Most employees today receive various benefits from their employers in addition to their salary. Such benefits often include employer paid group life insurance, a 401(k)/profit sharing plan, defined benefit pension plan, tax deferred annuity or other deferred compensation plan. These benefits are frequently a significant part of an employee’s compensation and, over time, may be a significant part of a person’s assets and net worth.
Such assets have become so important that the Florida Legislature decided in 2013 that they should not pass unintentionally to a divorced spouse. Section 732.703(2) of Florida Statutes provides:
A designation made by or on behalf of the decedent providing for the payment or transfer at death of an interest in an asset to or for the benefit of the decedent’s former spouse is void as of the time the decedent’s marriage was judicially dissolved or declared invalid by court order prior to the decedent’s death, if the designation was made prior to the dissolution or court order. The decedent’s interest in the asset shall pass as if the decedent’s former spouse predeceased the decedent.
Furthermore, subsection (3) of section 732.703 states that subsection (2) applies to life insurance policies, annuities and employee benefit plans, among other assets. Therefore, by way of example, assume that a wife designates her husband as the primary beneficiary of an employer paid group life insurance policy or her employer’s 401(k)/profit sharing plan or pension plan. If she later divorces her husband and then dies, this statute provides that the former husband will not be the beneficiary of these benefits unless the wife had named the former husband as her beneficiary after the divorce. The proceeds would go to the contingent beneficiary, or if there is no contingent beneficiary, to her estate and distributed according to her will or intestacy statute. Although one may debate whether this statute is appropriate or helpful, it appears to be clear that the former husband does not get the proceeds under Florida law.
Looks can be deceiving. What Florida law takes away, federal law may give back. Employer paid group life insurance policies, tax-qualified retirement plans, and non-qualified plans of deferred compensation are considered to be an “employee benefit plan” as defined in section 3(3) of the federal Employee Retirement Income Security Act (“ERISA”). ERISA preempts all state laws that relate to any employee benefit plan. 29 U.S.C. & 1144(a). In Egelhoff v. Egelhoff, 532 U.S. 141 (2001), the U.S. Supreme Court held that a similar State of Washington beneficiary designation statute was preempted by ERISA; the employer would have to follow the participant’s pre-divorce designation of beneficiary rather than the state law. The basis for this decision was that plans must be administered by the employer, and benefits paid, in accordance with plan documents (which includes the beneficiary designation forms). The Supreme Court reaffirmed this decision in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009) where the Court held that the plan administrator had the duty under ERISA to follow the participant’s beneficiary designation and plan document over a conflicting common-law waiver that was part of a divorce decree.
It is important to note that under ERISA, the employer has the right to design how the plan will operate so long as the design properly accounts for the mandates of ERISA and the Internal Revenue Code. Therefore, it is permissible for the employer to draft the ERISA plan documents to be consistent with Florida law and provide that beneficiary designations made prior to divorce become void upon divorce.
What are the lessons for employers and employees, not to mention the employees’ family members? First, employers should review their plan documents and determine whether they are drafted in the desired manner with respect to this designation of beneficiary issue. If the documents are silent on this issue, the pre-divorce designation of beneficiary probably will be enforced.
Second, employees should insure that their beneficiary designations on file with the employer are consistent with their intentions after divorce. At every major life changing event, such as a marriage, divorce, childbirth, adoption, or loss of a loved one, review the beneficiary designations to insure they comply with your current wishes.
Third, remember that changes in your life may not automatically change the beneficiary designations, even after a divorce. You may be required to change them, and you (or your surviving family members or intended designated beneficiaries) may have to live with the designations (or lack of designations) you have on file with the plan administrator. You should regularly insure you have named both primary and contingent beneficiaries so your assets will go to the person or trust you desire. If you die without named beneficiaries, the proceeds will pass to your estate, where creditors can lay claim to them.
Finally, as an employer, it is in your best interest to remind your employees on a regular basis to consider their beneficiary designations and make changes as necessary. If you become aware of life changes (such as when an employee changes his/her health insurance coverage or the employer receives a court order to divide a retirement account as part of a divorce), contact the employee and urge them to execute all new beneficiary designation forms. The last thing an employer wants is to become involved in litigation with a deceased employee’s survivors over who is the correct beneficiary.
With regular and timely attention to beneficiary designations, the intended beneficiaries of the benefits will be the true beneficiaries.