How a Prenup Can Trigger a Brawl Over Retirement Benefits
For many individuals, one of the most significant assets that gets transferred when they die is their benefits under an employer-sponsored retirement plan. A case recently decided by the Alabama Supreme Court, Moore v. Estate of Moore, is a reminder of the complex interaction between prenuptial agreements and the spousal rights provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Under ERISA, a married person’s benefits under an employer’s retirement plan, including a 401(k) plan, must be paid to the person’s surviving spouse, unless the person obtains a waiver from their spouse, agreeing to a different beneficiary.
Although prenuptial agreements are often thought of as a contract that specifies how the assets of a married couple will be divided in the event of their divorce, they also typically include limitations on the rights of a spouse to inherit assets upon the death of the other spouse.
Spousal Waivers Under ERISA
ERISA sets forth explicit instructions as to what steps must be followed by a married participant to be able to name someone other than their spouse as the beneficiary of their benefits under their employer’s retirement plan:
(i) the spouse of the participant consents in writing to such election
(ii) such election designates a beneficiary (or a form of benefits) which may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the participant without any requirement of further consent by the spouse)
(iii) the spouse’s consent acknowledges the effect of such election and is witnessed by a plan representative or a notary public (29 U.S.C. §1055(c)(2)A)).
These requirements, also found in the Internal Revenue Code (26 U.S.C. §417(a)(2)(A)), are mandated by the IRS to be spelled out in the retirement plan document. A retirement plan fiduciary that authorizes payment to a non-spousal beneficiary in the absence of a married participant having obtained a consent from his/her spouse risks liability under ERISA for not following the terms of the plan document, as well as potentially causing the plan to lose its tax qualification.
The Facts of the Moore Case
The facts in Moore are relatively straightforward. Jimmy Lee Moore named his brother as the beneficiary of his benefits under his employer’s 401(k) plan and pension plan. In August 2016, Moore married; shortly before doing so, he and his bride-to-be entered into a prenuptial agreement.
The prenuptial agreement stated that both parties renounced any right to the retirement benefits of the other, and each party agreed to execute any necessary “spousal consents or waivers.”
Moore died soon after getting married. At the time of his death, his brother was still his named beneficiary under the 401(k) plan and the pension plan. His spouse never executed a waiver or consent in favor of his brother, as beneficiary.
Relying upon the principle that ERISA obligates a retirement plan, in the absence of a qualifying waiver and consent, to pay the plan benefits of a married plan participant upon the death of the participant to the participant’s surviving spouse, the plans paid Moore’s wife benefits “totaling over $500,000” from the 401(k) plan and the pension plan.
The brother filed a lawsuit against Moore’s spouse arguing that her receipt of the retirement plan benefits constituted a breach of the prenuptial agreement.
The Alabama Supreme Court’s Analysis
In its opinion, the Alabama Supreme Court discussed an Eighth Circuit Court of Appeals decision, MidAmerican Pension & Emp. Benefits Plan Admin. Comm. V. Cox (720 F. 3d 715 (8th Cir. 2013), which held that a promise in a prenuptial agreement to execute a waiver of spousal rights to receive a retirement plan death benefit does not satisfy the statutory requirements of ERISA and, therefore, is not binding upon the plan in determining who is the beneficiary.
The spouse sought to use this reasoning to bootstrap her right to retain the distributions she received by arguing that, because she did not sign a consent and waiver that complied with ERISA, the prenuptial agreement did not result in her renouncing the benefits.
The Alabama Supreme Court rejected this contention, observing that her position “assumes that the waiver requirements under ERISA trump the contractual obligations to the prenuptial agreement.”
The court concluded that the lack of a valid ERISA waiver only impacts to whom a retirement plan must pay benefits. It does not preclude a breach of contract action against a spouse who receives the benefits where the spouse agreed to take actions that would have permitted the payment of the benefits to someone else.
Some Thoughts Regarding the Moore Decision
Thankfully, from the point of view of the retirement plans in which Moore participated, his brother did not bring a claim against the plans, presumably recognizing that the reasoning of the MidAmerican Pension & Emp. Benefits Plan Admin. Comm. opinion (and other, similar decisions) made it unlikely that he would have prevailed.
Had Moore’s brother sought distributions from the retirement plans, the plans would have been faced with a competing claim from the widow. In that event, the plans would have had indifferent stakeholders and their recourse would have been to file an interpleader action under Fed. R. Civ. P. 22, which provides: “Persons with claims that may expose a plaintiff to double or multiple liability may be joined as defendants and required to interplead.”
In Moore, the resolution of who was entitled to the retirement benefits was resolved by a breach of contract lawsuit, which was successful. That said, the lesson to be learned from Moore, of course, is that, although there may be a right of recourse against a spouse who does not follow through on a commitment in a prenuptial agreement to execute a valid ERISA waiver, it would be far better (and easier on all those involved) to execute the waiver at the time the prenuptial agreement is entered into.
“How a Prenup Can Trigger a Brawl Over Retirement Benefits,” by Daniel L. Morgan was published in Bloomberg Law on December 20, 2019. Reproduced with permission from ©2019 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.
This article was reprinted in the Society of Financial Service Professionals' Employee Benefits Newsletter (February 2020).