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It's been a while, but ... would the "secondary" (or "contingent") beneficiary be relevant only if the "primary beneficiary" predeceased the participant? Once the participant dies, if the "primary beneficiary" is still alive, don't they effectively step into the shoes of a participant -- such that they would basically have their own beneficiary?

That life insurance is paid for from participant contributions rather than from a matching or nonelective contribution does not by itself nonapply the tax law about a “PS 58 cost” attributed for the life insurance death benefit. Internal Revenue Code of 1986 (26 U.S.C.) § 72(m)(3): Life insurance contracts (A) This paragraph shall apply to any life insurance contract— (i) purchased as a part of a plan described in section 403(a), or (ii) purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indirectly to a participant in such trust or to a beneficiary of such participant. (B) Any contribution to a plan described in subparagraph (A)(i) or a trust described in subparagraph (A)(ii) which is allowed as a deduction under section 404, and any income of a trust described in subparagraph (A)(ii), which is determined in accordance with regulations prescribed by the Secretary to have been applied to purchase the life insurance protection under a contract described in subparagraph (A), is includible in the gross income of the participant for the taxable year when so applied. (C) In the case of the death of an individual insured under a contract described in subparagraph (A), an amount equal to the cash surrender value of the contract immediately before the death of the insured shall be treated as a payment under such plan or a distribution by such trust, and the excess of the amount payable by reason of the death of the insured over such cash surrender value shall not be includible in gross income under this section and shall be treated as provided in section 101. http://uscode.house.gov/view.xhtml?req=(title:26%20section:72%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section72)&f=treesort&edition=prelim&num=0&jumpTo=true 26 C.F.R. § 1.72-16(b) https://www.ecfr.gov/current/title-26/part-1/section-1.72-16#p-1.72-16(b). 26 C.F.R. § 1.402(a)-1(a)(3) https://www.ecfr.gov/current/title-26/part-1/section-1.402(a)-1#p-1.402(a)-1(a)(3). That someone mentioned premium payments sent directly to the insurance company instead of to the recordkeeper suggests possibilities for violations beyond the one you ask about. Consider reevaluating whether, or on what fee, and with what scope of engagement, you want the prospective client. This is not advice to anyone.

“If the Beneficiary does not predecease the Participant, but dies prior to the distribution of the death benefit, the death benefit will be paid to the Beneficiary’s ‘designated beneficiary’ (or if there is no ‘designated Beneficiary,’ to the Beneficiary’s estate).” That’s from a document a big recordkeeper provides its customer. (The copyright notice does not name the text’s author.) While that might be a possible beneficiary-ordering regime (and might appear in many service providers’ forms for plan documents), it’s not the only beneficiary-ordering regime, even before looking for a default beneficiary. A plan’s document might not state a beneficiary’s-beneficiary provision, and might provide something else—for example, exhausting all participant-named beneficiary designations, primary and contingent, before turning to anything else. Unless an adviser already knows what its particular advisee’s plan document provides, consider many BenefitsLink neighbors’ reminder: RTFD—Read The Fabulous Document.

Lois, that is my understanding and about to opine such until scrolling down to your post. Once the participant dies, if the primary beneficiary is living, that beneficiary becomes the account owner, so to speak, and any secondary contingencies the participant had are moot.

@truphao Same here. We often are forced to set up a new PS just to accommodate what the client desires for the current year (which is almost always after the year end). We typically then merge the new plan we created into the existing one in the following year. The client then pays administrative fees for 3 plans for 2 years, but the benefit of the combined plan testing results outweigh the cost, especially when running the disaggregated testing if the existing plan has earlier entry dates than we prefer for the CB plan.

Since you used the term "primary beneficiary", perhaps there is, either by affirmative action or by plan provision, a secondary beneficiary. Check the company personnel file for any other possible beneficiary election, and then check the definition in the plan document. Hint: the document might define someone else before the estate. BTW, you will eventually pay someone (estate or a real person), don't forget the withholding rules: an estate is not eligible to open an IRA, so a payment to an estate is not rollable, therefore the (usual) 20% withholding does not apply. Next in line is the "other withholding" rate of 10%, but the estate has the right to elect zero withholding. Read the instructions for the W-4R form. https://www.irs.gov/forms-pubs/about-form-w-4r

You should check the Plan Document, but I believe when this has come up in the past the answer was almost always the Estate of the Primary Beneficiary who should receive the payment. But if you are paying it to an estate, don't you need the estate's TIN to issue a 1099-R? If there is a only $1,000 and there aren't a lot of other assets, it's possible that no estate was opened.

