Understand clients’ pension plans

A ruling against the plaintiff in a recent pension benefit case highlights the need for financial advisers to understand clients’ pension plans, particularly plans’ rules around marriage.

The 6th U.S. Circuit Court of Appeals recently ruled that a pension plan administrator didn’t violate the Employee Retirement Income Security Act of 1974 by concluding that a widow didn’t qualify for benefits related to her husband’s pension because she hadn’t been married long enough. (Mary Kern v. Chrysler UAW Pension, 6th U.S. Circuit Court of Appeals, No. 12-2049, May 22)

John Kern worked for Chrysler Group LLC and participated in the Chrysler UAW pension plan.

On April 19, 2004, he married Mary Kern. Mr. Kern died Aug. 4, 2004.

Sometime afterward, Ms. Kern asked about her eligibility for widows’ pension benefits under the Chrysler UAW pension plan but was told that she wasn’t eligible.

The Chrysler plan’s terms required that the couple be married for at least a year before she could be added under the plan’s Surviving Spouse Option.

Under ERISA, one year is the maximum amount of time that a plan can exclude a new spouse from a participant’s benefits. As such, the plan denied her claim for pension benefits.

Nevertheless, Ms. Kern thought that she was entitled to benefits.

She argued that while the plan did have a one-year marriage requirement when a participant retires and had been married less than a year, it didn’t specifically exclude survivor benefits where the participant hadn’t been married for a year at the time he died. Ms. Kern thought that the plan administrator misinterpreted the plan’s language.

One-year minimum

On July 18, 2012, the U.S. District Court for the Eastern District of Michigan decided that a husband and wife do, indeed, need to be married at least a year for a surviving spouse to receive benefits under the plan.

Because the Kerns had been married for about four months before he died, Ms. Kern never became entitled to a widow’s pension benefit under the plan. The district court decision didn’t sit well with her, so she appealed but lost there, as well.

The appeals court also ruled that the plan administrator reasonably applied the plan language in denying her widow’s benefits because she was married just four months and the plan had a one-year rule.

Generally speaking, the spouse of a married ERISA plan participant is the beneficiary of his or her plan unless a spousal waiver has been obtained. However, ERISA contains an exception known as the one-year marriage rule.

Under the law, a plan is allowed to specify that spouses must be the beneficiary of plan assets only after they have been married for a year. Some plans have it, and some don’t.

The Kern case might lead one to think that the inclusion of the one-year rule is a negative feature and one that typically goes against a plan participant’s wishes. That, however, isn’t always the case.

A prime example of this, where the inclusion of such a provision could have helped carry out a deceased plan participant’s intentions can be seen in a 2011 case (Cajun Industries LLC v. Robert Kidder, et al. U.S. District Court for the Middle District of Louisiana, No. 09-267-BAJ-SCR, April 26, 2011).

In that case, the court found that despite having previously named his three children as beneficiaries of his 401(k), a deceased plan participant’s 401(k) balance would pass to his wife of six weeks. The Cajun Industries plan hadn’t adopted the one-year rule, and so the court found that a spouse’s right to plan assets was immediately vested upon marriage.

No spousal waiver had been obtained between the time the decedent was married and the time he died weeks later, which left the default beneficiary, per ERISA, as the participant’s spouse, even though she was never named as a beneficiary on the beneficiary form. As a result, the new spouse got the entire 401(k) after only six weeks of marriage, and the children, who were named on the plan beneficiary form, were completely disinherited from the plan assets.

Unlike the Kern case, in terms of fulfilling the participant’s wishes, the inclusion of the one-year rule by the Cajun plan would have produced a favorable result. Had the plan included the rule, the participant’s wife of six weeks would have been ignored, a spousal waiver wouldn’t have been necessary and the participant’s three children would have inherited the plan assets, as he had intended.

Ed Slott (irahelp.com), a certified public accountant, created The IRA Leadership program and Ed Slott’s Elite IRA Adviser Group.