What you Need to Know About Revocation of Beneficiary Designations upon Divorce

Owners of retirement accounts need to be cognizant of the impact of a divorce or annulment from a spouse who is a named beneficiary. In the absence of a change of beneficiary designation removing the former spouse as a named beneficiary, depending upon the type of retirement account that is at issue, the former spouse’s beneficiary may be automatically revoked as a matter of law.

Owners of retirement accounts in a post-divorce setting should carefully reassess their intended beneficiary designations and make changes as necessary, but with no such change, their accounts may be distributed contrary to their intent, especially if the plan is subject to the Employee Retirement Income Security Act (“ERISA”)

Retirement plans are often rolled over into other plans as a result of a job change, financial planning or other reason during one’s life. In the event a plan is subject to ERISA, ERISA requires that plan administrators may disburse funds according to plan documents, unencumbered by litigation. Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141 (2001).  If the retirement plan is not subject to ERISA, such as in the case of an Individual Retirement Account, or IRA, then state statutes come into play. Most states have in their nonprobate transfer statute a provision which automatically revokes the beneficiary designation naming a former spouse upon the dissolution or annulment of the marriage. See. RSMo 461.051, Cal. Prob. Code §5600.

ERISA itself does not specifically mention whether ERISA applies to an IRA account. The administrative regulations under ERISA, however, do exclude an IRA account from the scope of ERISA, but they also create certain exceptions under which an IRA will be subject to ERISA, i.e., where contributions were made by the employer or employee association.  Does this include a rollover of an ERISA plan into an IRA?

The Ninth Circuit addressed this issue in Charles Schwab & Co., Inc. v. Debickero, 593 F.3d 916 (9^th Cir. 2010). In this decision, the Court held that rollover IRAs are not covered by ERISA, reasoning that the scope of ERISA is limited to an “employee benefit plan that is established or maintained by an employer, employee organization, or both.” Because an IRA account is “established and maintained by an individual personally and not by his employer or any employee organization, thus it falls outside the scope of ERISA.” The Court further reasoned that with respect to an IRA account, “there is no employer oversight, no ongoing employer commitment, nor any potential for employer abuse.”

It should be noted that a recent case in the Western District of Missouri concluded that an IRA rollover was an employee benefit plan and that the Missouri nonprobate transfer statute didn’t control, disregarding the Debickero decision by the Ninth Circuit. See Estate of Merritt ex rel. Merritt v. Wachter, 428 S.W.3d 738 (Mo. App. W.D. 2014). It appears, however, that the court was unaware of the Debickero decision by the Ninth Circuit and the distinction applicable to an IRA rollover account.

In conclusion, plan account owners need to carefully review their estate plan and retirement account designations, especially if those accounts are true ERISA plans.

Please contact Hood Law Group at 816-561-5000 or send us a message through the form below if you’d like to schedule an appointment.

*This post was originally published on March 18, 2015