ERISA Changes Require Care

In the ordinary course of business, many financial planners and attorneys advocate renunciation clauses in wills to alleviate the bite of inheritance taxes. But, they may get bitten themselves if they try to renounce a benefit which is covered by ERISA and they do not follow the procedure necessary to accomplish such a renunciation.

Not that these benefits cannot be renounced under ERISA. They certainly may be. But they must be renounced properly, in accord with the requirements of the ERISA plan under which the benefits are offered to the employee. To fail to obtain prior written approval of the administrator of the ERISA plan to renounce may very well take this estate tax option away from the employee, and thereby wreck the tax advantage sought.

The same holds true for changes in the beneficiary of a life insurance policy issued under the terms of an ERISA plan. Many times the owner of the policy wants to change the beneficiary (divorce, death, etc.) and the advisor tries to do so in a formal legal document setting forth the details. Such an attempt might even be included in a separation or support agreement. But, if the proposed change is not in the form of a qualified QDRO, or it has not been run by the ERISA plan administrator and has not received the plan stamp of approval, there is no guarantee that the renunciation or the beneficiary change will ever go into effect.

Those familiar with ERISA litigation are aware that the most important third party to any transaction involving plan benefits is the plan administrator. The administrator has the “go” “no-go” say on any change which is not permitted by the clear language of the plan.

If there is a dispute, courts generally defer to the decision of the administrator because the administrator is held by law to have discretion in ERISA matters. Even though in a non-ERISA situation, the policyholder would have an absolute right to make a policy change in accord with the terms of the policy, the policyholder can’t take a chance under ERISA. If the ERISA administrator says “no”, it probably will be “no”.

If faced with the problem of trying to alter a benefit of an ERISA plan, you must read the plan documents before determining the action you want to take. If your client does not have the latest copy of the ERISA plan, (the usual situation), obtain one from the Human Resources Department of the employer. You have the right to get one on behalf of your client, the employee.

Read the plan carefully, particularly as it pertains to the action you want to take. If you have to run what you want to do by the administrator, follow the procedure set forth in the ERISA plan documents and make sure your intended change is accepted and acknowledged by the plan. Only then may you feel comfortable that you have effectively accomplished your goal for your client.

Estate and financial advisers who are aware of this required difference in approach to renunciation and other ERISA plan changes, will most certainly have taken the proper precautions.

Those who are not completely aware should immediately become familiar with the procedures required so their suggested strategies for ERISA clients are approved by the plan administrator.

Otherwise, the best laid plan may turn into a disaster.