What is ERISA?
ERISA stands for the Employee Retirement Income Security Act. The law was enacted in 1974 and its purpose is to establish certain minimum standards for pension and health plans. This ensures that workers will actually receive their retirement assets, and that health and medical plans will properly pay for covered treatment.
It is important to have a general understanding of ERISA so employers can correctly set up retirement, health and medical benefits for employees . Also, benefit providers (i.e. plan custodians, administrators) and certain third-parties (i.e. accountants, actuaries) can be held liable for mistakes that occur when setting up or maintaining benefit plans. A common mistake is failing to follow the beneficiary designation rules that are frequently found in ERISA-governed plans. When such mistakes happen, the mistakes can be costly and result in unnecessary litigation.
The Meaning of Beneficiary Under ERISA
The group of individuals who can be considered a plan beneficiary is somewhat limited under ERISA. A beneficiary can be a spouse, child, or another dependent of the plan participant. However, if the participant does not have a spouse or eligible child or dependent, then there may be an ordered hierarchy of beneficiaries – most commonly an eligible parent or grandparent of the participant, or the estate.
A non-spouse named as a beneficiary in a plan does not have the same rights as a spouse under ERISA. However, the named beneficiary does have the right to enforce the terms of the plan and to payments under the plan. In addition to the named beneficiary’s rights, a named beneficiary appointed by a plan participant has statutory rights conferred by ERISA. Specifically, the statutory rights of a beneficiary to a plan payment include among other things: rights to written notice about the status of any claim for benefits, the application of beneficiaries’ benefits under a plan that is subject to a Summary Plan Description, the right to view a plan document, the right to obtain a statement of plan assets, and the right to have a benefit lost because a benefit is not paid by the time of a participant’s death may be paid on behalf of a deceased participant’s estate.
What Can Beneficiaries Do Under ERISA?
The designation of an ERISA beneficiary is one of the most commonly overlooked aspects of employee benefit plans. Yet, what may seem like a simple form is arguably one of the most important documents that an employee will ever sign. A beneficiary designation is simply a document which instructs a plan administrator how to distribute benefits when the account holder dies. It is for this reason that proper execution is critical: unless the plan specifically states otherwise, a court will have no choice but to distribute benefits according to the instructions contained in the beneficiary designation.
As easy as it sounds, properly completing, signing, and dating a beneficiary form with the plan administrator is frequently overlooked by plan participants. Worse still, some employees believe that simply designating a primary beneficiary in their will is enough to ensure their intent will be fulfilled; it is not. As a general rule, a beneficiary designation can trump everything else, including a will. For example, in Burris v. Holiday Inns Inc., et al., 1990 WL 114685 (6th Cir. 1990), a deceased employee signed a 401(k) plan beneficiary form designating his estate as the beneficiary of the death benefit. Sometime thereafter, the employee changed his will, but neglected to change his beneficiary designation which he had previously filed with his employer. The district court refused to enforce the new will, reasoning in part that the beneficiary provision of the 401(k) plan trumped the new will. The Sixth Circuit affirmed.
Ensuring that an accurate and updated beneficiary designation is in place also benefits the employer administrator. It protects the plan’s assets, as well as the fiduciaries. As fiduciaries, the administrators have a duty to look after the interests of the beneficiaries, and in protecting the plan’s assets, they must provide the correct benefits to the rightful beneficiaries. But, as mentioned above, fundamentally, an incorrect distribution based on an erroneous beneficiary designation form can expose a fiduciary to liability under ERISA.
Mistakes and inadvertence are often overlooked when discussing the consequences of an improper designation. Courts have set aside compliance issues when they determined that a fiduciary – such as a plan administrator – made a mistake and that the mistake only arose from the fact that the beneficiary form was not immediately recorded. In Gosselin v. Mardon, 310 F. Supp.2d 606 (E.D.Pa. 2004), for example, a new employee filled out a beneficiary designation form naming his two children from a previous marriage to receive the plan assets. However, the form was misplaced by the plan administrator. After the employee died, the administrator distributed the assets to the widow with whom he lived with and whom he apparently attempted to divorce. Although the administrator did eventually locate the beneficiary designation form, it did not do so until after the former wife filed suit. Even though the widow was otherwise a proper beneficiary of another plan maintained by the employer, the court conducted a thorough review of the facts and concluded that the administrator’s conduct did not justify recision of the distribution.
