Contingent beneficiary question

[BG5150]

Participant indicates spouse is primary beneficiary and the contingent beneficiary is his nephew.

participant then gets divorced so spouse is no longer primary beneficiary.  Does the nephew now become the primary beneficiary until he (the participant) remarries?

The bene form says the spouse is primary and if not living at the time of participants death, the the named contingent benes will get the benefit.

But the ex-spouse is still living...

Does the whole thing get blown up due to divorce, and new paperwork would need to be filled out or the plan's hierarchy will take over?

[Bri]

That might take a careful reading of the document to see how it addresses (if at all) any automatic rescinding of the spouse as beneficiary.  I'm skimming a BPD and the one I'm looking at says the designation of the spouse as beneficiary is rescinded upon divorce. 

Is the spouse's status as primary beneficiary that which is rescinded, or is the FORM with that designation (and making the nephew contingent) rescinded?  It wasn't immediately clear in the text I was peeking at.

[BG5150]

Me, too, Bri.  That's my question.  JUST the beneficiary, or the whole shebang.

I have the question to my documents team now.

[Bri]

Hey, this is why Plan Administrators make the big bucks to interpret plan documents!  Or at least, a good-sized bunch of the small bucks.  Good luck!

[Peter Gulia]

Consider, too, that a divorce might have no effect on a beneficiary designation.

If the plan is ERISA-governed, it’s all about what “the documents and instruments governing the plan” provide.

Many documents omit or negate a provision for a divorce to affect a beneficiary designation.

[BG5150]

Directly from the basic plan document:

(f) Divorce revokes spousal Beneficiary designation. Notwithstanding anything in this Section to the contrary, unless otherwise
elected in Appendix A to the Adoption Agreement (Special Effective Dates and Other Permitted Elections), if a Participant has
designated the Spouse as a Beneficiary, then a divorce decree that relates to such Spouse shall revoke the Participant's designation of
the Spouse as a Beneficiary unless the decree or a "qualified domestic relations order" (within the meaning of Code §414(p)) provides
otherwise or a subsequent Beneficiary designation is made.

Side note:  there are no special instructions in Appendix A.

So, the ex-spouse is no longer the beneficiary, but does that mean everyone else (the contingent beneficiaries) move up a level (secondary to primary, tertiary to secondary, etc)?  Or is the entire designation scratched?
 

[david rigby]

Is there some reason the participant does not immediately eliminate this doubt by submitting a NEW beneficiary designation?

[Peter Gulia]

While I provide no advice:

That the plan’s text suggests a divorce “revoke[s] the Participant’s designation of the Spouse as a Beneficiary” could be interpreted to negate only the portion of the participant’s beneficiary designation that names the participant’s former spouse.

If the participant is alive and not incapacitated, making a beneficiary designation now might remove doubts, perhaps including one or more doubts about whether the participant intends to benefit the former spouse.

[Belgarath]

I'm certainly no lawyer, but if I were the Plan Administrator (and so foolish that I didn't believe in paying for legal advice, so making my own determination) I would interpret this such that the contingent beneficiary(ies) would receive the death benefit.

If the amount involved is quite small, I think it would be reasonable to take the "risk" - such as it is - of making my own determination as Plan Administrator.

[CuseFan]

1 hour ago, Peter Gulia said:

That the plan’s text suggests a divorce “revoke[s] the Participant’s designation of the Spouse as a Beneficiary” could be interpreted to negate only the portion of the participant’s beneficiary designation that names the participant’s former spouse.

I would agree with that statement, but....

 

1 hour ago, david rigby said:

Is there some reason the participant does not immediately eliminate this doubt by submitting a NEW beneficiary designation?

would strongly recommend this more sooner than later to make crystal clear, and possibly name a contingent to his nephew.

[acm_acm]

21 hours ago, BG5150 said:

Does the whole thing get blown up due to divorce, and new paperwork would need to be filled out or the plan's hierarchy will take over?

Regardless of what the plan document says, why would one *not* go ahead and submit new paperwork???

[fmsinc]

Primary beneficiary of WHAT???

What type of Plan? 

Under what law?  ERISA, US Military?  FERS or CSRS?  FSPS? State?  County?  Municipal?  Union? Church?

