In a recent blog, we discussed the importance of clearly defining who is a “participant” in a nonqualified plan and who is a former participant or retiree. A more recent Ninth Circuit decision in E & J Gallo Winery v. Rogers highlights a related issue that faces tax-qualified and nonqualified plans alike—who is the beneficiary? While cases like this may not raise novel issues of law, they highlight a more mundane yet important issue of preparing plan documents clearly and in a manner that is consistent with their administration. Further, the Gallo decision highlights the importance of reminding plan participants to make sure that they have completed beneficiary designation forms and that those forms are up-to-date.
In the case, E & J Gallo Winery filed an interpleader action to determine the proper beneficiary under its Key Executive Profit Sharing Retirement Plan, a nonqualified deferred compensation plan (the “Plan”). Robert Rogers had accrued a benefit under the Plan before he died. After his death, ambiguity arose as to who was Robert’s designated beneficiary entitled to receive his accrued benefit under the Plan. Michele McKenzie-Rogers, who was married to the deceased at the time of his death, had filed a motion for summary judgment arguing that she was the proper beneficiary under the Plan. The District Court denied this motion and instead held that Mark Rogers, Robert’s son from a prior marriage, was the proper beneficiary. McKenzie-Rogers appealed that decision, and upon hearing that appeal the Ninth Circuit affirmed the District Court’s decision.
The ambiguity arose over a letter that was sent by the Plan sponsor to Robert Rogers in 1988. The third paragraph of that letter explained to him that vesting, payment methods and “all other matters” under the Plan would be determined in accordance with the procedures set forth under Gallo’s tax-qualified plan document. According to McKenzie-Rogers, the “all other matters” language meant that the tax-qualified plan’s beneficiary rules, which paid benefits to the current surviving spouse, should apply to the nonqualified Plan as well. The District Court disagreed, holding that this interpretation was too broad, especially because the fourth paragraph in that letter clearly named Roger’s first wife as primary beneficiary and his son Mark as contingent beneficiary. However, Rogers’ first wife waived her rights as primary beneficiary under the Plan by signing a waiver and release in 1988. As a result of that waiver, the District Court concluded the participant’s son Mark became entitled to the benefits under the Plan as contingent beneficiary. Nothing in the Plan indicated that the participant’s subsequent re-marriage to McKenzie-Rogers canceled his prior beneficiary designations. Moreover, the Plan was exempt from ERISA’s spousal consent requirements (which, if applicable, automatically would have made McKenzie-Rogers the beneficiary when she married Rogers). The Ninth Circuit agreed with this analysis and affirmed the District Court’s decision.
Again, this decision provides two takeaway items for plan sponsors. One is to make sure that the plan document and communications with the participants clearly explain how participants may designate beneficiaries. The other is that plan sponsors should consider periodically sending reminders to participants to make sure that their beneficiary designation forms are up-to-date. Clear documentation and communication can help reduce ambiguity and help sponsors avoid this type of lawsuits in the future.