In other instances, however, intent has been the controlling factor in proper compliance. In Gallagher v. Hartman & Craven Specialist Servs., Inc., 2015 WL 9099420 (W.D.Tex. Dec. 14, 2015), the widow of a company president had submitted a beneficiary designation form which erroneously listed his children with another woman as the beneficiaries. To her dismay, the plan distributed benefits to the children listed on the form. The finding was based in part on the fact that the beneficiary form included a witness signature who did not comply with the proper form requirements but who was nonetheless accepted as valid by the plan administrator.
The lessons from these cases are clear: an inaccurate beneficiary designation will wreak havoc between family members, expose the administrator to liability, and is contrary to the intent of the parties. A beneficiary form should be taken seriously by plan participants and the administrators because once a participant signs the form, no one else – not even a spouse – can interfere with the transfer of the plan assets to the designated beneficiary.
Updating Beneficiaries Under ERISA
Like many ERISA issues a mistake with beneficiary designations can have serious consequences. It is not enough to simply designate a beneficiary – you must also make sure the designation is valid under ERISA. The good news is that you can change the beneficiary at any time.
The Basic Rules
To change a beneficiary under ERISA you must comply with the requirements of your plans. Most plans require that you submit a new beneficiary designation form to your plan administrator. In some cases you can designate a beneficiary by creating a new will but that is uncommon. The plans will have their own forms, and those forms must be filled out properly and submitted correctly.
Binding Designations
In most plans, once can in fact designate a beneficiary, however those designations may not be binding. For example, if your spouse is the automatically designated beneficiary of your plan benefits under the plan’s terms, you cannot waive your spouse’s rights over those benefits unless you meet ERISA’s rules for doing so. Likewise, the banking institutions and financial institutions that administer most ERISA plan benefits will not accept joint or contingent designations. Thus, be careful about designating anyone who is not your spouse as a beneficiary. Also ERISA allows plans to ignore most changes of beneficiaries made without following the plan’s procedures. Thus, it is important to follow your plan’s rules before assuming the changes you intend to make are effective. You should consult your plan administrator if you are in doubt as to what your plan requires.
Common Mistakes
There are several common mistakes people make with their beneficiary designations. An invalid beneficiary designation can lead to intestate succession, or even potentially cause ERISA violation if the company holds onto excess funds because a proper change was not made. To avoid problems be sure that you do the following:
Tips for Change
Even though changing a beneficiary is a simple form and process, It is advisable to keep your plan administrator informed of the changes. You should keep a copy of the beneficiary designation change and give a copy to your fiduciary and another copy to your new beneficiary.
Spousal Consent and Permission Under ERISA
ERISA sets forth spousal rights in two ways: (1) it automatically entitles the spouse to certain benefits generated by a plan (including certain survivor annuity payments), and (2) it requires that a spouse consent to any attempts to transfer, assign or change those benefits to a person other than the default recipient (the spouse).
With respect to the transfer, assignment and change issue, ERISA generally requires spousal consent prior to naming someone other than the spouse as a primary beneficiary, or attempting to transfer or otherwise assign a benefit.
The spousal rights requirements both with respect to entitlement and spousal consent are extremely onerous and burdensome, and thus allow a divorcing spouse to extract a significant amount of value from a marital estate.
Enforceable Disputes Over ERISA Beneficiaries
While ERISA provides a lot of protection to plan administrators regarding the enforcement of particular beneficiaries’ designations after a plan participant’s death, it does not mean that litigation over beneficiary designations under ERISA plans never occurs. For example, we recently represented an insurance company in a case where the same decedent had changed his designation of beneficiary numerous times during the last few years of his life, had filed a suit against the plan administrator in state court that was settled by a court approved judgment awarding the initial beneficiary a portion of the proceeds and leaving the administrator to follow the decision in determining who else would be entitled to a share of the proceeds; when this case finally came to trial nearly seven years after the decedent’s death, the only witness called by the plaintiff insurance company was the executor of the estate, and the administrator’s challenge to the beneficiary designation was upheld, allowing the administrator to reduce the funds available to the initial beneficiary by the amount of her attorneys’ fees in that case. In most cases in which a dispute as to the proper beneficiary designation is filed in federal court under ERISA , the court will make a decision based on the terms of the plan and the circumstances at the time of the initial beneficiary designations, without considering how those designations, whether or not they were properly made in the first instance, might impact the family members’ probate proceedings or other distribution. Depending on the particular state laws involved, the court may ask the parties who will receive the funds, not to take payment until the court has determined the beneficiary rights. As a general rule in federal court ERISA beneficiary disputes, the court will look for the prerogative of the insured to name his beneficiary and to substitute a new beneficiary at will, within the restrictions imposed by the insurance policy itself, not the equities which may exist among potentially competing beneficiaries as to their expectations of receiving the funds, the needs of the beneficiaries, the length of their relationship to the insured, whether they have been dependent upon the insured, or whether they are children or grandchildren of the insured.
