Limited Beneficiary Status of The Non-Participant Spouse: No QDRO Equals No Benefits
Significance: We recently represented one of the nation's largest retailers in an action filed in state court by the former spouse of a participant in the retailer's 401(k) plan. The court granted our request to dismiss the claim, agreeing that the claim was preempted by ERISA. The case demonstrates how important it is for counsel in cases involving employee benefit plans to be familiar with the interplay between ERISA and state laws which may affect plans and their participants.
Discussion: Heather married Michael in 1987. They lived together until November 1991, when they separated. In August 1995, Heather and Michael allegedly entered into an agreement whereby Michael agreed that when his employment by the retailer ended, he would pay to Heather "her community property share of contributions and earnings to the plan for the period they were married and living together." Michael terminated his employment in January 1996, and received distribution of his entire plan account balance at the same time. However, he did not pay to Heather any portion of the plan benefits. In June 1996, their marriage was terminated by decree of dissolution. Heather never obtained a Qualified Domestic Relations Order (QDRO) with regard to the plan benefits. Michael, meanwhile, spent all the money he had received from the retirement plan distribution.
In her Complaint, Heather alleged that (i) the retailer had actual knowledge of the marital relationship between Michael and her, (ii) the retailer was on notice of Heather's "community property interest in the funds in the plan," and (iii) the retailer negligently distributed the entire balance to Michael without Heather's consent.
We argued on demurrer (i.e., a motion to dismiss) that the rights and obligations of the parties were governed by ERISA, and therefore, Heather's negligence claim was preempted. We also argued that even if the claim was not preempted by ERISA, the retailer could not be liable for negligence since it owed no duty to Heather with regard to the plan benefits in the absence of a QDRO.
Decisions regarding the payment of plan benefits to participants are among the quintessential fiduciary acts of plan administration. Assets of a plan are held for the exclusive purposes of providing benefits to participants and beneficiaries and defraying reasonable expenses of administration. ERISA prohibits the assignment or alienation of benefits.
The retailer, in its fiduciary role as the plan administrator, was required to discharge its duties with respect to the plan solely in the interest of the participants and beneficiaries and pursuant to the plan's terms. Thus, the retailer's decision to pay the plan benefits to Michael, the plan participant, was undeniably governed by ERISA. Since Heather's claim was based on state community property law, there was a conflict between ERISA and the state's community property law. For that reason, Heather's state law negligence action was preempted by ERISA.
Although Heather was not a participant, wasn't she a beneficiary? Doesn't she have some rights with regard to the plan benefits? The answers to these questions may surprise you. Even had the claim not been preempted by ERISA, Heather could not prevail on a negligence claim against the retailer.
ERISA confers beneficiary status on a non-participant spouse or dependent in only two narrow circumstances. ERISA §205(a) requires that a surviving spouse has a right to receive an annuity in covered pension plans. As a consequence the spouse is a beneficiary to that extent. ERISA §206 also recognizes certain pension plan community property interests of nonparticipant spouses and dependents when a party obtains a QDRO.
Since Heather was not a surviving spouse, and failed to obtain a QDRO, she had no community property interest in the plan consistent with ERISA. Since she was neither a plan participant nor a beneficiary, the retailer owed her no duty with regard to the distribution of the plan benefits to Michael since a plan fiduciary's responsibilities run exclusively to participants and beneficiaries. An essential part of any negligence claim is that the defendant has some sort of duty toward the plaintiff. Because the retailer owed no such duty to Heather with regard to the plan benefits at the time it distributed them to Michael, it could not be held negligent in making that distribution.
Conclusion: In the absence of a QDRO, even if our client wanted to do so, it could not have distributed any portion of Michael's plan benefits to Heather (even with Michael's consent). In creating the QDRO mechanism, Congress was careful to provide that the alternate payee (the spouse, former spouse, child, or other dependent of a participant) is to be considered a plan beneficiary. Thus, Heather was not without protection in this case. She simply failed to avail herself of it. Faced with these arguments, the court had no choice but to dismiss Heather's claim against our client. Family law practitioners should be careful to make use of QDROs, and avoid relying on oral promises--or even written agreements that do not amount to QDROs--when attempting to divide pension plan assets.
© 1999
Reish & Luftman. All rights reserved. The Reish & Luftman ERISA Controversy Report is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish & Luftman does not warrant and is not responsible for errors or omissions in the content of this report.
Learn more about R&R related practice areas:
ERISA Litigation
