ERISA and IRAs

Tuesday, April 13, 2010

9th Circuit Holds ERISA Spousal Protection Requirements Inapplicable to IRAs

According to a recent federal appeals court decision, a surviving spouse who was not named as a beneficiary of her deceased husband's IRA had no rights in or to that IRA, notwithstanding that the IRA was funded by an indirect rollover from an ERISA-qualified retirement plan providing for spousal protection, where the rollover from the qualified plan occurred prior to the spouse's marriage to decedent.  Charles Schwab & Co., Inc. v. Debickero (9th Cir. 2010), 593 F.3d 916, 2010-1 USTC ¶50,180.

Section 205 of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended by the Retirement Equity Act of 1984, provides that "in the case of a vested participant who dies before the annuity starting date and who has a surviving spouse, a qualified preretirement survivor annuity shall be provided to the surviving spouse of such participant." [29 U.S.C. §1055(a)(2)].  As applied to a 401(k) plan, this requirement generally means that the surviving spouse is entitled to the entire plan balance as a matter of right, absent the spouse's written consent to waive that right.

Wayne Wilson ("Wilson") was employed by Siemens/GTE and participated in the company's 401(k) plan, an ERISA-qualified retirement plan.  Wilson's participation in the plan terminated when he left Siemens, in 1992, to work for another company.  In 1994, Wilson elected to close his Siemens 401(k) account and take a lump sum distribution, which he rolled over to an IRA with the investment firm, Smith Barney. In 2000, Wilson married Katherine Chandler ("Chandler"), a woman with whom he had been living since 1990.  In 2002, Wilson opened another IRA, this time with Charles Schwab & Co. ("Schwab"). Wilson funded the Schwab IRA by transferring to it approximately half of the proceeds from his Smith Barney IRA. Despite his marriage to Chandler, Wilson named his four adult children from his previous marriage as primary beneficiaries of the Schwab IRA, telling Schwab personnel that he was divorced. In 2005, at the age of 65, Wilson unexpectedly died, survived by his children and Chandler. Because he died at the age of 65, Wilson had not yet reached the required beginning date for taking required minimum distributions from his IRA.

Decedent's adult children and Chandler asserted competing claims to the Schwab IRA. As a result, Schwab filed an interpleader action in federal district court naming Chandler and the children as co-defendants.  Chandler then filed a cross-claim against the children, asserting that the surviving spouse protections under ERISA continued to apply to the 401(k) benefits even after they were rolled over to the IRA, and that, therefore, she, alone, as Wilson's surviving spouse, was entitled to the Schwab IRA. On cross-motions for summary judgment the trial court ruled in favor of Wilson's children, finding it significant that Wilson and Chandler were not married until several years after Wilson ended his participation in the Siemens 401(k) plan, and rejecting Chandler's argument that the surviving spouse protections under ERISA continued to apply even after the funds were rolled over to an independently managed IRA.

The trial court's ruling was affirmed by the U.S. Court of Appeals for the Ninth Circuit, which held as follows: "Although Wilson was at one time a participant in an employee benefit plan subject to ERISA's protections and limitations, ERISA ceased to apply when, long before his marriage to Chandler, Wilson terminated his participation in the employee benefit plan and transferred the proceeds to an independent IRA." [593 F.3d at 919].  The appellate court reasoned that insofar as the Schwab IRA was established and maintained by Wilson personally, and not by his former employer or any employee organization of his former employer, the IRA fell outside the spousal protection rules of ERISA.  The court noted that IRAs are specifically excluded from ERISA's participation and vesting provisions, which include the joint and survivor annuity requirements, and concluded that "it is beside the point that the IRA proceeds originated as employee benefits within an ERISA-qualified plan." [Id.]

For additional information please contact the writer, Keith Codron, toll-free, at (800) 497-0864, or via email at keith@octrustlawyer.com. Mr. Codron welcomes your inquiries.