Plan administrators must distribute funds even when there is a dispute between an estate and an ex-spouse who waived beneficiary rights, says the 3rd U.S. Circuit Court of Appeals. It recently ruled in Kensinger v. URL Pharma, 674 F. 3d 131 (March 20, 2012) that a decedent’s estate could directly sue the recipient of ERISA-governed 401(k) plan funds after the funds have been distributed.
The Facts
William Kensinger was a participant in a 401(k) plan administered by his employer, URL Pharma. When he and his wife Adele divorced in 2008, she waived her right to any proceeds under the 401(k) plan. However, William died intestate nine months later, and had not replaced her as the designated plan beneficiary.
The estate and Adele both claimed the right to the plan proceeds, which amounted to more than $76,000. The estate sued Adele and URL Pharma in Superior Court of New Jersey for the proceeds; URL Pharma moved the matter to U.S. District Court for the District of New Jersey.
The Courts Weigh in
The district court, relying on the Supreme Court ruling in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), said Adele was entitled to the funds because the plan was obliged to follow the plan documents, and ERISA provided no exception to that duty.
The district court then went beyond Kennedy and also ruled that the estate could not assert a claim against Adele after she received the funds because that would undermine ERISA’s requirement that funds due be distributed promptly. The estate appealed, claiming that even if Adele were entitled to the distribution, the estate could then sue her to enforce the waiver.
The 3rd Circuit affirmed in part and reversed in part. It agreed that Adele was entitled to the 401(k) proceeds, based on Kennedy. However, the court noted that the Supreme Court in Kennedy mentioned in a footnote that it left open the question of whether the estate could sue the recipient under contract law to enforce the waiver. Stating that the district court was “over reading” Kennedy, the appeals court said that ERISA permits the parties to litigate directly after Adele received the funds without putting the plan administrator in the middle of the dispute.
“The goal of ensuring that beneficiaries ‘get what’s coming quickly’ refers to the expeditious distribution of funds from plan administrators, not to some sort of rule providing continued shelter from contractual liability to beneficiaries who have already received plan proceeds. In this case, when URL pays the benefits to Adele, as it must, she will ‘get what’s coming’ under the plan. If, after distribution, her right to these funds is challenged because of her common law waiver, that challenge will be litigated as an ordinary contract dispute. Accordingly, to the extent that ERISA is concerned with the expeditious payment of plan proceeds to beneficiaries, permitting suits against beneficiaries after benefits have been paid does not implicate any concern of expeditious payment or undermine any core objective of ERISA,” the court said.
The 3rd Circuit also remanded the case so the district court could assess the need to remand further to determine any state-law issues.
A Key Reminder
This case highlights the importance of employers and plan administrators following the dictates of ERISA, even when doing so generates or is mired in controversy and legal disputes. Complying with ERISA is not optional; disputes that may arise are matters independent of that requirement.
More information about 401(k) plans is available in Thompson Publishing Group’s The 401(k) Handbook.
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