401(k) or other defined contribution Plan?  Defined benefit Plan?  Life insurance Plan?  Health Savings Account?  

Is the Participant alive or dead?  

Was a QDRO prepared?  Entered by the Court?  Qualified by the Plan Administrator?  

If not, is there a reason a QDRO cannot be prepared? 

If the Participant is dead, if there a reason that a post-mortem QDRO cannot entered pursuant to the Pension Protection Act of 2006. 

In your second post you used the term "QDRO" so I assume it's an ERISA qualified plan.  Am I correct? 

In divorce cases we call the former spouse the "Alternate Payee".  Is there a reason you haven't used that term?

How can any of you respond to a question that contains virtually no information upon which you can base your response?         

[MoJo]

27 minutes ago, fmsinc said:

How can any of you respond to a question that contains virtually no information upon which you can base your response?         

Because the question is clear and is only asking as to what happens to the beneficiary designation in a divorce when the now ex-spouse is the primary bene with contingent beneficiaries named in the same bene designation.  It isn't "who gets the money" but rather after all other claims including those of an AP (or two, or three) with what is left that must be distributed per the bene rules.  I though it was perfectly clear..

We're not giving legal advice here - but rather trying to discern a theoretical that happens.

And, stop shouting - it hurts my ears/eyes.

For what it's worth, I would also suggest those who write plans write them to indicate "in a divorce, if the spouse is named as primary bene, the spouse shall be deemed to have pre-deceased the participant with contingent beneficiaries receiving as if that were the case, unless the participant creates a new bene designation" - wordsmithed, of course.  It's what our docs say - to avoid this situation entirely.

[Bird]

1 hour ago, Belgarath said:

I'm certainly no lawyer, but if I were the Plan Administrator (and so foolish that I didn't believe in paying for legal advice, so making my own determination) I would interpret this such that the contingent beneficiary(ies) would receive the death benefit.

If the amount involved is quite small, I think it would be reasonable to take the "risk" - such as it is - of making my own determination as Plan Administrator.

This is my interpretation as well. And I don't know that it's all that risky. 

[rocknrolls2]

Peter and CuseFan are correct that the Plan language would only automatically revoke the spouse's designation as a beneficiary. As to why the participant does not simply complete a new beneficiary designation, that would certainly be the preferable way to approach this. However, in most cases, a participant only completes a single bene form at the beginning of his/her career with the employer and never revisits the decision at any future point ever.  I know that plan administration best practices suggest that plan administrators periodically contact participants and urge them to complete new bene forms, but those calls are, all too often, unheeded. Regrettably, the initial bene selection too often does not reflect the participant's wishes upon his/her retirement or death. Also, regrettably, that is the stuff that results in heavily-contested ERISA litigation.

[fmsinc]

If you are dealing with an ERISA qualified plan - and we don't know that for sure, a participant's beneficiary in a qualified retirement plan that is subject to the qualified joint and survivor annuity (QJSA) requirements under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code) is automatically his surviving spouse, unless the spouse has waived his rights or another exception applies. For plans that are not subject to the QJSA requirements, beneficiary designations are generally a matter of plan design.

Under ERISA you can have a beneficiary of a defined contribution plan as well.  In general, if you should die before you receive your benefits, your surviving spouse will automatically receive them. If you wish to select a different beneficiary, your spouse must receive notice and/or consent to someone else being named as beneficiary.  

A beneficiary can also be the person who will receive life insurance proceeds upon the death of the insured party, whether it's an employer sponsored play or not.  Most state laws do not permit a judge to direct that one party carry life insurance for the benefit of the other party, so you will not see QDRO requiring a former spouse to be named as a beneficiary of life insurance. 

The impact of a divorce (or of a limited divorce, or divorce a mensa et thoro) will depend on the terms of the Marital Settlement Agreement ("MSA") if any, and whether or not the MSA is incorporated into the Judgment of Absolute Divorce ("JAD"), or the terms of the JAD if there is no MSA, or the terms of any QDRO or DRO or EDRO or COAP, or similar Court Order, and whether a certified copy of the Court Order was sent to and approved by the Plan Administrator, or whether or not the Plan Administrator had actual notice of the terms of the MSA or the JAD or of the as yet unsubmitted and/or unapproved QDRO.

