In Kennedy v. Plan Adm’r for Dupont Sav., the Supreme Court gave fiduciaries a hard and fast rule for managing policies that fall under ERISA. The Plan Documents Rule states that ERISA “obligates [plan] administrators to manage ERISA plans ‘in accordance with the documents and instruments governing’ the plan.” In the context of determining what beneficiary takes after the plan holders’ death, this incredibly useful rule simplifies the jobs of plan administrators, reduces potential benefits-draining interpleader litigation, and gives plan holders straightforward and easy to follow rules for naming, adding and replacing beneficiaries.
The plan documents rule does away with intention determination. The rule says that no matter what extraneous documents exist and no matter what deathbed promises were made, a plan’s funds will only be distributed to those beneficiaries that were designated in accordance with the plan rules. These plan rules typically require the plan holder to designate beneficiaries by documenting their designation on a form or, increasingly, on some sort of online platform. Designating beneficiaries in these ways allows plan administrators to create easily accessible paper trails that they can rely on to the exclusion of literally all other information. The plan documents also give the plan holder the only information they need to change their beneficiary so that they know their own obligations and responsibilities under the plan. The Kennedy court put it perfectly when they said that ‘[b]y giving a plan participant a clear set of instructions for making his own instructions clear, ERISA forecloses any justification for inquiries into expressions of intent, in favor of the virtues of adhering to an uncomplicated rule.”
Kennedy was decided in 2009 and since then federal courts have been struggling to reconcile it with the previously applied substantial compliance rule. Under the substantial compliance rule, a plan holder’s attempt to change a beneficiary can be upheld, even if it doesn’t meet the rules under the plan documents, if the court finds that the plan holder has evidenced his intent to make a beneficiary change and “[attempted] to effectuate the change by undertaking positive action which is for all practical purposes similar to the action required by the change of beneficiaries provisions of the policy.” This rule is hard to pin down. It basically gives the court an incredible amount of discretion to decide which actions have gone far enough to qualify as “substantial compliance” and which haven’t.
I think that the Plan Documents Rule overrules the substantial compliance rule. And I also think that the Supreme Court intended for it to do so – substantial compliance is too subjective, demands a potentially endless amount of evidence, and makes the settlement of end-of-life issues harder than they need to be. Some courts share my opinion, but others are still attempting to reconcile the two doctrines, often choosing the doctrine that gives them more ability to make the decision that they feel is right or using the plan documents rule to “interpret” the wording of the plan to reach nonsensical outcomes.
The plan documents rule is heartless in its decisiveness. In Kennedy, the decedent’s ex-wife was awarded his plan’s proceeds even though she had disclaimed her interest in his life insurance policy in their divorce decree because the decedent failed to complete a paper beneficiary designation form. The decedent surely turned in his grave. Commonsense-wise, the fact that the decedent had divorced his wife is enough to tell a layman that he did not want her to get hundreds of thousands of dollars upon his death. But the Supreme Court – decidedly not laymen—held that the only thing that mattered was the beneficiary form — not his divorce from his wife, or her signature on a divorce decree in which she unequivocally disclaims any interest in the policy proceeds. The Court awarded the ex-wife the insurance proceeds, ignoring the competing claim of the decedent’s own daughter. Cold-blooded. But refreshingly reliable.