Conflicts of Law Affect Retirement Plan And Life Insurance Benefits
Family law practitioners not only need to be thoroughly familiar with the applicable law of any state in which they practice, but some federal law as well. One of the areas in which federal law has been carving out preemption is that of retirement and life insurance death benefits. In particular, since the United States Supreme Court case of Egelhoff v. Egelhoff, 532 U.S. 141, 121 S. Ct. 1322, 149 L.Ed.2d 264 (2001) the slope has become even more slippery. In Egelhoff, the Court reasoned that the relevant state statute was impermissibly connected with ERISA because it bound ERISA plan administrators to a particular choice of state law rules for determining beneficiaries, thereby implicating an area of “core ERISA concern.” 532 U.S. at 147.
Some lawyers also seem to confuse the concept of waiving death benefits and the actual retirement accounts themselves. For example, there have been cases involving the question of whether general waiver language in an antenuptial agreement is sufficient to waive rights under ERISA plans. Attorneys also need to draw a distinction between a statute and an agreement. In Egelhoff, a Washington State statute provided that beneficiary designations concerning a life insurance policy of an employee benefit plan were automatically revoked on divorce. The court held that the statute was in conflict with ERISA, and therefore, was preempted. The holding, however, does not mean that every agreement or judgment that waives or bars such rights is preempted.
The distinction is explained very well in a New York State court case, Edmonds v. Edmonds, 710 N.Y.S.2d 765 (Supreme Ct. N.Y. 2000). In that case, a provision in a premarital agreement was found not to be a valid waiver of survivorship benefits, but it was held to be a valid waiver of the husband’s equitable interest in the wife’s pension as marital property. The court noted that there was a strong public policy in favor of individuals ordering and deciding their own interests through contractual arrangements, including prenuptial agreements. 710 N.Y.S.2d at 768. The court explained that, “This is not a death case in which the waiver at issue is one of survivorship benefits. The object of this action is a divorce, which, if granted, will dissolve the defendant’s prospects of ever becoming the surviving spouse of the plaintiff. The spousal rights under ERISA do not survive the judgment of divorce (citation) and once a divorce is granted the survivorship benefits are moot.” Id. at 769. The court specifically held that the equitable distribution of the husband’s pension as marital property was an entitlement that was not mandated by ERISA and the waiver of which was not restricted by ERISA. A state court in Colorado reached the same result in Rahn v. Rahn, 914 P.2d 463 (Colo. Ct.App. 1996), which also featured a general waiver clause in a prenuptial agreement. The same outcome appeared in Moor-Jankowski v. Moor-Jankowski, 634 N.Y.S.2d 728 (N.Y. App. Div. 1995).
Similarly, in Stewart v. Stewart, 541 S.E.2d 209 (N.C. Ct.App. 2000) a North Carolina court held that ERISA’s spousal waiver restrictions do not apply to waiver in premarital agreements of interests in a spouse’s retirement account.
An important case that came out of Illinois was decided in federal court more than a decade ago. Fox Valley & Vicinity Construction Workers Pension Funds v. Brown, 897 F.2d 275 (7th Cir. 1990). In that case the parties divorced and the decree contained a general waiver of employment benefit clause. The husband did not change the designated beneficiary before he died. ERISA is silent on the issue of what constitutes a proper waiver, so the court looked at state law. It held, “The ability of a spouse to waive rights to a benefit through a specific waiver in a divorce settlement has been recognized by many courts and we adopt that rule for purposes of ERISA.” 897 F.2d at 281. (Emphasis added.)
A year later, a state court in Illinois ruled that an antenuptial agreement was effective in waiving pension benefits. This was so even though the wife did not obtain those rights until enactment of the Retirement Equity Act, which was over 2 years into the marriage. In re Estate of Hopkins, 574 N.E.2d 230 (Ill. App. Ct.1991). The parties entered into an antenuptial agreement the day before their marriage, each waiving rights to any property of the other. Two years later, the Retirement Equity Act was enacted, and the year after that, the husband died. The court had previously ruled that the antenuptial agreement was valid and enforceable. Then, looking at the general waiver language, the court held that it was sufficient to include any rights, including those of a beneficiary. The court found from the prospective nature of the language that all future rights acquired by the wife under the plan were waived by the agreement. Fox Valley was cited.
Similarly, in Indiana, in Ryan v. Ryan, 659 N.E.2d 1088 (Ind. Ct. App. 1996) another antenuptial agreement, was signed one day before marriage. At the time the antenuptial agreement was signed, pension rights were not marital property under Indiana law. There was a very general waiver clause of any property acquired by the other party before or during the marriage. This was deemed a sufficient waiver of the after-acquired retirement benefits.
In Robson v. Electrical Contractors Association Local 134, IBEW Joint Pension Trust Of Chicago Pension Plan No. 5, 727 N.E.2d 692 (Ill. App. Ct. 2000) the parties were divorced. The marital portion of the husband’s pension trust was divided equally between the parties. However, he died before he could change the beneficiary form. The wife filed a lawsuit trying to get the other 50% upon her former husband’s death. A Qualified Domestic Relations Order (QDRO) had also been entered. Neither the QDRO nor the dissolution judgment gave the wife a right of survivorship in the husband’s portion of the pension. The court noted that QDROs are exempt from ERISA’s general preemption clause. Furthermore, if the QDRO fails to specify that a former spouse has a right of survivorship, she is not entitled to that benefit. In the Robson case, there was a general waiver of all property rights in the dissolution judgment (even though the waiver provision did not specifically mention the pension trust).
