Precept Employee Benefits Blog» Janelle Sotelo – Precept Employee Benefits Blog

Judicial Developments 2008/2009 – Kennedy v. Plan Administrators for Dupont Savings

Janelle Sotelo — Fri, 15 May 2009 14:48:40 +0000

Judicial Developments 2008/2009

In the final case of our judicial development 2008/2009 series, we will be focusing on the Kennedy vs. Plan Administrators for Dupont Savings & Inv. Plan.

Kennedy v. Plan Administrators for Dupont Savings

Background:

In Kennedy vs. Plan Administrators for DuPont Savings & Inv. Plan, Kari Kennedy, the daughter of William Kennedy and the executor of his estate, tried to recover approximately $400,000 that had been paid to her father’s ex-wife, Liv Kennedy. Mr. and Mrs. Kennedy divorced in 1994, and at that time Liv voluntarily waived her right to receive benefits as part of her property settlement under the Savings and Investment Plan (SIP) sponsored by DuPont. Subsequently, Mr. Kennedy never removed his ex-wife’s name from the beneficiary form on file with DuPont. Once Mr. Kennedy passed away, over seven years later, DuPont distributed his SIP benefits to his ex-wife (the named beneficiary).

In response, Mr. Kennedy’s estate sued, claiming that Liv surrendered her rights under the divorce decree. The District Court entered a summary judgment in favor of William’s estate and ordered DuPont to pay the benefits to the Estate. The case then went before the Fifth Circuit Court of Appeals where they reversed the holding, ruling that Liv’s waiver of the benefits would have amounted to an “illegal diversion of benefits to someone else, in violation of ERISA’s provision against such diversion (or “alienation”). ‘A state court divorce decree,’ the Circuit Court said, ‘is technically not the kind of paper diversion of plan assets that ERISA allows because it was not a Qualified Domestic Relations Order (QDRO), in the phrasing of ERISA.’” It is interesting to note that other Circuit Courts have ruled that a divorce decree could amount to a waiver of benefits even though it isn’t a domestic relations order specified by ERISA,.

Kari Kennedy petitioned the Supreme Court and they agreed to rule on the case.

Result:

The Supreme Court ruled against the estate. The Court first ruled that, under ERISA, a divorcing spouse could waive plan benefits through a divorce decree under state law. The Court, however, disagreed with the Fifth Circuit’s ruling and stated, “we think that the better view is that Mrs. Kennedy’s waiver” was not an alienation or assignment that was illegal under ERISA. The Court held that ERISA provide no exception to a plan administrator’s duty to act in accordance with plan documents. The plan documents allowed DuPont to pay benefits to a participant’s designated beneficiary and specified the manner in which beneficiary designations and changes were to be made. The Court concluded, “William’s designation of Liv as his beneficiary was made in the way required; Liv’s waiver was not.”

Impact:

This case stresses the importance of updated beneficiary information and what constitutes ERISA approved designation or waiver beneficiary designation campaigns to ensure initial appointment by participants and on-going updates. For plans transitioning from paper elections to on-line beneficiary designation, it may be an opportune time to emphasize the importance of this simple but critical enrollment step.

For more information, please read:

http://www.lhdl.com/news/enewsletter_article_detail.cfm?ARTICLE_ID=311 (source)

http://www.scotusblog.com/wp/?s=kennedy+dupont (source)

Judicial Developments 2008/2009 – Gertjejansen v. Kemper Ins. Co.

Janelle Sotelo — Fri, 03 Apr 2009 15:54:30 +0000

In part two of our judicial development 2008/2009 series, we will be focusing on the Gertjejansen v. Kemper Ins. Co. court case. A ruling by the 9^th U.S. Circuit Court of Appeals emphasizes the importance of complying with the U.S. Department of Labor’s regulations on delivering plan documents electronically.

Gertjejansen v. Kemper Insurance Companies, Inc.

Background:

In Gertjejansen v. Kemper Insurance Companies, Inc., Linda Gertjejansen had applied for permanent disability benefits through her health insurance plan. She was denied her benefits by Kemper Insurance because “she did not cooperate with the Plan Administrator’s request for a scheduled appointment for case management”. This requirement was stipulated in the disability plan Summary Plan Description (SPD). The employer had posted the SPD on the company’s intranet site with no follow up to verify delivery or access.