Best Practices with ERISA Beneficiary Forms
The best practice for filling out and maintaining ERISA Beneficiary Forms is to fill them out clearly. Make sure that the signature/date line has a date and signature by the plan participant. Make sure that there is not a strike through or cross out (unless this is clearly an allowed change that is clear). Make sure that the name of the beneficiary is legible. Make sure that the witness does not misspell her or his name.
The practice that I recommend the most? Take a picture of the form once it is completed neatly. And, if the entry allows, write the date everything is signed. This will prevent future litigation.
Do not wait years to update your beneficiaries. It is a myth that there is sometimes a 60 day limitation or some other type of time bar for filing a claim under ERISA. The truth is that under ERISA, an attorney can usually file a lawsuit anytime – even if the plan time limit has expired. Under the common law of trusts, it is very difficult to overcome the presumption that a beneficiary designation is final and the benefits are owed to the beneficiary. But, under ERISA, the fiduciary duties of plan administrators and the remedies of plan participants create a situation where allowances are made to correct errors that were made. Often, a participant is unaware of who the member of the plan to name as the beneficiary. Or, an ex-spouse may not be aware of the fact that they no longer have a right to the benefits. When a relationship changes (marriage to divorce, relationship to break up; birth, adoption and/or death of a child), fill out a new beneficiary designation.
The Plan Administrator’s Role
The role of plan administrators is vital when it comes to ERISA beneficiary rules and 401(k) account and death benefits. The plan administrator is the person or entity named in the plan document to perform administrative functions relating to a benefit plan, such as group health plans or 401(k) plans. Generally, most plans are so-called "designated persons" who are not the plan sponsor/administrator, yet most plans provide that the plan sponsor/administrator exercises authority to make the final claims determination.
The primary requirement of plan administrators is to either adopt a beneficiary designation procedure that complies with ERISA requirements, or take the right steps to assure that the beneficiary designation scheme it has (if any) meets ERISA requirements.
For example, plans may include different provisions for spouses than they do for non-spouses. Alternatively, some plans simply provide the spouse as the beneficiary in certain situations, such as where the participant does not designate another beneficiary or where the participant fails to designate anyone at all. However, in some cases, all that needs to happen for the spouse to be the beneficiary is for automatic annuity payments to commence. Other plans do nothing to provide death benefits when the participant dies, and defer to applicable state law for payment of a death benefit after the participant dies.
So, in essence, the plan benefit design and selection of the beneficiary are two ways that plan administrators may comply with the requirement under ERISA. Alternatively, the plan can adopt its own procedure (although it would be prudent to design that procedure to match any ERISA minimum standards). The plan can even adopt an entirely different procedure (also subject to any minimum requirements). The bottom line though is that the plan must have some specific procedure for adopting a beneficiary scheme that complies with ERISA.
If there is no designated beneficiary scheme or process for complying with ERISA, the plan administrator may face exposure for failing to have such a scheme/procedure to determine the death benefit payable to eligible and designated beneficiaries.
From a practical perspective, the plan administrator usually will choose to define the beneficiary scheme itself either in or outside of the plan document. If no such elected/defined beneficiary scheme exists, a court may look to state law to determine what beneficiary scheme applies. For example, suppose a plan provides that to the extent permitted by applicable state law, the participant’s account balance automatically passes to a named beneficiary upon a participant’s death.
In a situation like this, the applicable state law (based on the plan’s chosen law governing the plan), or the state laws of the participant’s domicile, may determine what happens. However, the plan administrator may still need to determine how beneficiary designations are made under state law to determine the proper beneficiary.
How Life Events Impact Beneficiary Choices
Recent changes in life may have a substantial impact on the ERISA beneficiary designation. When a person marries, for example, it is important for them to review whether they need to change their designation from single to married. The designation will always default to the last filed beneficiary designation form until it is replaced or rescinded. One of the most important aspects of a group benefits plan is the right to designate who shall receive the proceeds from the plan in the event of death. Qualified Domestic Relations Orders ("QDROs") can require that a former spouse be designated as a beneficiary.
The birth of a child , marriage, or death of a spouse may all lead to the necessity of updating a beneficiary designation. 2016 is an election year, so it is a good time to review designations on 401(k) plans or the ability to designate a beneficiary to a Survivor Benefit Package under the Thrift Savings Plan. In most cases, failure to properly designate beneficiaries can lead to unintended consequences for the administrator, the spouse, and the children.