Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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cause the property to pass to the contingent beneficiary, and a disclaimer by all named beneficiaries will cause the benefits to pass to the default beneficiary under the plan document. Sometimes the beneficiary designation form specifies one contingent beneficiary in case of the primary beneficiary’s disclaimer, and a different contingent beneficiary if the primary beneficiary actually predeceases the participant. See ¶ 4.4.13 (C).

Disclaimers, ERISA, and the plan administrator

One concern is whether a plan administrator of a qualified retirement plan (QRP) might cite ERISA requirements in refusing to recognize a disclaimer. A plan administrator might take the position that the plan requires the benefits to be paid to the beneficiary named by the participant, and the plan has no authority to pay the benefits to someone else if the named beneficiary is in fact living; that ERISA requires the plan to be administered in accordance with its terms; and that ERISA preempts state laws including disclaimer statutes. “ERISA,” which stands for the Employee Retirement Income Security Act of 1974, refers to the constellation of requirements that apply under the United States Code to “employee pension benefit plans” (usually called “retirement plans”) as defined in 29 U.S.C. § 1002 (§ 3(2)(A) of ERISA). There are two concerns regarding enforceability of a disclaimer with respect to a qualified retirement plan: Does a disclaimer violate ERISA’s “anti-alienation” requirement? See “A.” And, does the disclaimer contravene the terms of the plan document? See “B.” These issues are of no concern to IRA administrators, since IRAs are not subject to ERISA and its preemption rule. A. Disclaimers and ERISA’s anti-alienation rule. One of the requirements a retirement plan must meet in order to be “qualified” under § 401(a) is that the plan document must provide that benefits under the plan “may not be assigned or alienated,” except through the medium of a “qualified domestic relations order” (QDRO; § 414(p) ), which is a court-ordered transfer of benefits between spouses in connection with a divorce. § 401(a)(13) . This “anti- alienation rule” is also a requirement applicable to retirement plans under ERISA. 29 U.S.C. § 1056(d)(1). In GCM 39858 ( ¶ 4.4.03 ), the IRS stated that disclaimers do not violate ERISA, and that a disclaimer is not an “assignment or alienation” of plan benefits of the type forbidden by § 401(a)(13) . The IRS has blessed disclaimers of QRP benefits in several letter rulings; see PLRs 9016026, 9247026, and 2001-05058. In Kennedy, Executrix, v. Plan Administrator for DuPont Savings and Investment Plan et al., 129 S.Ct. 865 (2009), the Supreme Court (confirming GCM 39858) held that a beneficiary’s giving up the right to an inherited benefit under a QRP does not constitute an assignment or alienation, provided the beneficiary does not attempt to direct where the inherited benefit will go. Although Kennedy dealt with a divorcing spouse’s waiver of her rights to benefits under her ex- husband’s plan, the same principle would apply to a disclaimer which, under federal tax law, must not involve any direction by the disclaimant regarding who shall inherit the asset as a result of the disclaimer. ¶ 4.4.08 (B). In fact the Court compared the spousal waiver to a disclaimer, pointing out that the law of trusts serves as a backdrop to ERISA, and “the general principle that a designated spendthrift beneficiary can disclaim his trust interest magnifies the improbability that a statute written with an eye on the old law would effectively force a beneficiary to take an interest