In Charles Schwab & Co. v. Debickero, No. 07-15261 (9th Cir. 2010), the Court dealt with an interpleader action brought by Charles Schwab & Company (“Schwab”). In the interpleader, Schwab asked the Court to resolve a dispute over the ownership of an individual retirement account (the “IRA”), established by Wayne Wilson at Schwab. The disputing parties were Katherine Chandler, Wilson’s surviving spouse, on the one hand, and Wilson’s four adult children from a previous marriage, the named beneficiaries under the IRA, on the other hand. The funds in the IRA originated in the 401(k) plan of Wilson’s employer, and were transferred by Wilson to an IRA at Smith Barney, and then transferred to the IRA at Schwab. The transfer out of the 401(k) plan was made after Wilson terminated his participation in the plan and before he married Chandler.
The Court noted that Chandler’s primary claim to the IRA was that the automatic surviving spouse rules in section 205 of ERISA and section 401(a)(11) of the Code carry over to the IRA, since the IRA’s funds originated in a 401(k) plan, to which those sections of ERISA and the Code apply. Those rules generally provide a lifetime annuity to a participant’s surviving spouse. However, the Court found that these rules ceased to apply when- long before his marriage to Chandler- Wilson terminated his participation in the 401(k) plan and transferred the proceeds to an independent IRA, an arrangement to which those rules do not apply. As such, the Court rejected Chandler’s claim to ownership over the IRA, so that the four named beneficiaries became the owners.
Comment: It has long been thought that the ERISA/Code automatic surviving spouse rules do not carry over (or otherwise apply) to an IRA, with respect to amounts transferred to the IRA from a qualified retirement plan (such as a 401(k) plan), or with respect to any other amounts. Thus, the Court’s decision is not a surprise. I like the use of the interpleader to resolve disputes over funds and ownership. Allowing the Court to decide the dispute lets the bank or other financial institution avoid paying amounts out of the IRA (or any plan or arrangement at issue) to the wrong individual, and later having to pay the right individual those same amounts out of its own pocket.