A recent decision by the Seventh Circuit highlights why employers may want to consider including a provision in their 401(k) plan that revokes a beneficiary designation to an ex-spouse if the plan does not already provide for it. The Seventh Circuit recently awarded the 401(k) account of a deceased Packaging Corporation of America employee to his ex-wife after the deceased employee unsuccessfully attempted to change his 401(k) beneficiary designation following his divorce.
The deceased employee previously designated his ex-wife as beneficiary and his sisters as contingent beneficiaries of his 401(k) account. He sent a fax to the company’s benefits center shortly after his divorce was finalized requesting to remove his ex-wife from his health, dental, and vision benefits and as beneficiary for his 401(k), pension, and life insurance. The fax also requested that any necessary paperwork be faxed to him. However, the employee never completed a new beneficiary designation form for the 401(k) plan. The ex-wife was removed from the health, dental, and vision benefits, but not as beneficiary from the 401(k). The employer filed an interpleader action in response to competing claims to the 401(k) account after the employee died a few months later.
The district court awarded the 401(k) account to the contingent beneficiary’s estate based on the fax constituting substantial compliance with the terms of the plan and the beneficiary designation procedures. However, the Seventh Circuit disagreed and awarded the 401(k) account to the ex-wife.
While there is nothing an employer can do if an employee chooses not to follow the plan’s beneficiary designation procedures, this case highlights the value in reminding participants to confirm their beneficiary designations and of the procedures for changing them. This case also includes a harsh lesson on how reasonable minds can differ about whether procedures were substantially complied with. Employers should be vigilant about responding to participants who request a beneficiary change outside of the plan’s beneficiary designation procedures to minimize the chances of a beneficiary dispute. Some employers include provisions in their retirement plans automatically revoking a beneficiary designation upon divorce to avoid this type of unfortunate situation.
