United States: ERISA Newsletter - Second Quarter 2018

EDITOR'S OVERVIEW

As we head into the thick of summer, all eyes are on President Trump's nomination to the U.S. Supreme Court to replace retiring Justice Anthony Kennedy and the impact the new Justice will have on shaping the law for generations to come. We think it's a good bet that not everyone is as focused on a recent benefits decision from Seventh Circuit involving slayers, pension benefits, beneficiaries, and the ultimate question of who gets the money! Nevertheless, for ERISA practitioners and plan administrators, the Seventh Circuit's decision is interesting and should be taken note of. It is a good reminder that, while clear plan language and properly executed beneficiary designations can help minimize the risk of litigation involving competing beneficiaries, it is not foolproof because there are some public policy concerns that may override even the best-written plan terms. In Laborers' Pension Fund v. Miscevic, 880 F.3d 927 (7th Cir. 2018), a federal Court of Appeals for the first time considered whether an individual who was the designated beneficiary of a plan participant she killed was precluded from receiving the decedent's pension benefit. As the article below discusses, the Court concluded that ERISA does not preempt a state slayer statute that prohibits killers from benefitting from their crimes.

The balance of our Newsletter reviews a number of developments over the second quarter, including updates on the DOL fiduciary rule, Mental Health Parity Act, IRS announcements, defined contribution plan investment litigation, pharmacy benefit managers, delinquent contributions, and a variety of fiduciary breach issues.

CLEAR ERISA PLAN BENEFICIARY DESIGNATIONS GO A LONG WAY, BUT THEY DON'T PROTECT SLAYERS

By Russell L. Hirschhorn and Paul M. Hamburger

Plan administrators are often called upon to identify the proper beneficiary of a deceased participant's ERISA plan benefits. Clear plan language and properly executed beneficiary designations can help minimize the risk of litigation by competing beneficiaries or the need for the plan administrator to file an interpleader action to avoid the risk of having to pay the benefits twice. There are nonetheless occasions where clear plan terms may not alone resolve the question of who the proper beneficiary is. One such occasion, which occurs more frequently than one may think (but thankfully not too frequently), is when the beneficiary under the terms of the plan is responsible for the participant's death.

Most, if not all, states have so-called "slayer statutes"—statutes that prohibit killers from being beneficiaries of their victims' pension benefits, by providing that the killer is deemed to have predeceased the victim. The existence of these statutes can pose a dilemma for plan administrators, who must determine whether to follow a properly executed beneficiary designation, which would require payment to the beneficiary-killer, or the state slayer statute, in which case a contingent beneficiary must be identified.

But which law applies: ERISA or the state slayer statute? The U.S. Court of Appeals for the Seventh Circuit recently became the first circuit court to decide the issue. Relying on dicta from a nearly two-decade old Supreme Court decision, the Seventh Circuit held that that ERISA does not preempt the Illinois slayer statute and that the statute precluded the killer from being the beneficiary of the decedent's ERISA pension benefits. Below, we briefly review ERISA preemption principles, review the Seventh Circuit's decision in Laborers' Pension Fund v. Miscevic, 880 F.3d 927 (7th Cir. 2018), and then conclude with implications of the Court's decision for plan administrators and offer some considerations to think about concerning beneficiary designations.

ERISA Preemption Principles

A state slayer statute, like any state law affecting the payment of pension benefits, can be enforced only if it is not found to be preempted by ERISA. The principle of ERISA preemption—the reservation to federal authority of the sole power to regulate the field of employee benefits—has been called ERISA's "crowning achievement." Congress enacted ERISA preemption to simplify the regulatory environment by ensuring that there be a uniform system of benefit plan regulation on a nationwide basis. This, in turn, eliminates the possibility of plans having to reconcile inconsistent state and local regulation. The only exception is that traditional police powers of the States are not preempted absent express congressional intent to the contrary.

