Supreme Court Rules that ERISA Pre-empts State Beneficiary Designation Statute

October 1, 2001 Advisory

In the recent case, Egelhoff v. Egelhoff, the U.S. Supreme Court held that a Washington state statute which automatically revoked the designation of a spouse as a beneficiary under an employee benefit plan upon a divorce was preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"). This decision is good news for plan administrators.
David Egelhoff and his second wife, Donna, were divorced in April of 1994. Two months later, David died intestate following a traffic accident. At the time of his death, Donna Egelhoff was still designated as the beneficiary under David's life insurance policy and pension plan with his employer. David's children from his first marriage sued Donna claiming they were entitled to the life insurance and pension plan benefits because a Washington state statute automatically revoked her beneficiary designation upon the divorce, leaving David's children as the statutory heirs. Ms. Egelhoff countered that the state statute was preempted by ERISA. ERISA preempts any state law that "relates to" an employee benefit plan.
The U.S. Supreme Court agreed with Donna Egelhoff that ERISA did indeed preempt the Washington statute. The Court found that the statute has an "impermissible connection" with an ERISA plan because it attempted to dictate who should receive the benefits under an ERISA plan. Under ERISA, the plan itself, not a state law, must "specify the basis on which payments are made to and from the plan." Furthermore, ERISA requires that the plan be administered according to the "documents and instruments governing the plan." The state law, by voiding the beneficiary designation, in effect required a plan administrator to ignore the plan documents.
The Court further explained that the statute interfered with nationally uniform plan administration by requiring plan administrators to familiarize themselves with the state laws and thus undermining ERISA's objective of minimizing administrative burdens. The problems caused by application of state law are further compounded where more than one state is involved, e.g., the participant lives in one state, the beneficiary lives in another state, and the employer is located in a third state.
The decision by the Supreme Court should allow plan administrators to rely on beneficiary designations on record, without having to resort to state family or probate laws to make this determination. It is unfortunate in this case that the issue of the pension and life insurance proceeds was not addressed in the divorce proceedings. For example, pension benefits are often divided as part of the settlement via a qualified domestic relations order ("QDRO"). A QDRO may also designate whether or not the former spouse will be treated as the surviving spouse under a pension plan.