ERISA Preempts State Laws That Automatically Revoke Ex-Spouse Beneficiary Designations

The Supreme Court has ruled that ERISA preempts state laws that automatically revoke spousal beneficiary designations after a divorce. The ruling applies to all ERISA-covered plans, such as life insurance, retirement and most types of executive deferred compensation plans.

Marriage, Divorce, Life Insurance and a 401(k) Plan

The facts of the case: During their marriage, David Egelhoff designated his second wife as his beneficiary under an employer-sponsored life insurance plan and a 401(k) plan. When the couple later divorced, their divorce decree granted Egelhoff 100 percent of his Boeing 401(k) account, but made no mention of his life insurance policy. Eight months later he died, leaving his children from his first marriage as his statutory heirs. His second wife remained the designated beneficiary under the life insurance policy and his 401(k) plan. Egelhoff's children sued their father's ex-spouse, claiming that Washington state law had revoked her designation as beneficiary after the divorce. The highest court of the state upheld the state law, meaning that the children were entitled to the life insurance proceeds and the 401(k) plan.

However, the Supreme Court reversed the state court, ruling that ERISA preempts state laws that purport to revoke spousal beneficiary designations upon divorce. In a brief filed with the Supreme Court, the Department of Labor had argued in favor of preemption.

The Court reasoned that if ERISA did not preempt such state laws, plan administrators would have to look beyond the terms of their plans to the laws of the 50 states to determine beneficiary status. Thus, these state laws would interfere with ERISA's goal of nationally uniform plan administration. The case is a victory for employers, who are spared the time and expense of having to look to state law in order to determine the proper beneficiary for payment of a death benefit.

The Lesson

Egelhoff should serve to increase awareness of the need to review death benefit beneficiary designations after a divorce. Such designations should be modified, if necessary, to reflect a participant's current intentions, as well as the provisions of any property settlement agreements executed in connection with the divorce.