 205©(6), which has been interpreted by the 9th circuit in Hearns v Teamsters Fund, 68 F.3d 301. The solution for a non j&s plan may be to write into the plan document a similar discharge of the plan's liability for payment made on reasonable reliance on the participant's application and representation.

[mal]

I would disagree that the opinions and regulations

dealing with Section 205 of ERISA would be irrelevant.

I think a court would place a great deal of faith in

the "reasonable reliance" standard imposed on administrators

in this situation.

I also agree with the post above that mentions

the administrator's duties to follow the plan documents. If

he has done so, the spouse will have great difficulty

stating a claim against the plan.

However, I would still argue that the plan (even though

it has clean hands with respect to the distribution) has

a duty to file and seek a constructive trust over any

monies still in the possession of the participant.

[mbozek]

Could someone one explain what is the liability risk that is at issue here. If the plan merely required spousal consent to a LS distribution in the absence of a requirement under ERISA for such consent is there any liabilitity to the spouse for the payment of the benefit? I dont know if there is any contractual right of the spouse against the plan to 50% of the payment. If the plan had a benefit form for which spousal consent was required before the distribution could be paid to the ee then there is a stronger claim of the spouse to the funds unless one of the exceptions applies. I dont know if there has ever been a case where a spouse has collected the spousal benefit from a plan that did not get spousal consent before making the distribution. Also if the parties reside in a community property state then 50% of the assets belong to the spouse even if the funds are paid to the ee.