Two questions were at the heart of an retirement plan court case involving an ESOP distribution that was decided in 2018:
- When is a retirement plan distribution a distribution?
- Is a retirement plan distribution subject to state law or the federal Employee Retirement Income Security Act (ERISA)?
Majors Plastics is a 100% employee-owned company with an ESOP. On Friday, September 12, 2014, one of its employee owners requested a lump-sum ESOP distribution of his accrued benefits to his personal trust. The stock totaled about $2.7 million. Prior to the request, the plan participant had filed for divorce from his wife.
What Happened Next
Majors Plastic’s ESOP Administrative Committee (Plan Committee) wired the funds on the day the ESOP distribution request was made. Two days later, on a Sunday, the plan participant died.
The funds reached his trust on Monday.
Because the couple were still married at the time of death, and because the ESOP defined a “beneficiary” as a “participant’s surviving spouse,” the wife submitted a claim for benefits. The Plan Committee denied the claim, explaining that the former ESOP plan participant had no accrued benefits under the plan at that point.
The wife sued, claiming that the wire transfer was irrelevant because the plan participant’s trust did not receive the funds until after his death.
The Plan Committee’s Defense
The Plan Committee argued that the relevant inquiry is not when the participant receives the funds, but rather when the funds are transferred out of the plan. Therefore, at the moment the funds left the plan, the plan had satisfied all obligations to the participant or beneficiary.
The Court’s Decision
A district court held that as of September 12, 2014, the date of transfer, the funds were no longer held by the plan and the participant had accrued no further benefits as of that date.
The court concluded that the plan gave the Plan Committee “broad discretionary authority” to determine eligibility for benefits, citing case law that states, “[w]here an ERISA plan grants the administrator discretion to determine eligibility for benefits and to interpret the plan’s terms, courts must apply a deferential abuse-of-discretion standard of review.”
The wife appealed with a claim that there was “no discretionary act at issue.” She argued that the case presented a legal question that required a “de novo” review of all of the facts rather than just a determination of whether the plan fiduciaries had abused the discretion granted to them under the plan. Her attorney also argued that the remedy should be determined under Nebraska state law rather than ERISA. Under Nebraska state law, a funds transfer is not completed until it is accepted.
But the federal 8th Circuit Court of Appeals confirmed the district court’s ruling that the claim fell under ERISA 502(a), not state law. The appellate court also found that the Plan Committee had reasonably explained its interpretation of the plan and relied on substantial case law to deny the wife’s claim.
What does your plan document say regarding payment of benefits? Does the plan satisfy obligations to the participant or beneficiary when the distribution is made or when the distribution is received by the participant? One thing is certain, be sure that when your plan committee denies claims, it provides a reasonable explanation of the committee’s interpretation of the plan and offers substantial evidence to back up that explanation.