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Three Weddings and a Funeral

When it comes to protecting your assets, covering all of your bases is a best practice. The Employee Retirement Security Act (ERISA) lists specific provisions for which your 401(k) can be protected in the event of your passing, a divorce, or other major life changes.

Specific documents regarding your 401(k) plan should be considered in conjunction with a prenuptial or postnuptial agreement.

In this case study, we will discuss a recent ruling by the 8th Circuit Court of Appeals. The ruling stated that a surviving spouse’s signing of a postnuptial agreement did not waive her rights to her husband’s 401(k) funds because the agreement was written incorrectly. We will discuss further in this article.

Background

Picture two people who have been married and divorced twice, getting married a third time. Let’s call them John and Jane. John and Jane decided to sign a prenuptial agreement, which stated that in case of a third divorce, both John and Jane waived their rights to each other’s property.

Since a prenuptial agreement can’t be used to waive a spouse’s rights to the 401(k) plan, John and Jane also signed a postnuptial agreement after their marriage, in which John specifically noted Jane had no rights to his 401(k) and his parents would remain the beneficiaries in the event of his death. They also agreed that they each wouldn’t obtain a Qualified Domestic Relations Order (QDRO) if this were to happen. According to the United States Department of Labor, a QDRO is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable.¹

What Happened Next

The postnuptial agreement also addressed Jane’s rights under ERISA. In the event of a divorce, she was supposed to give her consent, in writing, acknowledging that her rights to John’s retirement assets would be waived, and wouldn’t have the ability to change the beneficiary of his property.

The next turn of events happened swiftly – after more than one year of marriage, John and Jane filed for a divorce. Seven days later, in the midst of a not-yet-finalized-divorce, John passes away.

Jane and John’s parents argued over who should receive the retirement funds. In deciding what would happen next, the 401(k) plan administrator referred back to the postnuptial agreement, which stated that John’s parents are the beneficiaries of his 401(k). The plan administrator sent a waiver to Jane to validate the agreements; she refused to sign.