By Todd B. Castleton

Beneficiary designations, and disputes over them, can be a disproportionate drain of time and other resources spent by administrators of tax-qualified retirement plans. The Employee Retirement Income Security Act of 1974 (ERISA) does not prescribe a particular manner by which participants in ERISA-covered plans must designate their beneficiaries.

In recognition of this, plans generally will specify the manner in which beneficiaries are to be designated, and who the designated beneficiaries will be in the absence of an affirmative beneficiary designation.

Even if a plan specifies a procedure, circumstances and the nuances of language can put a plan in the center of a feud between people claiming to be the rightful beneficiaries of retirement benefits of deceased participants. Resolving these disputes, or extricating the plan from the middle of them, can require a significant commitment of time, energy, and legal budgets.

But federal court decisions should boost plan sponsors’ and administrators’ confidence that they can insist on compliance with the beneficiary designation procedures they specify—and reject designations that do not comply.

The Force of Kennedy

The U.S. Supreme Court has held that a waiver of beneficiary rights in a divorce decree was insufficient to override a beneficiary designation made in accordance with the provisions of an ERISA-covered retirement plan (Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009)).

In reaching its conclusion, the High Court focused on the plan administrators’ obligation to act in accordance with the documents and instruments governing the plan; ERISA provides no exemption from this duty when it comes time to pay benefits.

The court favored “a straightforward rule of hewing to the directives of the plan documents that lets employers “establish a uniform administrative scheme, with a set of standard procedures to guide processing of claims and disbursement of benefits. . . .[B]y giving a plan participant a clear set of instructions for making his own instructions clear, ERISA forecloses any justification for enquiries into nice expressions of intent, in favor of the virtues of adhering to an uncomplicated rule: simple administration, avoiding double liability, and ensuring that beneficiaries get what’s coming quickly, without the folderol essential under less-certain rules.” (internal alterations, quotations, and citations omitted).

In the wake of the Kennedy decision, some would-be beneficiaries have continued to assert a claim based on the judicial doctrine of “substantial compliance,” arguing that if they substantially comply with the beneficiary designation procedures, this should be good enough.

The problem with the doctrine of substantial compliance is that it undermines the preference for straightforward administrative rules favored by the Supreme Court in cases like Kennedy because it leaves the lower court to decide issues such as what level of compliance is “good enough” to express the plan participant’s intent to change a beneficiary.

Rejection of Doctrine

One recent case rejecting the substantial compliance doctrine is Ruiz v. Publix Super Markets Inc., 2017 U.S. Dist. LEXIS 67769 (M.D. Fla. May 3, 2017). The participant in this case was a deferred vested participant in two ERISA-covered pension plans sponsored by her former employer.

The participant had properly designated her beneficiaries under the plan to be her two nieces and a nephew. Shortly before her death from cancer, the participant had attempted to change her designated beneficiary to Arlene Ruiz, who was in a long-term, committed relationship with the participant before her death.

The summary plan descriptions for the plans directed that participants wishing to change their beneficiary designation to “obtain a Beneficiary Designation Card from your work location’s Publix Communication Center and complete, sign, and submit it to the” employer’s Retirement Department. The plans also provided very detailed provisions concerning how Beneficiary Designation Cards should be completed:

Remember that a Beneficiary Designation Card is a legal document. It should not contain mark outs, erasures or correction fluid. It should be typed or printed in ink, and you must sign and date the card. Your beneficiary designation is not valid under the Plan until the Retirement Department receives and processes the properly completed Beneficiary Designation Card.

According to the claims of Ruiz—whose claims the court accepted as true for purposes of deciding the parties’ cross-motions for summary judgment—she and the participant called the former employer to find out how to change her beneficiary. Ruiz claimed that the representative told them that they should send in a letter with the pertinent beneficiary designation details and Beneficiary Designation Cards, if they could obtain them.

The representative also said it was important that the participant sign and date the letter. The participant dictated a letter to Ruiz, which the participant read, signed, and dated, and directed Ruiz to put her name and Social Security number on two Beneficiary Designation Cards they had obtained. The participant then gave an envelope to Ruiz to mail, which Ruiz assumed to be the letter and Beneficiary Designation Cards. The participant died the next day.

When the plans received the participant’s letter and Beneficiary Designation Cards, the cards had been filled out, but on the signature and date lines—instead of the participant’s signature and a date—appeared the handwritten notation “as stated in letter.” The letter enclosing the cards was signed and dated. The plans determined that the Beneficiary Designation Cards were not properly completed, and consequently did not change the participant’s beneficiary designation.

Instead, the plans returned the cards to the participant with a letter explaining why they were being returned. When Ruiz made a claim for benefits under the plans, the claims were denied because she was not the properly designated beneficiary under the plans.

Ruiz then filed an ERISA claim for benefits against the plans in federal court, and the plan sought declaratory relief by adding the participant’s nieces and nephew named in her prior beneficiary designation, some of whom had already received a portion of the participant’s benefit.

The court found, taking the claims as true, that the participant clearly had intended to change the beneficiary to Ruiz and had attempted to do so, but she did not strictly comply with the plans’ summary plan description provisions describing how to properly change a beneficiary designation.

Ruiz stated that under the federal common law equitable doctrine of substantial compliance developed in the absence of specific ERISA statutory provisions on beneficiaries, a beneficiary designation should be honored if there is evidence that a participant intended to make a change and the participant takes action similar to the action required by the plan.

The Death of Substantial Compliance?

The court found that in the wake of the Supreme Court’s rationale in Kennedy, the doctrine of substantial compliance is dead, at least to the extent it applies to beneficiary designations, because “ERISA forecloses any justification for inquiries into expressions of intent that do not comply with the plan documents.”

The court also found, although this was not expressly raised by Ruiz, that a claim of equitable estoppel based on the employer representative’s instructions to provide a signed letter was not viable. Significantly, the court found that there was no ambiguity in the plan document’s instructions to file a Beneficiary Designation Card sufficient that the participant or Ruiz’s reliance on the representative’s instructions would be reasonable. Because there was no ambiguity, the court found the doctrine of equitable estoppel did not apply.

Since the participant did not properly designate Ruiz to be her beneficiary, the prior beneficiary designation remained in force, and the court authorized the plan to pay the benefit to the two nieces and nephew.

The lesson plan sponsors and administrators can take from the Ruiz case is that by developing, communicating, and enforcing standards for beneficiary designations in plan documents, courts are likely to support the plan administrator’s right to insist on compliance with those standards before honoring beneficiary designations and changes to those designations.

Beneficiary designation requirements that are clear and unambiguous are likely to be enforced by courts, without plan administrators conducting inquiries into participant intent, examining all of the actions the participant took to comply that were similar to the plan’s rules, and then making a judgment whether all of this was close enough. Such judgments could fuel further disputes among competing would-be beneficiaries, and be subject to challenge in federal court.