Time to revisit the Retirement Equity Act? Married Spouse denied $2.7 million ESOP Benefit of Deceased Spouse
On April 3, 2018, The Eighth Circuit Court of Appeals affirmed a summary judgment decision against Susan Wengert who had sued the plan administrative committee of the Majors Plastics ESOP, the personal representative of the Timothy McConnell Estate and the Trustee of the Timothy McConnell Trust in federal district court for her husband’s accrued benefit under the Major Plastics ESOP.
Ms. Wengert and Mr. McConnell were in the process of divorcing (but no qualified domestic relations order for the ESOP benefit had been issued) when Mr. McConnell requested a lump sum distribution from the ESOP. The lump sum was requested on Friday, September 12, 2014, and the plan administrative committee directed a wire transfer of the $2.7 million to Mr. McConnell’s trust that same day. Mr. McConnell died on Sunday, September 14, 2014, still married to Ms. Wengert, and the funds were received by his trust on Monday September 15, 2014. .
The plan administrative committee denied her claim for his benefits on the basis that there were no benefits in his account at death. Ms. Wengert argued that since the funds had not reached the trust before her husband’s death, they were still in the plan. Under the plan document, a living spouse would be the beneficiary of a death benefit. The District Court found that once the funds were wired by the custodian, they are no longer considered part of the plan or the participant’s account.
The Retirement Equity Act (“REA”) was passed by Congress in 1984 to protect spousal benefits. Some plans require written consent of the employee’s spouse before benefits can be withdrawn in a lump sum or assigned to a beneficiary other than the spouse on death. In this case, the REA was not effective to preserve the spouse’s rights. If the divorce had proceeded, the ESOP benefit would likely have been included in the property division between the spouses. Many plans will impose a “hold” on distributions if the plan administrator is advised that a divorce proceeding has commenced. Clearly that did not happen in this case. https://www.govtrack.us/congress/bills/98/hr4280/text