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Old Beneficiary Designation Effective?


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Hello all,

I have an interesting problem that doesn't seem to quite fit into some others that I've found here while searching.  Here's the situation:  We are a RK vendor for part of a non-ERISA 403(b).  A participant died naming her spouse as her primary 100% beneficiary and her parents as 50/50 contingent beneficiaries.  Her spouse died 2 days later.

Initially, we believed that he passed without having made a designation himself.  Per the plan document, the default is spouse, then estate.  This would mean his assets now belong to his estate, who wants us to roll it over into an IRA the estate seems to have setup (I know this isn't correct, but it's a topic for another post).  It has since been discovered that the spouse was a former participant of the plan on his own and he did have a beneficiary designation dated in 2009.  His form named his spouse as 100% primary and his brother as 100% contingent.  He took a full distribution of his account in 2016.

The TPA firm, and to an extent the client, is trying to say since he took a full distribution years ago, his beneficiary form is basically null and void as the account was 'closed'.  The beneficiary form doesn't have any language that would nullify it except upon receipt of a new beneficiary form.  My opinion is that his beneficiary form is still valid and in force regardless if he cashed out previously or not.  It'd be no different than if someone left service, took a full distribution, and then ended up with a non-elective contribution 8 months later but died in the interim.  I've tried digging through IRC and even the EOB trying to find any guidance and have not come up with anything concrete enough to prove my point.  Has anyone seen anything like this or have any other places to try looking?

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Maybe I'm missing the point here, but HIS beneficiary designation for his own benefits as a participant in the plan, shouldn't have any effect on the payment of HER benefits, based upon her beneficiary designation and plan provisions. The death benefit from HER Plan account should be distributed according to HER beneficiary designation and the plan provisions.

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Please check your document carefully.   I have some documents that clear say a beneficiary can't make a beneficiary election.  Odd but true....

I would also read the document carefully to see if it has any provisions about a beneficiary's death before payment.   Many of the documents I work with have such provisions.  I will admit since ESOP documents have historically been individually written and not a prototype or volume submitter I see a much broader versions of documents. 

 

If you are using a prototype or VS I would read both the document you make selections and the base document.   I find most documents have a section that describes the rights of beneficiaries and what happens if they die before being paid.  It MIGHT add some clarity.   

If it comes down to that election I am not aware of any guidance.  

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43 minutes ago, kazoni said:

Correct.  She died, so funds go to him per her beneficiary designation.  He died 2 days after she did so I believe his designation should take effect at that point.

I'll leave it to the lawyers, but I think I respectfully disagree. What do you mean when you say "his designation?"  His former beneficiary designation for HIS plan benefits is meaningless, unless the PLAN somehow provides something crazy that specifically states that a former participant's plan beneficiary designation still applies in this situation. I certainly have never seen anything like that, although I guess anything is possible. As ESOP mentions, the plan may have provisions dealing with this situation. Likely it will go to the estate.

If by "his designation" you mean that the plan has provisions/forms for a potential beneficiary to designate their own beneficiary(ies) in the event that the participant dies, and the beneficiary also dies before receiving benefits, and as such potential beneficiary he validly executed such a beneficiary designation, then that's a different story, and presumably such a designation would control.

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56 minutes ago, kazoni said:

Correct.  She died, so funds go to him per her beneficiary designation.  He died 2 days after she did so I believe his designation should take effect at that point.

But his beneficiary designation for the plan was for his account in the plan. I think it's irrelevant to other inherited assets. The fact that they are both participants in the plan is a smokescreen.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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56 minutes ago, kazoni said:

Correct.  She died, so funds go to him per her beneficiary designation.  He died 2 days after she did so I believe his designation should take effect at that point.

I'm with Belgarath.*  That old bene des covered him as a participant.  I don't think the fact that his account was closed even matters; if he were still an active participant I would not be looking at his participant bene des for guidance.

*And Bill Presson; I'm piling on but I had started writing this as they were responding and didn't want to waste the finger effort.

Ed Snyder

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3 hours ago, kazoni said:

This would mean his assets now belong to his estate, who wants us to roll it over into an IRA the estate seems to have setup (I know this isn't correct, but it's a topic for another post). 

