Typically when dealing with retirement plans, the beneficiary form trumps all. But in this case, the beneficiary form was trumped — by federal ERISA rules.
A U.S. District Court in Louisiana ruled a few months ago that, under the terms of the participant's plan, a spouse's right to plan assets is vested immediately upon marriage (Cajun Industries vs. Robert Kidder et al). Since no spousal waiver had been obtained, the default plan beneficiary was the participant's spouse, even though she was not the named beneficiary. In this particular case, the spouse inherited the 401(k) after just six weeks of marriage.
The decisive factor was that the man had not obtained a spousal waiver after getting remarried. That means if your client wants to name someone other than his or her spouse as the beneficiary of an ERISA-regulated retirement plan such as a 401(k), it's not enough to only fill out a beneficiary form.
NO FAMILY TIES
Leonard Kidder originally named his wife, Betty Kidder, as sole beneficiary of his Cajun Industries 401(k) plan. But after her death, Kidder updated his beneficiaries, naming his three children.
So far, Kidder was making all the right moves — exactly what he should have done if he wanted his kids to get the money.
In late 2008, just six weeks after Beth Bennet Kidder became his wife, Leonard Kidder died. During that brief period, no waiver of spousal rights was granted for Leonard's 401(k) assets. Following his death, a dispute arose between Beth Bennet Kidder and Leonard Kidder's three children, with each side claiming they were the rightful beneficiary of Leonard Kidder's 401(k) plan.
Kidder's children claimed that, as the named beneficiaries on the most up-to-date beneficiary form, they were entitled to the money. But Beth Bennet Kidder claimed that, as Leonard's wife — and without having waived any of her rights — she was entitled to the money, regardless of what the beneficiary form said.
To make her point, Beth Bennet Kidder pointed to a section of Cajun Industries' 401(k) plan documents, which states in part: "The participant's spouse will be the beneficiary of the participant's entire vested interest in the plan unless an election is made to waive the spouse as a beneficiary."
Kidder's children countered by claiming that the use of the word "spouse" should mean a spouse married for at least one year. They cited the Employee Retirement Income Security Act of 1974, which governs 401(k) plans and does not mandate that a participant receive spousal consent for distributions to someone other than a spouse during the first year of their marriage.
The court apparently had little difficulty in determining that Beth Bennet Kidder was the rightful beneficiary of the retirement plan. The judges noted that the plan's language was "clear and unambiguous" in declaring that, unless a spousal waiver was executed, a deceased participant's vested interest would belong to the spouse.
The court also addressed the ERISA issue raised by Kidder's children, saying that although the law allows for plans to waive spousal consent requirements when a participant has been married less than a year, it does not require that they do so. "The court finds no merit in the argument that a uniform construction of the plan requires the term 'spouse' ... to be defined as a spouse married for at least a year," the ruling said.
CHOOSING THE ROLLOVER
IRAs usually offer far greater benefits than employer-sponsored retirement plans. One of those benefits is that, unlike with ERISA plans, a spouse is not required to be the beneficiary of a client's IRA account (some exceptions apply to clients living in community property states).
Instead, an IRA owner may name whomever he or she chooses as beneficiary. A single IRA can even be split into multiple IRAs, each with a separate beneficiary.
So what about clients who are married, have 401(k) accounts and want to leave their retirement money to a beneficiary other than their spouse? Can they simply roll the savings into an IRA and name a new beneficiary without their spouse knowing — essentially disinheriting them in the process?
The answer is no. Distributions from 401(k)s and other ERISA-regulated plans, including direct rollovers to IRAs, still require consent of a spouse.