Remember, each contribution source - 401k, 401m, 401a is a "plan" that must satisfy coverage. If the solo 401ks have deferrals and PS, then adopting 2024 retro PSP for NHCEs fixes the PS but not the 401k. Not sure how you fix the 401k part when the missed deferral opportunity is because there was no plan.

David, we are getting a lot of situations where the client/prospect already has an existing 401(k) Plan through ADP, Paychex, and the likes. This is usually a total crap from the perspective of accomodating a CB Plan. So, more often than not a workable solution is to add a CB Plan and a stand-alone PS plan just to get going to accomodate the proper eligibiltiy, entry, TH minimums, etc. The actual benefit level design is limited by imagination and creativity only.

Brian, I typically see in level-funded arrangements that the TPA holds the amounts in its account, and therefore they don't remain in the employer's general assets so, in most cases at least, 92-01 won't apply. Is that your experience?

If the plan is ERISA-governed and the employer/administrator seeks ERISA’s supersedure of a State’s wage-payment law, that likely requires a notice beyond merely having delivered a less-often-than-yearly summary plan description. ERISA § 514(e)(3)(A) requires that the plan’s administrator deliver the notice “within a reasonable period before [each] plan year[.]” 29 U.S.C. § 1144(e)(3)(A) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1144%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1144)&f=treesort&edition=prelim&num=0&jumpTo=true. Likewise, if the plan sponsor or a participating employer wants the arrangement treated as an eligible automatic contribution arrangement, tax law requires a notice before each plan year. I.R.C. (26 U.S.C.) § 414(w)(4) (“before each plan year”); accord 26 C.F.R. § 1.414(w)-1(b)(3)(i) “for a plan year[.]” http://uscode.house.gov/view.xhtml?req=(title:26%20section:414%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414)&f=treesort&edition=prelim&num=0&jumpTo=true; https://www.ecfr.gov/current/title-26/part-1/section-1.414(w)-1#p-1.414(w)-1(b)(3)(i). Although I might suggest delivering a revised summary plan description before every year, many plans’ administrator don’t use that means of communication. This is not advice to anyone.

A few comments/responses: I assume they are taking advantage of the DOL Technical Release 92-01 trust nonenforcement policy (i.e., the "cafeteria plan exception"). In other words, there is no trust. In an unfunded self-insured health plan, there is no obligation to share any surplus with participants. This is just a standard risk-shifting structure with claims paid from general assets. Level funded plans essentially pre-pay for claims during the course of the year. If those funds are not actually drawn down based on more favorable experience, there is no obligation to return them to participants. No different than if the pre-payment structure had not been in place, and claims were simply paid as they came in. The employer simply retains the amount in general assets. This is of course different than the situation with MLR rebates for fully insured plans. In that case, the portion of the rebate attributable to employee contributions is plan assets that must be returned to employees or used for another DOL-approved plan purpose. This is also different from a situation that might arise under some fully insured "participating" policies that were most common in the past and pay a "dividend" or "experience-rated refund". Those situations are more akin to the insurer rebate/refund/demutualization/shared savings/excess surplus guidance from the early 2000s and generally have to be handled in the same manner as an MLR rebate. More details: https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-1 https://www.newfront.com/blog/mlr-rebates-2 Slide summary: 2025 Newfront ERISA for Employers Guide

You may need to discuss with benefits counsel. It is quite possible that the amounts needed to be held in trust. If they weren't that is a problem itself but in general, they cannot revert back to the employer. I need to know more facts, though.

As you help the employer think about those and other questions, consider this: If there is a year for which expenses are more than what had been estimated and paid in as the “level-funded” amount, is the employer obligated to pay whatever is needed to meet all claims and other expenses? If the employer bears a bad experience, should it take a good experience? This is not advice to anyone.

No, that is absolutely correct, why else invest in such property?

Peter, w/o knowing the exact facts, I do not see the time lag as problematic. My thought being, if done properly, the Plan Administrator (also likely Company X) instructs RK or TPA to initiate the involuntary cash out process which entails providing a 402(f) notice and at least 30 days in the election period. Adding administrative time on the front end and back end, a couple of months from start to finish is not unreasonable (if this is indeed how the situation unfolded). That begs the question and the initial ask from rocknroll2, if the cash out process begins when the account is under the threshold but exceeds such at the time of distribution, may it still be paid without consent?