I'm no expert but have seen a few examples of death distributions to an estate.  Our review concluded that the estate (not a natural person) cannot create an IRA.  And this result may have distinct tax advantages to the estate's beneficiary (don't know, just speculating).  Thus, the payment is not roll-able, and the 20% default withholding is not relevant.  However, the alternative default withholding of 10% does apply, with the estate having the option to elect zero withholding.  IMHO, the plan, assuming the estate is the proper beneficiary, should not make a payment to an IRA.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Just to be picky, I think the applicable term should be "red herring" rather than "smokescreen". A smokescreeen is a deliberate action/phenomenon, designed to conceal or deceive.  Some definitions of "red herring" involve deliberate action, but the nuance is that a red herring is a distraction from the subject (leading to  misconception) rather than a concealment (misleading to misconception).

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21 hours ago, Bill Presson said:

But his beneficiary designation for the plan was for his account in the plan. I think it's irrelevant to other inherited assets. The fact that they are both participants in the plan is a smokescreen.

 

21 hours ago, Bird said:

I'm with Belgarath.*  That old bene des covered him as a participant.  I don't think the fact that his account was closed even matters; if he were still an active participant I would not be looking at his participant bene des for guidance.

*And Bill Presson; I'm piling on but I had started writing this as they were responding and didn't want to waste the finger effort.

I wouldn't think the source of the assets would make a difference since his beneficiary designation is for the plan.  I've never seen where a participant designates person A as bene for their own contributions and person B as bene for funds they received as bene.  Although, I haven't seen anything that says they couldn't if they really wanted to.

 

21 hours ago, Belgarath said:

I'll leave it to the lawyers, but I think I respectfully disagree. What do you mean when you say "his designation?"  His former beneficiary designation for HIS plan benefits is meaningless, unless the PLAN somehow provides something crazy that specifically states that a former participant's plan beneficiary designation still applies in this situation. I certainly have never seen anything like that, although I guess anything is possible. As ESOP mentions, the plan may have provisions dealing with this situation. Likely it will go to the estate.

If by "his designation" you mean that the plan has provisions/forms for a potential beneficiary to designate their own beneficiary(ies) in the event that the participant dies, and the beneficiary also dies before receiving benefits, and as such potential beneficiary he validly executed such a beneficiary designation, then that's a different story, and presumably such a designation would control.

I think that's the crux of this part of my issue.  When are beneficiary designations considered 'completed'?  To change the situation a little bit, what is your opinion on if say a participant cashes out, then gets a QNEC years later for some reason.  Would their original bene designation still be considered effective as it was the last designation made or would you call the old one void and make them redesignate?  I did kick this back to the Sponsor/TPA since it's ultimately their interpretation that matters.  If the old designation held, it'd make less work on my end of things.  Either way, it's mostly CYA for us.

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20 hours ago, david rigby said:

I'm no expert but have seen a few examples of death distributions to an estate.  Our review concluded that the estate (not a natural person) cannot create an IRA.  And this result may have distinct tax advantages to the estate's beneficiary (don't know, just speculating).  Thus, the payment is not roll-able, and the 20% default withholding is not relevant.  However, the alternative default withholding of 10% does apply, with the estate having the option to elect zero withholding.  IMHO, the plan, assuming the estate is the proper beneficiary, should not make a payment to an IRA.

My research agrees with you.  I have a meeting with the executor's attorneys in 45 minutes who argue otherwise - even after I showed them in the regulations why they can't.  I'm not looking forward to it.  That's why I was hoping to find a way to call the spouses bene form valid and just process it that way.  C'est la vie.

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I agree with Belgarath (and the others who agree with Belgarath). I would certainly want to review the documents, but it seems almost inconceivable that there would be anything in them that would cause the beneficiary designation for his account (which he does not have anymore anyway) to apply to the interest passing to him (or his estate) directly from her account. I am clueless as to what an "RK" vendor is, but you say the plan is not subject to ERISA. Some states have statutes that ignore a beneficiary of a first-to-die spouse if he or she dies within a certain period of time after the first-to-die, so you should probably check that as well. Also, often spouses will have "mirror" wills to the same effect. Under ERISA, this would simply go to his estate and then under his will, trust, or intestate succession.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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