Can a marital agreement (like a pre- or postnup) override a spouse’s right to be a retirement plan beneficiary? The U.S. Court of Appeals for the Eighth Circuit recently said no – in one specific case, at least. The ruling illustrates that overriding spousal rights to a client’s retirement plan may be more difficult than expected.
For financial advisers, this is a key point to discuss with married plan participants who wish to leave their employer-sponsored retirement account to a non-spouse. Such clients should proceed carefully, making sure they comply with the plan’s procedure for a proper spousal waiver.
In this case, Michael Cox was employed at MidAmerican Energy Corp., where he participated in its 401(k) plan. He married Kathy twice; both marriages ended in divorce. With their third marriage, in 2010, they signed a postnuptial agreement, 20 days after the ceremony. Among the provisions of this agreement, one said that each party “irrevocably consents” to the change in beneficiary of the other’s retirement plan. Michael had named his parents as beneficiaries.
In a move that we assume came as a shock to no one, Michael filed for divorce just 14 months after marriage number three began.
Before the divorce was finalized, Michael died. Although his parents were designated beneficiaries, Kathy refused to relinquish her spousal rights and the matter wound up in a district court, which granted summary judgment on Kathy’s behalf.
The decision came down to federal law (ERISA) regarding qualified retirement plans. A spouse is entitled to be the beneficiary, unless he or she elects to waive that right. Such an election has several requirements, including that “the spouse’s consent (to waive) acknowledges the effect of such election and is witnessed by a plan representative or a notary public.” The district court held that Kathy’s consent in the marital agreement did not satisfy this acknowledgement requirement, and the appeals court recently agreed. (MidAmerican Pension and Employee Benefits Plans Administrative Committee, No. 12-3563, Filed 7/12/13)
According to the decision, Kathy agreed in the marital agreement she signed to execute a waiver of her spousal rights, but she never did. Moreover, the agreement failed to inform Kathy that she had a spousal right to Michael’s 401(k), and that she was waiving that right. As the appeals court noted, ERISA has “strict compliance requirements” for waiving spousal rights, and this agreement didn’t measure up.
Donald Jay Korn writes for Financial Planning, a SourceMedia publication.
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