The name on the beneficiary form of a 401(k) plan is the final determinant of who inherits the account assets… or is it?
A recent U.S. district court ruling illustrates the dangers of assuming that beneficiary forms always take precedence. Given the right set of circumstances, remarriage can thwart a plan participant’s intentions.
When a Louisiana man’s longtime wife died, he amended his 401(K) beneficiary form so that his three adult children would inherit the account assets upon his death.
Leonard Kidder remarried and then died just six weeks into his second marriage, at age 66.
Kidder’s second wife claimed she had the sole right to the assets under the terms of the plan, which specified that a deceased employee’s spouse is the automatic beneficiary unless the spouse waives that right, which she had not.
The children argued that because ERISA (Employee Retirement Income Security Act) laws do not require a living participant to seek spousal consent for non-spousal distributions until after the first year of marriage – consistent application of the law would require that a couple be married for at least a year before the participant’s death in order for the waiver requirement to take effect.
The company asked the court to rule. The judge in Cajun Industries LLC v. Robert Kidder, No. 09-267-BAJ-SCR (M.D.La.Apr.26, 2011, sided with Kidder’s widow, awarding her the entire $250,000 in the account and disinheriting the children.
The court held that Cajun’s 401(K) plan clearly stated that the employee’s spouse is the beneficiary unless he or she waives that right. ERISA laws governing 401(K) plans allow companies to specify that spousal rights take effect at any point up to a year after the marriage takes place. Because the Cajun plan did not specify that spousal rights would commence at a particular time, the spousal rights of Kidder’s widow took effect as of the day the couple married.
Further, the court noted that ERISA rules allow individual 401(K) plans to decide whether to require spousal consent when a living participant has been married less than a year. Therefore, limiting the definition of “spouse” to apply only to those who have been married for at least a year is not, as the children claimed, necessary to ensure consistency between the plan and the ERISA provisions.
This case is a real wake-up call for families, especially in light of the growing popularity of 401(K) plans and the prevalence of second marriages.
Clearly, participants should not assume that those they list as beneficiaries will inherit their plan assets under every scenario. Plan participants must understand the provisions of their plan, especially if their life situation or marital status changes.
Not all plans, for instance, specify that spousal rights take effect immediately upon marriage.
If your client has an individual retirement account, in most cases the spouse is not automati-cally specified as the beneficiary. So if Kidder had rolled his 401(K) assets into an IRA before entering the second marriage, there would have been no dispute and his children would have inherited the funds. The timing of the rollover is key.
Clients who roll over their 401(K) plan assets into an IRA after remarrying cannot avoid the spousal consent rule. That’s because distributions from 401(K)s and other ERISA plans, including direct rollovers to IRAs, require spousal consent.
The bottom line is that you need to be aware that a remarriage can drastically affect any provisions clients have made regarding the distribution of their assets. You can provide a valuable service by ensuring that both the plan participant and the new spouse understand their rights and responsibilities before the new marriage takes place.
Wade Chessman is a financial advisor in Dallas, Texas. Questions or comments? Check out his GuideVine profile to watch Wade’s videos and learn more.