Denial of benefits to non-spouse beneficiary prior to pension starting date was reasonable

The denial of pension benefits to a non-spouse beneficiary where the participant died prior to the pension starting date was not arbitrary or capricious, according to the U.S. Court of Appeals in Chicago (CA-7).

The plan participant decided to retire and received an application for pension benefits. The plan made four benefits available to employees: a normal retirement pension, an early retirement pension, a deferred vested retirement pension, and a pre-retirement surviving-spouse death benefit. The participant opted for the early retirement pension and elected to receive her pension in the form of a ten-year annuity. She designated her only daughter as her beneficiary.

The participant died three days before the start of her pension. Under the terms of the plan, where a participant dies prior to the date that distributions begin, the designated beneficiary will be his or her surviving spouse, if any. The plan vested the administrative committee with full and complete discretionary authority to apply the provisions of the plan. The plan’s administrative committee denied the pension to the participant’s daughter claiming only spouses were entitled to benefits under the plan when a participant died before the start of her pension. At trial, the federal district court concluded that the administrative committee’s interpretation of the plan was reasonable. This appeal ensued.

Plan’s interpretation not arbitrary or capricious

Because the plan granted discretion to its administrator, the appellate court reviewed the administrator’s decision to deny benefits under the arbitrary and capricious standard.

Under the terms of the plan, the effect of a participant’s beneficiary designation depends on the date of first distribution vis-à-vis the date of the participant’s death. If distribution occurs first, the designated beneficiary is the person named by the participant. But if death occurs first, as happened in this case, the designated beneficiary is the participant’s spouse, if any. Given that delineation, the court said, the plan could be reasonably (if not exclusively) read to disregard the participant’s designation of her daughter and allow only the surviving-spouse benefit.

The plan provisions aim to ensure the plan’s compliance with the required minimum distribution rules of Code Sec. 401(a)(9), which require that pensions purporting to be “qualified trusts” pay an employee’s interests within five years of her death if she dies before distributions begin. The plan, apparently concerned with the tax consequences of failing to comply with Code Sec. 401(a)(9), employed a blanket rule: only spouses can collect benefits when the participant dies before distribution. That decision had an unfortunate consequence here, the court noted, but was not unreasonable.

The participant argued that the plan provisions incorporated Code Sec. 401(a)(9) and that this section does not prevent designated beneficiaries from receiving benefits when the participant dies before distribution. Code Sec. 401(a)(9) dictates when a plan must distribute benefits depending on the recipient, but does not dictate who has the right to receive benefits. Code Sec. 401(a)(9) may not limit designated beneficiaries to surviving spouses when participants die before distribution, the court noted, but the plan does.

The plan administrator’s view that the ten-year annuity was not payable before the pension commenced was reasonable, compatible with the language and structure of the plan document, and entitled to deference, the court stated. Hence, its decision to deny the daughter’s claim was not arbitrary or capricious. Accordingly, the district court’s holding was affirmed.

Source: Estate of Jones v. Children’s Hospital and Health System Inc. Pension Plan (CA-7).
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