The U.S. Supreme Court recently confirmed that employee benefit plans are governed exclusively by federal law and the plan documents. In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, et al., the Supreme Court unanimously held that a plan's payment of benefits to a designated ex-spouse beneficiary was proper, despite the ex-spouse's purported waiver of plan rights upon divorce.

What does this mean for plan participants? For starters, it is important to understand that the federal Employee Retirement Income Security Act of 1974 (ERISA) requires every employee benefit plan to specify how benefits are to be paid. ERISA also states that the plan administrator must act in accordance with the plan documents insofar as they are consistent with federal law. As evidenced by the Supreme Court's ruling in the Kennedy case, these requirements can create a particularly unfavorable situation for plan participants who fail to change their beneficiary designation following a divorce.

While many state laws automatically revoke the designation of a spouse as beneficiary upon dissolution of marriage, ERISA preempts such statutes and requires that plans be administered—and benefits be paid—in accordance with the plan documents, irrespective of state laws. In the Kennedy decision, the Supreme Court went so far as to hold that even where a divorce decree specifically divests the non-participant spouse of his or her interest in plan benefits, in the absence of an executed plan document removing the non-participant ex-spouse as a beneficiary, the plan benefits are properly payable to the non-participant ex-spouse. The only exceptions, according to the Court, are when the waiver is part of a special “Qualified Domestic Relations Order” presented to the plan administrator, or when the waiver is consistent with the plan documents (i.e., the plan itself provides that benefits are automatically waived by the non-participant spouse in the event of divorce or that a divorce decree is a proper method of waiver).

While the Kennedy case holds that the plan administrator properly paid the benefits to the ex-spouse, the issue of whether the deceased participant’s estate had any valid claims for payment over from the ex-spouse was not litigated. However, even if such claims could have been successful for the estate, the associated litigation would likely have been very costly.

Lessons Learned

What should participants in employee benefit plans do now to avoid a similar outcome?

1. 1. 1. Even if you are not divorced, review your current beneficiary designations to make certain you have named your intended beneficiary. If the designated beneficiary is an ex-spouse (or another individual whom you no longer consider appropriate), make sure to execute the proper change of beneficiary forms to name the beneficiary you desire.
          
      2. Review your plan documents. If your plan does not provide for an automatic waiver of benefits by a non-participating spouse in the event of divorce, the plan should be amended to provide that a non-participant ex-spouse is automatically divested of his or her interest in plan benefits, and that the designation of an ex-spouse is automatically revoked upon the entry of a divorce decree, regardless of whether that decree meets the requirements of a Qualified Domestic Relations Order.