Under ERISA, plans sponsors must deliver SPDs to participants within a certain time frame. The Department of Labor (DOL) permits electronic delivery of required disclosure documents, however, it requires measures intended to ensure actual receipt. Simply posting an SPD on the company’s intranet site is adequate. For many employers, providing “hard copy” SPDs to every participant is still the standard method to ensure receipt.

Result:

The 9^th U.S. Circuit Court of Appeals determined that delivering the SPD over the intranet did not meet the DOL’s requirements for electronic delivery. For this reason, the court reviewed the denial using the de novo (evaluated whether the plan administrator correctly or incorrectly denied benefits) standard of review but ruled against Gertjejansen anyway because she failed to cooperate with the plan administrator’s request to schedule an appointment with case management.

Impact:

Plan sponsors should confirm that required documents are properly distributed and received by participants in accordance with DOL approved delivery methods.

For more information, please read: http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=19916 (source)

Judicial Updates 2008/2009 – LaRue v. DeWolff

Janelle Sotelo — Fri, 20 Mar 2009 16:30:55 +0000

In light of the recent market and economic climate, it is important that plan sponsors establish proper due diligence guidelines regarding their plan. There have been recent judicial developments that could impact the way plan sponsors not only administer their plan but also how participant information is provided. For the next three weeks, we will focus on three recent court cases: (1) LaRue v. DeWolff (2) Gertjejansen v. Kemper Ins. Co. (3) Kennedy v. Plan Administrators for Dupont Savings.

LaRue v. DeWolff

Background:

James LaRue was a participant in DeWolff, Boberg & Associates’ 401(k) plan since 1993. He alleged that his retirement account balance was short approximately $150,000 because the administrators of DeWolff failed to carry out his instructions to make certain investment changes to his account in 2001 and 2002. He sued DeWolff in 2004.

Result:

The case was filed with the 4^th U.S. Circuit Court of Appeals in Richmond, VA, who ruled in favor of DeWolff in June 2006. It maintained that participants may sue a fiduciary to make up losses due to a fiduciary breach, but only on behalf of the entire plan, not on an individual participant account. The case was than brought before the Supreme Court which back in February 2008, overturned the District Court’s previous ruling and ruled that the Employee Retirement Income Security Act (ERISA) allows an employee to sue his employer because of a fiduciary breach that resulted in individual losses to his 401(k) plan.

Update:

James LaRue voluntarily dismissed his claim when he recognized that it was too costly to proceed and his previous loss claim of $150,000 could not be substantiated.

Impact:

Participants in 401(k) plans may now sue fiduciaries on an individual basis claiming fiduciary breach. Whether or not there’s an influx of participant initiated lawsuits, based on this new ruling, sponsors should work with their providers to understand and establish proper administrative procedures.

Is an Independent Audit Necessary?

Janelle Sotelo — Thu, 19 Feb 2009 16:01:19 +0000

“As a plan sponsor, are we required to perform an independent audit on our 401(k) Plan?” This is one of the most common questions we receive from clients and potential clients. The quick answer is, plans with over 100 participants at the beginning of the plan year are subject to an audit, which must be attached to the 5500 form that is to be filed each year.

However, plan sponsors must also be aware of the “80 –120” rule, and what is the definition of a plan participant.

80-120 Rule

If the plan had between 80 and 120 participants at the beginning of the plan year, the sponsor may file the same form as filed in the previous year, thus avoiding the time and expenses involved in an audit. For example, if you had 85 participants in 2007 and filed a short form 5500, and you had 110 participants at the beginning of 2008, you would be able to file the same short 5500 and an independent audit would not be required. However, if the plan participant count exceeded 120 at the beginning of 2008, the plan is required to engage an independent audit for 2008.

Who is a Plan Participant?

Defining the plan participants is the next step in determining if an audit is necessary. Are they active participants only? Are terminated participants included? Are eligible employees included? Yes, yes, and yes! A plan participant for independent audit purposes is any eligible employees as of the prior plan year-end, any terminated participants with account balances, and any new participants eligible as of the first day of the plan year. For example, an employee who was eligible by meeting age and service requirements at the beginning of the plan year, but is not deferring into the plan is considered a participant. More importantly, all terminated employees with account balances are included as participants. These termed participants highlight the need for administering the distribution process and tracking down “lost” participants.

If you have any questions or are still uncertain if your plan requires an audit please contact Precept and we can walk through the steps to determine if your plan requires an independent audit.

Janelle Sotelo – RPS Account Manager