And State, County and Municipal plans, and Union and Church Plans, and International Plans and not bound by ERISA and do things their own way.

A beneficiary does not always relate to death.  A plaintiff has standing to bring a claim under ERISA if he/she is a plan participant, beneficiary, or fiduciary. Caples v. U.S. Foodservice, Inc., 444 F. App'x 49, 52 (5th Cir. 2011) (citing 29 U.S.C. § 1132(a)); Cobb, 461 F.3d at 634; Coleman v. Champion Int'l Corp., 992 F.2d 530, 533 (5th Cir. 1993).  A "participant" under ERISA is an "employee or former employee" of an employer offering an employee benefit plan. 29 U.S.C. § 1002(7). A "fiduciary" is someone who (1) exercises "discretionary authority . . . respecting management of such plan or . . . disposition of its assets," (2) "renders investment advice for . . . compensation . . . with respect to any moneys or other property of such plan," or (3) "has any discretionary authority or . . . responsibility in the administration of such plan," Id. § 1002(21)(A).  A "beneficiary" is defined as "a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder." Id. § 1002(8). In order to qualify as a beneficiary, an individual must have "a reasonable or colorable claim to benefits." Crawford v. Roane, 53 F.3d 750, 754 (6th Cir. 1995); see also Cobb, 461 F.3d at 635-36 (holding that to have standing as a beneficiary under ERISA, a plaintiff must show both that he or she was designated as such by the participant or terms of the plan, and that he or she has a colorable entitlement to benefits under the plan)."

So a beneficiary can be a person who receives a benefit at the time designated by a QDRO or at the death of the Participant.   

There are about 175,000 pension and retirement plans in the USA, 163,000 of which are governed by ERISA.  See attached somewhat dated list.  One thing is certain - the lack of uniformity.  

The suggest that the original question told you everything you needed to know is quite simply incorrect.  You cannot ignore the implications of Kari E.  Kennedy, Executrix v.  Plan Administrator for Dupont Savings and Investment Plan, 129 S.Ct. 865, 555 U.S. 285 (2009), and its progeny including Andochick v. Byrd, 709 F.3d 296 (2013).  Nor can you ignore the responsibilities of the Plan administrator to investigate set forth in DoL EBSA Advisory Opinion 1999 -13A and 1992 - 17A - see attached. 

All problems cannot be answered by "a close reading of the Plan Documents".  There are almost always legal implications.  The practice of law requires the ability of the lawyer to ask what, where, why, when, which, who, how, and how much, and to get all of the facts before giving advice. 

If the purpose of this blog is not to give well reasoned advice, I am in the wrong place. 

DSG 

     

337474398_QualifiedPlanList.xlsx Advisory Opinion 1992-17A.pdf Advisory Opinion 1999-13A _ U.S. Department of Labor.pdf

[fmsinc]

A new case from the 8th US Circuit Court of Appeals, just issued on August 29th, shows just how complicated beneficiary issues can become.  

Sally A. Hogen made contributions to a 401(k) plan during her employment at Honeywell International Inc. She originally designated her husband, Clifford C. Hogen, as the sole beneficiary in the event of her death. Sally and Clifford divorced in 2002. In the marital termination agreement (MTA), they agreed that "[Sally] will be awarded, free and clear of any claim on the part of [Clifford], all of the parties' right, title, and interest in and to the Honeywell 401(k) Savings and Ownership Plan."

In 2008, Sally submitted a change-of-beneficiary form to Honeywell. She, however, did not comply with a requirement. She allocated "33 1/3%" of the 401(k) benefits to each of her siblings. The instructions said, "The Allocation % must be whole percentages." Because she did not use whole percentages, Honeywell did not change her designation. Honeywell called Sally and left a message notifying her of the rejection. Honeywell also sent eleven annual statements showing Clifford as the sole beneficiary. She took no further action.

Sally died in 2019, with nearly $600,000 in her 401(k) plan. Honeywell paid the benefits to Clifford.  Robert F. Gelschus, as personal representative of Sally's estate, sued Honeywell for breach of fiduciary duty, and Clifford for breach of contract, unjust enrichment, conversion, and civil theft. 

