Supreme Court Clarifies Pension Distributions to Former Spouse

Posted on February 3, 2009 by Stephen R. Kern

On June 26, 2008, the U.S. Supreme Court issued a unanimous decision in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan. The case had attracted significant attention because it dealt with the common situation that plan administrators face in having to deal with conflicting documents relating to a pension distribution to a divorced spouse. The Court held that plan administrators have a duty under ERISA to follow the language in the plan in distributing benefits and that a divorce decree can not supersede the plan's terms.

William Kennedy had designated his wife, Liv, as the beneficiary of his interest in his employer's pension and savings plans. When they divorced, Kennedy executed a new beneficiary form with respect to the pension plan (naming his daughter as the beneficiary), but he did not execute a new form for the savings plan. In their divorce decree, Liv waived her interest in the savings plan benefits. Upon William's death, the savings plan administrator, relying on William's unrevoked beneficiary designation, paid the savings plan benefits to Liv rather than to William's estate.

The estate sued, alleging that the distribution to Liv violated ERISA. The District Court granted summary judgment for the estate. On appeal, the U.S. Court of Appeals for the 5th Circuit reversed the decision, holding that Liv's waiver was an improper assignment or alienation of her benefits under ERISA and, therefore, could not be honored. The 5th Circuit stated that the divorce decree did not satisfy the requirements for a QDRO, which is the only exception to the anti-alienation rule.

With respect to the anti-alienation issue, the Supreme Court reversed and held that the divorce decree simply waiver Liv's rights, but did not constitute an impermissable assignment or alienation. The Court went to hold, however, that the plan administrator is required under ERISA to follow the terms of the plan, not the divorce decree, with respect to the distribution of benefits. Because the DuPont plan included a specific procedure for changing a beneficiary, which William did not follow, the plan administrator properly distributed the benefit to Liv. The Court left open the question, however, of whether the benefit had to be returned in light of Liv's valid waiver as to that benefit.

The result of this Supreme Court decision is that plan administrators should review the terms of their plans, SPDs and other communications to ensure that benefit distribution and beneficiary designation provisions are clear and unambiguous. Consideration should also be given to including language in SPDs and other communications that specifically states that divorce decrees that are not QDROs will not determine the disposition of benefits under the plan. This decision provides plan sponsors and plan administrators with a long awaited directive that they are not required to investigate the existence of other documents or other events in determining the manner in which benefits are to be distributed if the terms of the plan are clear and unambiguous.

Tags: , , , , , ,

Making Sure Your "HEART" Is In The Right Place When It Comes To Soldier-Employee's Benefits

Posted on August 11, 2008 by Marcy L. McCullough

On June 17, 2008, President Bush signed into law the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act"). The HEART Act extends or modifies several tax and retirement benefits for active-duty and former military service members, and employers and plan administrators should be familiar with its provisions.

Retirement Plans

            Currently, for purposes of retirement plan vesting or accruals, an individual's period of qualified military service is treated as a period of employment, which is credited when the soldier-employee returns to work. As such, if the individual dies during military service, his or her survivors do not receive accelerated vesting, ancillary life or other benefits they may have received if the employee died while actively performing his civilian employment. Under the HEART Act, retirement plans must pay the survivors of a soldier-employee who dies during qualified military service any benefits (other than those that accrued during military service) that the plan would have paid had the employee died during active employment. If a plan fails to follow this provision, it will be disqualified. Of note, this provision is effective for military service related deaths and disabilities occurring on or after January 1, 2007, so some plan sponsors may have to provide this benefit retroactively or risk disqualification.

            In addition to this mandatory provision, the HEART Act provides that retirement plans may elect to provide optional benefits to soldier-employees and their families. Notably, under one of the optional benefits, a plan may treat someone who dies or becomes disabled during qualified military service as if he or she resumed employment the day before the death or disability occurred and then terminated employment because of the death or disability. This optional benefit allows the plan to pay out benefits that would have accrued during the soldier-employee's military service presuming he or she was reemployed. Plan sponsors that elect to make this benefit available must do so for all employees performing qualified military service on a reasonably equivalent basis.

Differential Wage Payments

            The voluntary payments made by some employers to service members during a qualified military leave to account for the difference between what the soldier-employee makes in the military and what his or her average compensation was while actively employed are commonly referred to as "differential wage payments." Under prior law, the Income Revenue Service (IRS) took the position that these payments were not subject to tax withholding and were not required to be treated as compensation for retirement plan purposes. Under the HEART Act, however, as of January 1, 2009, differential wage payments will be deemed wages subject to income tax withholding and must be treated as compensation of the employee for retirement plan purposes. In the HEART Act, "differential wages" is a term of art that includes: "compensation paid by an employer to an individual who is on active duty in the uniformed services for a period of more than 30 days, that represent all or a portion of the wages the individual would have received from the employer if the individual had remained in active employment with the employer." Any plan amendments relating to differential wages must be made on or before the last day of the first plan year beginning on or after January 1, 2010. 

Flexible Spending Arrangements

            The HEART Act permits health flexible spending arrangements ("FSA") to provide "qualified reservist distributions." A soldier-employee may be eligible for a "qualified reservist distribution" if he or she is called to active military duty for at least 180 days (or for an indefinite period), and the distributions are made during the period beginning with the active-duty call and ending on the last day of the FSA's coverage period that includes the date of the active-duty call. Although this provision will help employees avoid the FSA use-it-or-lose-it rule, a number of important issues remain open for clarification. Specifically, the permissible amount of the distribution, timing of the distribution, and taxation of the distribution are not squarely addressed under the HEART Act. Accordingly, employers may amend their FSAs to include qualified reservist distributions as of June 17, 2008, it is advisable for employers to wait to offer these distributions until after the IRS clarifies some of the foregoing issues.

Tags: , , , , , , , , , , ,