Article on the Plan Document Rule Under ERISA
Ken and Barbie fell hopelessly in love. They married with the intent to live happily ever after; unfortunately, that is not how the story ends. After a bitter divorce, Barbie waived her rights to Ken’s retirement plan that was governed by the Employee Retirement Income Security Act (ERISA) of 1974. Ken was advised by his attorney that the waiver was effective to remove Barbie as his designated beneficiary. Ken later found his true love, Skipper, and they lived happily ever after until Ken’s death. Ken’s will left all of his property, including his retirement benefits, to Skipper. To Skipper’s surprise, the retirement benefits were paid to Barbie because Ken had never changed the designated beneficiary on his employee-benefit plan documents. Skipper, who was much younger than Ken, was relying on this money to support her for her remaining years. This is the unfortunate outcome when a person does not change the designated beneficiary on their employee benefit program that is governed by ERISA. Now, Ken’s attorney is worried about a malpractice suit for not advising Ken to change the name on the beneficiary form, and Skipper, the intended beneficiary, is left with no money to support her. Barbie, on the other hand, is quite content. She takes the money without remorse and begins traveling the world with her new man, spending the money like a lottery winner, and cannot be found.
In a recent United States Supreme Court decision, the Court held that the benefits of an employee-benefit plan governed by ERISA are to be distributed in strict compliance with the plan’s documents. Compliance with an ERISA plan’s documents is commonly referred to as the “plan documents rule.” This decision, at first, may seem to be the final decision about who will receive the benefits; however, it is only the beginning. The Supreme Court remained silent on whether an estate may recover proceeds under state law after the proceeds are first distributed to the designated beneficiary in the employer’s ERISA plan documents.
When a couple makes an agreement pursuant to a divorce, but does not file a Qualified Domestic Relations Order (QDRO), it may create a future issue over who is the rightful owner of future benefits. In a divorce decree, or a premarital agreement, an ex-spouse may waive their right to claim proceeds from a retirement account. Problems arise, however, when the ex-spouse’s name is not properly removed as beneficiary from an employer’s benefit-plan documents. If the participant dies, the intended beneficiary may not be entitled to receive any benefits due to the plan documents rule. The ex-spouse may end up receiving the proceeds even though they waived their right to receive them under the divorce decree or premarital agreement.
Many federal courts have held that ERISA does not govern employee benefits once they are distributed. These holdings leave the door open for future claims to recover the benefits under state law. By remaining silent on the issue, the Supreme Court created an opportunity for more litigation in an unsettled area. In the meantime, the person to whom the proceeds were distributed in accordance with the plan documents may make them unavailable by the time the person to whom they are rightfully entitled attempts to recover them in subsequent litigation.
The emphasis of this Comment is that once the proceeds of an ERISA plan have been distributed, they are no longer entitled to ERISA protection, and, at that point, they may be recovered either by the imposition of a constructive trust or by other state causes of action. Texas and other states have the ability to apply these mechanisms; however, these state recovery actions must be filed shortly after the initial distribution to avoid the proceeds disappearing.
The analysis of this Comment begins in Part II with a brief history of ERISA and its preemption clause. Part III focuses on whether it is possible to recover proceeds after they have been distributed to the beneficiary in accordance with ERISA, and addresses when a state cause of action impermissibly relates to an ERISA plan and when it does not. Part IV of this Comment addresses possible remedies under state laws that may allow recovery of post-distributed proceeds. This section analyzes how other states have applied a constructive trust to the proceeds once they were distributed to an unintended beneficiary. It also addresses how a waiver in a divorce decree may result in the ability to bring a breach of contract claim as a method of recovery after the proceeds have been distributed in accordance with the plan. Finally, Part V applies the methods used by other states and explains how Texas litigants may use similar approaches to recover the proceeds after distribution. This part explores both the option of imposing a constructive trust and the option of bringing a breach of contract claim under Texas law to recover distributed benefit proceeds.