You can read the case,  at https://scholar.google.com/scholar_case?case=18383345369852454654&hl=en&lr=lang_en&as_sdt=20006&as_vis=1&oi=scholaralrt&hist=bY5nDLcAAAAJ:17102308171145443235:AAGBfm2dXJvPo0nUQKlDLqIPUBXxyXMitw&html=&pos=1&folt=kw

Assume nothing.  Just because you're paranoid doesn't mean they're not really out to get you.  You can read the Plan documents ad nauseum, but you need to know what you are looking for.  Would you ever expect a requirement that the beneficiary of a 401(k) cannot receive a fractional percentage?  I have never seen this in 55 years of law practice.  

David

[BG5150]

Participant passed away, so no new designation is possible.

Our staff attorney opined that only the primary beneficiary election was revoked and everyone moves up a level.

[Luke Bailey]

On 9/2/2022 at 9:41 AM, BG5150 said:

then a divorce decree that relates to such Spouse shall revoke the Participant's designation of
the Spouse as a Beneficiary

I've always written provisions for auto revocation of spouse as beneficiary upon divorce to state that the entire beneficiary designation is revoked and therefore if there is no new beneficiary designation after the divorce and before the participant's death you would use the plan's default beneficiary designation provisions for when there is no beneficiary designation, rather than go to the contingent beneficiary. I agree that this provision as you have quoted it, BG5150, is susceptible of the interpretation that the divorce only revoked the designation of the divorced spouse as primary beneficiary, but before you act on that I would at least check the definition of "contingent beneficiary," which may say that this is the person who takes the primary's share if the primary predeceases the participant, which of course is not your case, BG5150.

[Peter Gulia]

A provision of the kind BG5150 quoted is in the cycle 3 IRS-preapproved documents of a few of those big publishers.

Perhaps some of them might see this discussion, recognize an ambiguity in the text, and internally file a reminder—for the next cycle—to write something to answer the question BG5150 asked.

[BG5150]

Secondary question:

Which takes precedence:  a will or a properly executed beneficiary designation for the retirement plan?

Say I name my brother beneficiary of my plan when I first start.  Later in life, I make out my will and designate the benefit to go to my sister.

Who gets the goods?

[Belgarath]

Your brother.

[Luke Bailey]

29 minutes ago, Belgarath said:

Your brother.

But after he gets it the sister might be able to sue the brother in state court if by taking it he violated an understanding that was in place at the time of death and that could be proven to the judge or jury as a matter of fact. I said "might." It's an emerging area of law and subject to state law.

[MoJo]

On 9/3/2022 at 9:22 AM, fmsinc said:

Would you ever expect a requirement that the beneficiary of a 401(k) cannot receive a fractional percentage?  I have never seen this in 55 years of law practice.  

David

Never - but it is amazing how some financial institutions (not sure how the Honeywell plan was administered, or by whom) don't do basic math.  I handled my mother's estate, and Schwab (which is where I worked at the time) would NOT split her accounts based on percentages (some went 50-50 and, some went 1/3, 1/3, 1/6, 1/6).  I was required to specify *exactly* how many shares of each security (in whole numbers - despite her owning fractional shares due to dividend reinvestment - which had to be cashed out), and how many dollars of cash went to whom.  Painful.

In the Honeywell case, while it may not have been a breach of fiduciary duty for Honeywell to not change the bene's, it just seems wrong that 1) they wouldn't have been more helpful; and 2) Sally didn't follow up after how may years of statements....

[MoJo]

1 hour ago, BG5150 said:

Secondary question:

Which takes precedence:  a will or a properly executed beneficiary designation for the retirement plan?

Say I name my brother beneficiary of my plan when I first start.  Later in life, I make out my will and designate the benefit to go to my sister.

Who gets the goods?