A determination that ERISA preempts state law or does not preempt state law, as the case may be, could have significant implications. For instance, if ERISA preemption applies, the claim is more likely than not going to be litigated in federal, not state, court. That is because the federal courts have exclusive jurisdiction over fiduciary breach claims; and benefit claims, even if commenced in state court, can be removed by the defendant to federal court. A determination that ERISA preempts also limits a plaintiff to remedies enumerated under ERISA's civil enforcement scheme rather than potentially more expansive state or common law remedies.

ERISA preemption is codified in Section 514(a) of ERISA, which provides that ERISA preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" covered by ERISA. A law "relates to" an employee benefit plan if it has "a connection with or reference to such a plan." Shaw v. Delta Air Lines Inc., 463 U.S. 85 (1983). (ERISA provides for certain exceptions pertaining to the regulation of insurance, banking and securities, and exceptions to that exception, see ERISA §§ 514(b)-(d), but those are beyond the scope of this article.)

Over the past several decades, the Supreme Court has issued many decisions on ERISA preemption and, in particular, opined on the breadth of what it means to "relate to" an employee benefit plan for purposes of ERISA preemption. Several relevant principles have emerged from those cases. To begin with, ERISA's preemption provision is "clearly expansive." N.Y. St. Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995). At the same time, "[s]ome state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan." Shaw, 463 U.S. at 100 n.21. In addition, where the state law is a "traditional area of state regulation," a party seeking a determination that a claim in preempted must overcome "the starting presumption that Congress does not intend to supplant state law." Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141 (2001).

Seventh Circuit Concludes ERISA Does Not Preempt Illinois Slayer Statute

The ruling in Laborers' Pension Fund v. Miscevic provides a good illustration of the application of ERISA preemption principles, albeit in unique circumstances. The underlying facts are relatively straightforward: Anka Miscevic killed her husband Zeljiko Miscevic and was found by the state court to have intended to kill him without legal justification. However, Anka was determined not guilty by reason of insanity. The question presented, therefore, was whether under these circumstances Anka was entitled to be a beneficiary of her husband's pension benefits.

Following the state criminal proceedings, the Laborers' Pension Fund initiated an interpleader action in federal court to determine the proper beneficiary of Zeljiko's pension benefits. Not surprisingly, the Fund's documents did not address directly whether a claimant who killed a Fund participant can receive a benefit from the Fund as a participant's beneficiary, but there was no question that Anka would otherwise be the proper beneficiary under the terms of the plan. The child of Anka and Zeljiko argued that Anka was barred from receiving the benefits pursuant to the Illinois slayer statute, which provides that a "person who intentionally and unjustifiably causes the death of another shall not receive any property, benefit or other interest by reason of death." The child argued that application of the slayer statute required that the benefits pass as if the person causing the death died before the decedent. Anka claimed she was entitled to the benefits because she was the participant's surviving spouse and that ERISA's spousal beneficiary protections preempt the Illinois slayer statute. Alternatively, Anka argued that the slayer statute should not apply because she was found not guilty by reason of insanity.

The Seventh Circuit reviewed the ERISA preemption principles discussed above and concluded that ERISA does not preempt the Illinois slayer statute. In so ruling, the Court was guided by the Supreme Court's decision in Egelhoff. There, the Supreme Court held that ERISA preempted a Washington state statute that provided that a dissolved or invalidated marriage would revoke an earlier beneficiary designation to the former spouse. The Court reached that conclusion upon finding that the state statute "directly conflict[ed] with ERISA's requirements that plans be administered, and benefits be paid, in accordance with plan documents" and also "interfere[d] with nationally uniform plan administration." Egelhoff, 532 U.S. at 148-150. Importantly, the Court rejected an argument that if ERISA preemption applied in that case then it also must preempt state slayer statutes. Although slayer statutes were not at issue in Egelhoff, the Court commented that the statutes have a long historical pedigree predating ERISA, they have been adopted by nearly every state, and, because the statutes are more or less uniform nationwide, "their interference with the aims of ERISA is at least debatable."

