Beneficiary Reformation?

[jy12443]

Our 401(k) plan just received a consent order from the state probate court ordering the reformation of a deceased participant's beneficiary designation from the estate to the trusts of the participant's three children.  I've seen PLRs on this topic (e.g., 201628005) with respect to IRA's - and the IRS has said no to reformation, but in the context of Section 401(a)(9).  Has anyone come across this?  And, if so, how did you proceed?

[RTK]

You may want to start your review with the 2001 U.S. Supreme Court case of Egelhoff v. Egelhoff (121 S. Ct. 1322) and the 2009 U.S. Supreme Court case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (129 S. Ct. 865) generally holding that death benefits under an ERISA plan are payable only in accordance with its terms. 

I add that I have seen disclaimers used after death to allow a different person to receive aN ERISA plan death benefit, but likely would not be useful in this instance.  Under a disclaimer, the designated beneficiary disclaims his or her right to receive the death benefit.  The effect of a disclaimer is that the beneficiary will be treated as dying before the participant, and the resulting beneficiary determined in accordance with the applicable plan terms.  A disclaimer cannot designate a beneficiary for the death benefit or otherwise direct its payment.   

[Albert F]

        Let me clarify one point first.  Individual retirement arrangements that are not part of ERISA plans are subject to state beneficiary designation rules.  The IRS did not hold that the state lacked authority to reform a beneficiary designation in PLR 201628005.  In fact, on page 5 the IRS stated, “In addition, although the Court order changed the beneficiary of IRA X under State law, the order cannot create a “designated beneficiary” for purposes of section 401(a)(9).”  The IRS held that this change, however, was not effective int the determination of  whether the designee was the decedent’s estate at the time of his death for purposes of determining the required  Section 401(a)(9) minimum distributions.
       RTK is correct that the plan terms determine the beneficiary of an ERISA plan, which I presume is the case with the 401(k) plan at issue.  The Supreme Court has consistently held that ERISA preempts any state law that is contrary to the terms of an ERISA plan.  See Boggs v. Boggs, 520 U.S. 833 (1997); Egelhoff v. Egelhoff, 532 U.S. 141 (2001), and Kennedy v. Plan Adm’r of DuPont Sav.& Inv. Plan, 555 U.S. 285 (2009   See generally Albert Feuer, When Do State Laws Determine ERISA Plan Benefit Rights?, 47 J. MARSHALL L. REV. 145, 282-292 (Fall 2013), abstract and full article available at  http://ssrn.com/abstract=2440008.   
      The practical question is what does one do when one represents a plan that is confronted with a state-law order with respect to a benefit claim that ERISA preempts.  First, I would call the lawyer on the other side and explain that ERISA preempts his order, but the plan will consider his client’s benefit claim under the plan’s claims procedures, and you can then determine if there is any basis under the plan terms for his client's claim, such as the designation being ambiguous.   If that does not work, you have two litigation choices.  First, respond in state court that the order is preempted under conflict preemption, and cite the above Supreme Court decisions.  This, however, means one has to appeal through the state courts, if one can’t persuade the local court to withdraw its order.  Second, rely on 28 U.S.C.S. § 1441(a) to remove the matter to federal court on the basis that ERISA completely preempts a state-law benefits claim, which is what the court order is seeking to achieve.  See generally Metropolitan Insurance Co. v. Taylor, 481 U.S. 58 (1987).  Most benefits attorneys prefer the latter approach.