Other than a QDRO, nothing outside of the plan overrules anything within the plan.  There may be circumstances where an enforcement may be had against someone for something outside of the plan, but it can't alter the plan's provisions (including a bene form).  In the Honeywell case - I believe they are pursuing the ex-husband (who properly received the funds) under the theory that the divorce decree bars him from keeping that distribution.  In other words, he received the distribution  properly, but holds the money in "constructive trust" for others (and the plan is out of the picture).  Interestingly enough, Sally's named bene's may not be those who get it.  If ex-hubby doesn't get to keep it, and if Sally's bene form is invalid, the money will go to Sally's estate, and be distributed accordingly, either per her will, or per state intestacy law..

[RatherBeGolfing]

Just now, Luke Bailey said:

I said "might." It's an emerging area of law and subject to state law.

Luke, can you expand on this?  I could see this come up if the beneficiary designation is in question for some reason, but lets assume that the beneficiary designation is signed sealed and delivered with no defects.  What state law(s) is emerging (probate?), and what arguments are made to overcome preemption by ERISA? Aren't Supreme Court cases like Egelhoff and Kennedy very much on point here?

  

 

[Peter Gulia]

Luke Bailey’s point is not about whom an ERISA-governed retirement plan pays, but rather about State-law remedies (not involving the retirement plan or its fiduciaries) the decedent’s estate or another potential taker might have against the plan’s distributee (who might have money or other property which equitably belongs to the estate or another potential taker).

About a beneficiary who is not the participant’s surviving spouse (or under a plan that need not and does not provide that a participant’s surviving spouse is the participant’s beneficiary), some (but not all) courts in some circumstances find ERISA might not preempt a state court’s order—made after the ERISA plan has paid or delivered the plan’s benefit—that does not involve the plan or any fiduciary of it.

All Federal courts recognize that ERISA preempts States’ laws at least until the plan’s disposition of the plan’s benefit is done. Decisions for the Third, Fourth, Sixth, Eighth, and Eleventh Circuits interpret ERISA as not always precluding a remedy that does not involve the plan or any fiduciary of it, and does not frustrate a surviving spouse’s right. On the other side of a circuit split, a Seventh Circuit decision interpreted ERISA to preempt such a constructive-trust remedy, even if the remedy would ask nothing of the plan or any plan fiduciary. (I express no view about which interpretation is better.)

Some States’ court decisions recognize that those who would be takers under law or an agreement external to a retirement plan might have equitable remedies against a plan’s distributee.

The situation that most frequently raises issues about whether equitable remedies against a plan’s distributee are available is a participant’s unrevoked beneficiary designation that names the participant’s former spouse. An estate’s personal representative might argue that the former spouse ought not to keep property that the divorce agreement allocated as not that former spouse’s property.

[Luke Bailey]

3 hours ago, RatherBeGolfing said:

Luke, can you expand on this? 

RatherBeGolfing, I agree completely with Peter's thorough explanation of the concept. The plan applies Egelhoff and Kennedy, and is out of it. Peter's Circuit survey is undoubtedly correct, but I don't have as much command of that as he does. I can tell you that the cases I have reviewed where a state court did impose a constructive trust on the divorced spouse post-distribution involved an agreement as part of the divorce that the nonparticipant spouse was giving up his or her interest in the plan participant's benefit, but where there was no QDRO, since the nonparticipant spouse was giving up his or her interest. Although the beneficiary designation issue was not specifically addressed in the marital settlement, the court after the participant's death and following the distribution to the divorced spouse inferred that the parties' intent was that the divorced spouse was giving up his or her entire interest, e.g. in favor of the participant's children by an earlier marriage. The court then enforced what it saw as the parties' agreement in the marital settlement that the divorced spouse would not receive anything.

In BG5150's hypothetical, I'm extrapolating, but if there were evidence that the sister and brother and the deceased had gotten together with the participant and the participant's lawyer when the will was being drafted (e.g., the unmarried participant was grievously ill in a hospice) and the parties had agreed that the brother would take the plan benefit, e.g. because the sister would get the participant's house, then it would seem to me that this could come close to the no QDRO divorce agreement cases.

[RatherBeGolfing]

@Peter Gulia @Luke Bailey

Thank you both!  Your explanations clarified it for me somewhat (since the issue isn't exactly clear) and gave some great jump off points for research.

[Peter Gulia]

RatherBeGolfing, if you want the citations to the courts' decisions, just email me.