By Ian Berger, JD
What if you have an IRA with your spouse as primary beneficiary, get divorced without changing your beneficiary and then die? Who inherits your IRA benefits.
If you live in one of the 26 states (as of June 2018) that have “revocation-on-divorce” (ROD) laws, your ex-spouse would automatically be removed as beneficiary upon divorce. Instead, your IRA would go your contingent beneficiary or, if none, to the default beneficiary under your IRA agreement.
In the 2018 Sveen v. Melin decision, the U.S. Supreme Court approved the Minnesota ROD law as it applied to life insurance. In that case, Mark Sveen purchased a life insurance policy and named his wife Kaye as primary beneficiary and two children from a prior marriage as contingent beneficiaries. Mark and Kaye subsequently divorced, but Mark had not changed the beneficiary form by the time he died. The result of the Supreme Court ruling is that the life insurance proceeds went to the two children since Kaye was removed by the ROD law.
The Sveen decision led to speculation that ROD laws could (depending on the law’s particular wording) also apply to inherited IRAs. And, in fact, just days after the Sveen decision, the Supreme Court approved a lower court ruling that said an ex-spouse could be removed as IRA beneficiary after divorce under the Arizona ROD law.
If these laws apply to IRA benefits, shouldn’t they also apply to 401(k) plans and other ERISA company plans? Well, not so fast. When ERISA was enacted back in 1974, Congress included a “preemption clause” that says that ERISA supersedes any state law that relates to company retirement plans. The purpose of this clause was to protect companies doing business in more than one state (think Walmart) from having to comply with a patchwork of different state laws.
The Supreme Court has interpreted the preemption clause very broadly. One example of this was its 2001 Egelhoff v. Egelhoff decision. There, David Egelhoff designated his wife Donna as beneficiary under his Boeing Company pension plan, an ERISA plan. The couple divorced, David never changed his beneficiary designation, and then he died. The Supreme Court ruled that the Washington state ROD law was superseded by ERISA because it clearly relates to ERISA retirement plans. For that reason, Donna was still entitled to receive the pension plan’s death benefits despite the divorce.
So, although state ROD laws can apply to IRAs (which aren’t covered by ERISA), they can’t apply to ERISA-covered plans like 401(k)s. But don’t forget the bigger picture. You shouldn’t have to worry about whether your state has a ROD law and, if so, whether it’s superseded. Just make you have filled out a beneficiary designation form for all your IRAs and company plans and be sure change your form when necessary after a life event such as divorce. That way, you can be certain that your retirement savings will go to the person (or persons) you want to receive them.