Employer Retirement Plans – Where Wishes Do Not Count

How ERISA affects your retiremnet accounts by Hammerle Finley Law Firm

In 1974 an undoubtedly very nice man by the name of William Kennedy worked for DuPont. He, like company employees are wont to do, participated in his employer’s retirement savings plan. William dutifully filled out the plan’s beneficiary form and designated his wife Liv as the sole beneficiary.

Twenty years later William and Liv divorced. The divorce decree recited that Liv gave up all of her interest in William’s retirement plans.

William, secure with a divorce decree in his back pocket, did not change his DuPont beneficiary form (cue ominous music).

William died in 2001. William’s daughter was named executor of his estate and she contacted DuPont to claim his retirement account. She reasoned that the only named beneficiary, Liv, had given up all of her rights to the account during the divorce and thus the ownership defaulted to William’s estate.

Dupont disagreed. It paid the plan proceeds, roughly $400,000, to Liv. A lawsuit ensued and the case wound its way up to the U.S. Supreme Court and into the history books.

William’s retirement account, you see, was a SIP, which is a type of defined contribution plan sponsored by a private employer. Similar types of plans include: 401k plans, profit sharing plans, employee stock ownership plans, SEPs, and SIMPLEs. All of these plans are governed by a federal statute called ERISA.

What Is ERISA?

ERISA is a very complex law that maybe 25 people in the country profess to understand, and we are just taking their word for that.

However, the Supreme Court was nice enough to clarify at least one part of it. In a nutshell, ERISA as a federal law wins out over any conflicting state law. Under ERISA, the retirement plan’s documents specify the only way for a beneficiary to waive pension benefits. William and Liv’s divorce decree did not follow the steps required by the plan documents, so her waiver of benefits was not effective. Liv kept the entire $400,000.

That result seems counter-intuitive, but then so do a lot of other rules about 401ks and like employer-sponsored plans. Here are a few.

Can You Transfer Your 401k To Someone Else?

You cannot designate anyone except your spouse as a beneficiary of your 401k unless your spouse signs a written waiver of rights.

If you designate someone other than your spouse and your spouse signs a waiver, that waiver is is valid only one time. If you change your beneficiary designation, you have to get a new waiver.

A written pre-marital agreement that contains your spouse’s waiver is not effective to waive your spouse’s rights to your 401k. Why? Because he or she was not your spouse at the time the agreement was signed.

If you get married and already have a 401k, your new spouse automatically becomes the beneficiary of that existing 401k. This is true even if you had previously named your children as your beneficiaries.  This is true even if you are retired when you get married and all of the money in the 401k was earned before marriage. This is true even if you wish it were not so.

On the other hand, an IRA is not an employer retirement plan. ERISA does not apply to IRAs.

Just saying.

Get Legal Assistance at Hammerle Finley Law Firm in Lewisville, Texas

Virginia Hammerle is a Texas attorney whose practice includes estate planningguardianship and probate. Sign up for her newsletter at legaltalk@hammerle.com. Contact Hammerle Finley Law Firm to schedule a consultation at hammerle.com.

This column does not constitute legal advice.