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Friday, February 22, 2013

One of the sadder tasks encountered by a plan administrator is sorting out who is the appropriate recipient of benefits when a participant has been murdered by the intended beneficiary of such benefits.  Over time, we have advised many plan administrators in handling situations like this one dealing with their pension, 401(k), life insurance and accidental death plans and, in doing so, have developed a variety of alternatives each with varying levels of cost and risk.   These alternatives, each of which is summarized in more detail below, include: (1) commencing an interpleader action, (2) securing a receipt, release, and refunding agreement, and (3) obtaining an affidavit of status (e.g., heirship).

In arriving at these alternatives, we have considered applicable law, including state statutes and ERISA preemption.  Most individual states have enacted so-called “slayer” statutes, which generally provide that an individual who kills the decedent cannot benefit from his or her crime and, therefore, forfeits all benefit rights he or she possessed as the primary beneficiary.  While some courts have held that these state slayer laws may be preempted under ERISA’s broad preemption doctrine, a similar result is likely to be reached through applicable federal common law principles.  In fact, an Eastern District of Pennsylvania court recently addressed this situation in In re Estate of Burklund (January 28, 2013). The Burklund court declined to decide the ERISA preemption issue since the Pennsylvania state law and the federal common law that would apply if ERISA preempted Pennsylvania’s slayer’s act are essentially the same in a “slayer” situation and further noting that several district courts have taken this approach.  In this case, the court ruled that the wife (also the primary beneficiary of her husband’s employer-sponsored life insurance and accidental death policy) was barred from receiving any benefits from her husband’s insurance policy following her first-degree murder conviction for the husband’s death.  The son was, instead, deemed to be the appropriate beneficiary since he had been designated as the contingent beneficiary named under such policies.

Interpleader

When a substantial amount of benefits are involved and/or a plan administrator is aware of multiple parties who will potentially assert a claim on the benefits, an interpleader action may be the most appropriate course of action. In essence, an interpleader action involves the plan administrator paying the entire benefits into the court and having the potential claimants become parties to the litigation.  The claimants proceed against each other and the court determines which of the claimants is legally entitled to the benefits.  While an interpleader may be prohibitively expensive (and burdensome from a time and cost perspective) for a plan administrator if a small amount of benefit is involved, it is one of the only manners in which a plan administrator can gain certainty that it will not have to pay out the dispute benefits to more than one party making such a claim.  Thus, the time and money invested may be worthwhile.

Receipt and Refunding Agreement

In situations where a plan administrator chooses not to proceed with an interpleader action (perhaps on account of the cost or time involved with such an action), obtaining a receipt, release, and refunding agreement may serve as an attractive alternative.  By securing such an agreement, the signing payee/beneficiary acknowledges that he/she has received the proceeds, and further agrees to immediately refund to the plan(s) the amount of any excess or improper distribution.  A receipt, release, and refunding agreement may be used in conjunction with an affidavit of the party’s relationship with the participant (discussed below) to minimize the chance the recipient would need to refund any amount that was initially distributed.  However, unless the signing payee/beneficiary voluntarily agrees to repay the inappropriately distributed amounts, a plan administrator may have to commence litigation to enforce the agreement.  Even if that litigation is successful, there is a possibility that a plan administrator may not be able to secure repayment if the  signing payee/beneficiary is “judgment proof.”  Thus, this alternative is not without risk.

Affidavit of Status

Where a plan administrator is paying out benefits to a party on account of their relationship to the decedent/participant, a plan administrator may choose to secure an affidavit from the payee/beneficiary as to that relationship.  For example, if (1) a participant in a 401(k) plan dies without a designated (i.e., named) beneficiary, (2) his spouse murdered him and, (3) the plan provides that the surviving children of the participant would be the appropriate beneficiary, then it might make sense to secure an “affidavit of heirship” from a surviving child stepping forward affirming that such child is and ever was the only known child of the decedent/participant.  As suggested above, by using this type of affidavit in conjunction with a receipt, release, and refunding agreement, the plan administrator preserves an “undo” feature to the initial distribution in case another beneficiary is subsequently discovered.

In no way do the enumerated alternatives described above constitute an exhaustive list.  We are constantly seeking more creative and effective methods to ensure that the proceeds are paid to the appropriate recipient.  In addition, the appropriate strategy to undertake largely depends on the factual circumstances facing the plan administrator.  Do you have any other alternatives that you’d like to share?

Disclaimer/IRS Circular 230 Notice

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