The Lawletter Vol 38 No 12
Jim Witt, Senior Attorney, National Legal Research Group
Over the past decade, a troublesome issue under the Employee Retirement Income Security Act of 1974 ("ERISA") has been resolved in stages. That issue arises when there is a conflict between the identity of the designated beneficiary under an ERISA plan and the named beneficiary's apparent inability under state law to accept the benefits (for instance, due to the beneficiary's waiver of such rights). In 2001, the U.S. Supreme Court in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), held that where the plan participant had neglected to remove his ex-wife as beneficiary under an ERISA-covered insurance plan following the couple's divorce, the designation prevailed over a Washington state law providing that upon a couple's divorce, there is an automatic revocation of the beneficiary designation made by one spouse in favor of the other under a nonprobate asset such as an insurance policy. The Court's ruling also prevented the application of state law with respect to questions of survivorship in the case of simultaneous deaths and with respect to antilapse provisions, slayer's statutes, and the spousal elective share. The basis for the Court's decision was the command of ERISA that the plan administrator's payment of benefits is to be "in accordance with the documents and instruments governing the plan." 29 U.S.C. § 1104(a)(1)(D). The Court noted that allowing the application of state law as to the designation of beneficiaries would result in an undue burden on plan administrators because it would force them to become familiar with the variations among state laws applicable to these different issues.
In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), although the waiver executed by the named beneficiary/ex-spouse under the decedent-spouse's ERISA-covered savings and investment plan was classified as a "federal common law" waiver, the Supreme Court held that an ERISA plan administrator was still obligated to distribute the benefits in accordance with the beneficiary designation made under the plan. However, the Kennedy Court explicitly left open the question of whether once the benefits were distributed by the administrator, the decedent's estate could enforce the waiver against the plan beneficiary. As the Kennedy Court stated:
Nor do we express any view as to whether the Estate could have brought an action in state or federal court against [the ex-spouse designated beneficiary] to obtain the benefits after they were distributed.
Id. at 300.
This very question was decided by the U.S. Court of Appeals for the Fourth Circuit in the case of Andochick v. Byrd, 709 F.3d 296 (4th Cir.), cert. denied, 134 S. Ct. 235 (2013), in which Scott Andochick and Erika Byrd were a married couple. Erika worked as an attorney for a limited liability partnership and participated in a 401(k) plan and a life insurance plan, both sponsored by her employer and therefore subject to ERISA. As part of the terms of the couple's marital settlement agreement and divorce, Andochick waived his right to any benefits under the plans. Erika died without changing the beneficiary designations on the plans, and Andochick took distribution of the benefits. Erika's estate obtained a state court order requiring Andochick to turn over the benefits to the estate. Andochick brought a declaratory judgment action under ERISA on the basis that ERISA's preemption of state law prohibited the state court from ordering Andochick to return the benefits. The U.S. District Court for the Eastern District of Virginia granted the estate administrators' motion to dismiss. Andochick v. Byrd, Civ. Act. No. 1:11-cv-739, 2012 WL 1656311 (E.D. Va. May 9, 2012).
In affirming the decision, the Fourth Circuit stated:
In Kennedy, the Court emphasized three important ERISA objectives:
"[1] simple administration, [2] avoid[ing] double liability [for plan administrators], and [3] ensur[ing] that beneficiaries get what's coming quickly, without the folderol essential under less‑certain rules." Id. at 301, 129 S.Ct. 865 (some alterations in original) (citation omitted).
Allowing post‑distribution suits to enforce state‑law waivers does nothing to interfere with any of these objectives. For in situations like that at issue here, Kennedy merely dictates that the plan administrator distribute plan benefits to the named beneficiary. This ensures simple administration regardless of whether post‑distribution suits are permitted, because the plan administrator would have no role in any post‑distribution proceedings. For the same reason, post‑distribution suits do not expose the plan administrator to double liability— only the named beneficiary has any claim against the plan administrator.
709 F.3d at 299.
The court also addressed the concern that a postdistribution suit would interfere with achieving the goal of ensuring the expeditious distribution of funds by plan administrators to the proper recipients. Citing the Third Circuit case, Estate of Kensinger v. URL Pharma, Inc., 674 F.3d 131, 136 (3d Cir. 2012), the court noted that there is no rule
["]providing continued shelter from contractual liability to beneficiaries who have already received plan proceeds." Estate of Kensinger v. URL Pharma, Inc., 674 F.3d 131, 136 (3d Cir.2012). Permitting a post‑distribution suit against a plan beneficiary based on his pre‑distribution waiver does not prevent the beneficiary from "get[ting] what's coming quickly." Rather, as the district court noted, it merely prevents him from keeping what he "quickly" received. Thus, we conclude that permitting post‑distribution suits accords with the ERISA objectives discussed in Kennedy.
709 F.3d at 299-300 (alterations in original) (emphasis in original).
Thus, in a roundabout way, the Fourth Circuit in Andochick effectively nullified ERISA's preemption of state law in the sense that the court recognized the validity of a predistribution state law waiver of ERISA plan benefits by holding that the waiver can be enforced once distribution is made.
