Failing to Update Beneficiary Tax Forms Can Lead to Legal Battles

Two federal court rulings in recent months are the latest examples of the need for vigilance when reviewing and updating beneficiary designation forms for qualified retirement plans, employer life insurance programs, deferred compensation plans, and individual retirement accounts.

Most employees are familiar with all the documents they have to complete when beginning a new job, such as qualified retirement plans, deferred compensation plans, and life insurance programs. As major life events occur—marriage, divorce, the birth or adoption of a child, or the death of a loved one—beneficiary designations may be overlooked and can cause previously designated individuals to receive benefits instead of intended beneficiaries, leading to legal battles.

One such battle played out in the US District Court for the Middle District of Pennsylvania. In Proctor & Gamble U.S. Business Services Company v. Estate of Rolison, a P&G employee enrolled in the company’s investment plan in 1987 and named his then-girlfriend as the sole designated beneficiary. Their relationship ended in 1989.

Rolison died 26 years later, in 2015. Despite routine notifications from P&G about updating his beneficiary designations, Rolison left his original designation unchanged. His ex-girlfriend received over $750,000 from the P&G plan.

Rolison’s estate sued, claiming Rolison never intended for his ex-girlfriend to remain as his beneficiary and argued that P&G breached its fiduciary duties under the Employee Retirement Income Security Act of 1974. Rolison’s family also sought to impose a constructive trust—a legal remedy that benefits the party who is claiming that their rights have been violated—on the funds that were distributed.

The court ruled in April against Rolison’s estate, holding that P&G adequately fulfilled its fiduciary duty under ERISA by observing the beneficiary designation on file with the plan administrator, and sending multiple notices to update beneficiary designations and providing all plan participants online access for changing beneficiaries. The court also held there was no basis for imposing a constructive trust on Rolison’s ex-girlfriend due to insufficient proof that Rolison’s original choice was a mistake.

ERISA’s legislative intent was to provide plan administrators with a uniform set of rules to administer ERISA-covered plans. This rigidity was designed to make it easier to administer such covered plans.

To further illustrate this strict rule, consider the US Supreme Court’s 2001 decision in Egelhoff v. Egelhoff ex rel. Breiner. There, a plan participant’s ex-wife remained the named beneficiary of his plan benefits following their divorce because the participant never updated his beneficiary designation.

The high court ruled that ERISA preempted state laws that would have otherwise revoked the ex-wife’s beneficiary status, highlighting that a beneficiary designation remains valid unless or until changed.

As in Rolison, the Egelhoff court emphasized that ERISA commands a plan fiduciary to administer the plan according to the documents governing the plan, including the beneficiary designation. The high court further explained that ERISA preempts differing state regulations affecting its procedures for processing claims and paying benefits.

Another federal court ruling from June shows that following the proper steps to designate a beneficiary is just as important as updating designations.

In Liu v. Kaiser Permanente Employees Pension Plan for Permanente Medical Group, Inc., a woman claimed to be the beneficiary of her sister’s pension plan after the participant died without a surviving spouse, children, or other dependents. The deceased participant hadn’t completed all the necessary steps to designate a beneficiary, and only an online application had been started on her behalf.

The surviving sister claimed that starting the application was “substantial compliance” with the plan’s rules to designate her as the beneficiary or, alternatively, that she should receive the benefits through equitable remedies. The US District Court for the Northern District of California disagreed, ruling that procedures to name a designated beneficiary weren’t followed, and that the surviving sister wasn’t the beneficiary.

While ERISA preempts state laws to the extent they relate to employer-sponsored plans, courts of equity occasionally have granted equitable relief to individuals other than the designated beneficiary. These cases serve as a cautionary tale about the critical yet frequently neglected task of keeping beneficiary designations current.

Regular review and updates to beneficiary designations, especially after major life events, is essential. Following a plan’s specific procedures for designating or changing beneficiaries is imperative. Consulting with legal and financial professionals can ensure beneficiary designations align with overall estate planning goals.

The cases are: Proctor & Gamble U.S. Business Services Company v. Estate of Rolison, M.D. Pa., 3:17-CV-00762, 4/29/24; Egelhoff v. Egelhoff ex rel. Breiner, U.S., 99-1529, 3/21/01; and Liu v. Kaiser Permanente Employees Pension Plan for Permanente Medical Group, Inc., N.D. Cal., 23-cv-03109-AMO, 6/20/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stephen Ferszt is chair of the employee benefits practice at Olshan Frome Wolosky.

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