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Estate May Sue ERISA 401(k) Beneficiary for Proceeds

By Tanya Roth, Esq. | Last updated on

If a divorced man fails to remove his ex-wife as a beneficiary of his 401(k) plan, does she get the proceeds, despite the fact that she may have waived those rights in divorce?

And if she gets the proceeds by virtue of the operation of the plan, can the estate sue her to recover those proceeds?

Here's a case where two areas of law collide-- family law and estate planning. The 3rd Circuit Court of Appeals looked at this case and the lower court's ruling, reversing in part and affirming in part.

William Kensinger was enrolled in an ERISA governed 401(k) plan. He listed his wife, Adele, as the beneficiary. William and Adele divorced in 2008 and at that time, they entered into a Property Settlement Agreement, where the parties waived the rights to any interest in the retirement accounts of the other.

William died nine months after the divorce and he left behind no will. He never removed Adele's name as beneficiary.

After William's death, Adele claimed that she was entitled to the proceeds under the plan, since ERISA mandated that the proceeds be paid to the named beneficiary, under the "plan documents rule." And since ERISA was a matter of Federal law, she claimed it trumped the common law idea that she waived her rights under the Property Settlement Agreement.

William's estate argued otherwise.

The District Court held that Adele was entitled to the plan's proceeds and that the Estate could not pursue a claim directly against Adele to enforce her waiver, as such would be undermining a principal objective of ERISA.

The 3rd Circuit found that ERISA did not address whether a waiver of benefits could be enforced through a direct suit against the beneficiary. Thus, the 3rd Circuit Court of Appeals turned to common law for the answer.

The court looked to Kennedy v. Plan Administrator for DuPont Savings & Investment Plan. The District Court applied Kennedy, but the 3rd Circuit distinguished the lower court's application, stating that Kennedy dealt with a plan that had yet to be distributed and that enforcement of a waiver would get in the way of speedy distribution. Here, the 3rd Circuit noted, the proceeds had already been distributed.

In relying on several cases, the 3rd Circuit held that the beneficiary could be sued by the estate to enforce the waiver, after the funds have been distributed.

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