The Seventh Circuit observed that a handful of courts—before and after Egelhoff—have expressly held that ERISA does not preempt the slayer statute at issue. For instance, in Hartford Life & Accident Ins. Co. v. Rogers, No. 3:13–cv–101, 2014 WL 5847548 (D.N.D. Nov. 12, 2014), the district court ruled that given the well-established principle against permitting slayers to benefit financially from the intentional or felonious killing of another, "it would contradict federal common law and the congressional intent for ERISA to allow" a murderer to recover ERISA benefits. See also Union Sec. Life Ins. Co. of N.Y. v. JJG-1994, No. 1:10–CV–00369, 2011 WL 3737277, at *2 (N.D.N.Y. Aug. 24, 2011) (citing Mendez-Bellido v. Bd. of Trs. Of Div. 1181, A.T.U. N.Y. Emps. Pension Fund & Plan, 709 F. Supp. 329 (E.D.N.Y. 1989)); New Orleans Elec. Pension Fund v. Newman, 784 F. Supp. 1233 (E.D. La. 1992).

Agreeing with those courts, the Seventh Circuit held that ERISA does not preempt the Illinois slayer statute. The Court determined that slayer statutes are an aspect of family law, which is a traditional area of state regulation, and that Anka could not meet the "considerable burden" of overcoming the starting presumption that Congress did not intend to supplant this traditional area of state regulation. The Seventh Circuit then determined that the Illinois slayer statute applies even where the plan participant was killed by an individual found not guilty by reason of insanity. The Court explained that an individual may not appreciate that her conduct amounted to a crime, but she still may have intentionally or unjustifiably caused a death.

Proskauer's Perspective

The ruling in the Laborers' Pension Fund came about because the plan administrator was uncertain who the proper beneficiary was and—to remove the risk of paying the wrong beneficiary and possibly having to pay twice—elected to engage in the time consuming and expensive process of initiating an interpleader action. If a consensus develops and the circuits agree that ERISA does not preempt state slayer statutes, plans may more confidently determine not to pay benefits to slayers without resorting to filing an interpleader action. But until then they should proceed with caution.

More broadly, plan administrators should take note that although in this instance, the state statute trumped plan provisions that might otherwise have been properly construed to require payment to the slayer, this represents the exception and not the rule and thus should not deter plan sponsors from carefully delineating plan beneficiary rules and thereby avoiding any ambiguity. Indeed, the Supreme Court has made quite clear that the plan documents rule when it comes to processing claims and disbursing benefits. Kennedy v. Plan Adm'r for DuPont Savings & Inv. Plan, 555 U.S. 285 (2009).

Giving advance thought to these issues and proactively addressing areas where there may be ambiguity ought to help minimize the risk of litigation to identify the proper beneficiary of a decedent's benefits. Some questions for plan administrators to consider include the following:

  • Is the plan language on beneficiary designations clear and complete?
  • Are beneficiary designation forms (written or electronic) clear as to how to designate multiple beneficiaries and/or contingent beneficiaries?
  • Are there procedures in place to identify deficiencies/inconsistencies in beneficiary designations so they can be corrected before they are accepted by the plan administrator?
  • Does the plan provide periodic (perhaps annual) reminders to participants to review and update beneficiary designations?
  • For pension and 401(k) plans, are the spousal protection provisions clear and up-to-date? Do the plan terms address what happens to beneficiary designations when a participant is married or when a married participant is divorced (or the spouse dies)?
  • Are existing beneficiary designation records reasonably accessible, either in hard copy or electronically?
  • If there was a plan merger, are records of the transferor plan's beneficiary designations maintained in good order?
  • Are there clear default beneficiary designations in case a purported designation is invalid, inaccurate, or incomplete?

To read this Newsletter in full, please click here.

ERISA Newsletter - Second Quarter 2018

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