By: Andrew L. Rochester, Esquire

In a very unusual case, the United States Court of Appeals for the Third Circuit (a Court just below the Supreme Court) took the unusual step of wading into divorce law. This case can have major ramifications for every person who gets a divorce who has a retirement plan.

Many Americans have retirement accounts like 401K’s and IRA’s. They usually set up their accounts, through their plan administrator, so that if they die the funds go to their surviving spouse, if they are married. In a divorce, these accounts are usually divided in some way or the parties can waive their interests in the other’s accounts. After they are divided each party can change the designation of who gets the account upon death. In the case of Estate of William E. Kensinger, Jr., v. URL Pharma, Inc. and Adele Kensinger, the United States Court of Appeals addressed what happens when a former spouse forgets to change the beneficiary designation of his 401K.

In the Kensinger case, the parties agreed to waive their interest in the other’s retirement accounts. Mr. Kensinger did not then go to his plan administrator and change his beneficiary designation from his ex-wife. He then died a short time later. The question became who gets the money in his 401K. His ex-wife argued that because he did not change his beneficiary designation that she should get the money. The Estate argued that he made that beneficiary designation long before he got divorced and never intended for his ex-wife to get the money after the divorce. He pointed to the provision in their divorce settlement agreement which stated that his wife would waive her interest in his account.

As pensions are governed by Federal law, the Employee Retirement Income Security Act (ERISA), the case was adjudicated in Federal court.

The Court of Appeals addressed this issue in two steps. The first step was under Federal pension law. The United States Supreme Court had previously ruled that pension plans must follow the documents. If the beneficiary designation form had the name of the ex-wife, the pension plan had to follow that document. At first blush, it sounds like the former spouse won.

However, the Court of Appeals then addressed the issue of New Jersey state law. If under New Jersey contract law the ex-wife did not have the right to keep the money because their Property Settlement Agreement (a contact) waived her right to the money, then the husband’s estate can sue the ex-wife in state court to then get the money back. Under state law, the ex-wife did not have a right to keep the money because the contract indicated that she was forfeiting her rights to the money.

In the end, the ex-wife will have to give the money to the Estate after the unusual process of the retirement plan paying her as required by Federal law and then her having to surrender the money to the Estate under state contract law.

What this case demonstrates is how the competing goals and purposes of Federal law and state law sometimes interact in unusual ways. The lesson of this case is that immediately after your accounts are divided you should go to your plan administrator and change your beneficiary designations unless your Martial Settlement Agreement prohibits you from doing so.