A state court in Emmens v. Johnson, 923 S.W.2d 705 (Tex. Ct. App. 1996) held that federal common law, rather than ERISA, applied. Although it was not bound by decisions of lower federal courts, the state appellate court was persuaded by the Seventh Circuit’s Fox Valley opinion. It held that ERISA benefits may be waived by the beneficiaries and that such a waiver is not against public policy. Accordingly, the court held that the divorce decree waived a profit sharing plan, even though the general waiver language did not mention the plan. This case, however, involved a statute and might not be decided the same way after Egelhoff.
Another federal court applied federal common law, holding that a former spouse effectively waived her benefits under an ERISA plan in a divorce settlement agreement. Altobelli v. IBM, 77 F.3d 78 (4th Cir. 1996). This case contains a good discussion of what other federal circuits have done. The decision notes that the anti-alienation clause does not apply to a beneficiary’s waiver, but only to a participant’s. (The largest exception to that is, of course, a QDRO.)
There are several post-Egelhoff decisions. In Keen v. Weaver, 121 S.W.3d 721 (Tex. 2003) it was held that the former wife’s waiver of any interest in the former husband’s ERISA plans was enforceable under federal common law. Again the former husband died before changing the beneficiary. The court held that the former wife’s waiver of her interest in the ERISA plans was specific, knowing, voluntary and therefore enforceable under federal common law.
Egelhoff was very recently distinguished by the Eleventh U.S. Circuit Court of Appeals in Liberty Life Assurance Company of Boston v. Kennedy, 02-14044 (11th Cir., February 4, 2004). That case took place in Georgia, and like many others, dealt with a divorce situation where the actual beneficiary change was never effectuated before the party in question died (the practice tip by now should be obvious). His first wife contended that the court should not have allowed his will to serve as a beneficiary designation, because that invoked state testamentary law and violated the Egelhoff doctrine. In this case it was found that the benefit plan allowed the will to serve as an alternative means of designating beneficiaries. Egelhoff was found to be inapplicable.
Earlier this year, a state court in Estate of Rowley v. MacInnes, _____ N.W.2d ____, 2004 WL 41414, Docket Number 241649 (Mich. App. 2004) dealt with the same fact pattern. After a divorce, the former husband did not change the life insurance beneficiary before he died. The court held that the settlement agreement, which released all rights to proceeds of any life insurance, constituted a waiver. Egelhoff was distinguished and held not to apply when the ultimate issue is not whether a state statute is preempted. The case was analyzed under principles of waiver rather than preemption. It held that, “Under the view taken by the majority of the federal circuits, ‘even where ERISA preempts state law with respect to determining beneficiary status under an ERISA-regulated benefits plan, ERISA does not preempt an explicit waiver of interest by a non-participant beneficiary of such a plan.’ ” (Emphasis added.) The court noted that state courts are bound by the holdings of federal courts on a federal question where there is no conflict along federal appellate courts. However, if there is no United States Supreme Court decision concerning the interpretation at issue, and a conflict exists among the federal circuit courts of appeal, the state court is free to choose the view it determines most appropriate. The court recognized that the majority of federal circuit courts of appeal have concluded that waivers of beneficiary rights are possible under ERISA-governed plans. ERISA is silent on the issue of what constitutes a valid waiver of interest. The courts must turn to federal common law and state law to fill the gap. It is generally held that courts will look at whether a reasonable person would have understood that she is waiving her interest in the benefits in question, rather than analysis of any “magic language.” This situation arises in prenuptial agreements all the time. Parties can waive rights to property that already exists and to property that may come into existence in the future.
In Sabad v. Fessenden, 825 A.2d 682 (Pa. Super. Ct. 2003), a state court found, as a matter of first impression, that an antenuptial agreement represented an effective waiver of rights to equitable distribution of the marital portion of a spouse’s pension plans that were subject to ERISA. The court recognized that apart from the survivor benefit of the Retirement Equity Act, ERISA does not mandate that other benefits be provided to a participant’s spouse. Furthermore, spousal rights under ERISA do not survive a judgment of divorce.
When There Is a QDRO
When there is a QDRO, the parties’ intent with regard to what is to be done with survivor benefits will generally be more clear, and that intent will control. However, QDROs do not deal with life insurance benefits. To avoid subsequent problems, a party, while married, could file an action to compel his or her spouse to execute an appropriate waiver of survivorship benefits – most antenuptial agreements contain a general clause requiring either party to execute any documents that may become necessary to effectuate the terms of the agreement. (Most of the cases are litigated after the fact, ie, after one party has died, and usually after the parties are divorced.)
In a recent federal case, the divorce decree was held not to be sufficiently explicit to be a waiver. Melton v. Melton, 324 F.3d 941 (7th Cir. 2003) (concerning life insurance). In Hagwood v. Newton, 282 F.3d 285 (4th Cir. 2002) it was held that a prenuptial agreement did not satisfy the requirements under ERISA for waiver of the husband’s survivor spouse rights. Again, in this case, the husband died and the court opined that the husband could have compelled the execution of a specific spousal waiver before he died pursuant to the terms of an antenuptial agreement, but that was not done.
In conclusion, due to the federal implications of these kinds of assets, it makes sense to try to keep up on the law everywhere. Obviously, these are not all of the cases around the country dealing with this issue, but they are believed to be a fair sample.
Paul L. Feinstein, a Chicago practitioner with over four decades of experience, practices family law with an emphasis on divorce litigation, consulting, and appeals. Paul is often hired by trial lawyers to handle appeals and to assist them with determining legal strategies and preserving a sufficient record at trial. He has belonged to the American Academy of Matrimonial Lawyers since 1991 and the Appellate Lawyers Association since 2010. He can be reached at (312) 346-6392. View his Divorce Magazine profile.