Death Benefits, loans and an ex-wife

[Guest jetfaninmn]

Sounds like a soap opera.....

I have a participant who named his fiance his beneficiary in 2000, later married and divorced her. He then remarried a co-worker, but never changed his beneficiary form. He passed away last week. Who is the beneficiary? Is it his current wife?

The participant also had an outstanding loan. If his wife wanted to pay it back before she takes the rollover, can she?

Thanks in advance.

[mbozek]

If the plan is subject to ERISA the current spouse is beneficary of 100% of the death benefits if the plan is not subject to the J & S rules, e.g, 401k plan. I will assume that the spouse had not consented to the designation of the x as the bene. If the plan is not subject to ERISA need to check state law to see if ex spouse is automatically removed as beneficary (e.g., CA, HI, WA) or whether divorce decree or plan provided for removal.

I dont think the spouse can pay back the loan because it is deemed distributed at death. Check for prior threads on this topic.

[Kirk Maldonado]

Mbozek:

Is there a deemed distribution even if the deceased participant's estate continues to make the loan repayments in a timely manner?

[mbozek]

I dont know if estate can continue to make repayments since most plans require that loans be repaid by salary deduction. Also the note is a personal obligation of the participant. I dont know if it could be assigned to another person and I dont know why a plan admin. would want to be involved in such transaction. Need to review the note.

[Appleby]

Kirk, see Treas. Reg. § 1.401(a)-20, Q&A-24(d)

Q-24: What are the rules under sections 401(a)(11) and 417 applicable to plan loans?

A-24: (a) Consent rules. (1) A plan does not satisfy the survivor annuity requirements of sections 401(a)(11) and 417 unless the plan provides that, at the time the participant's accrued benefit is used as security for a loan, spousal consent to such use is obtained. Consent is required even if the accrued benefit is not the primary security for the loan. No spousal consent is necessary if, at the time the loan is secured, no consent would be required for a distribution under section 417(a)(2)(B). Spousal consent is not required if the plan or the participant is not subject to section 401(a)(11) at the time the accrued benefit is used as security, or if the total accrued benefit subject to the security is not in excess of the cash-out limit in effect under §1.411(a)-11©(3)(ii). The spousal consent must be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent is subject to the requirements of section 417(a)(2). Therefore, the consent must be in writing, must acknowledge the effect of the loan and must be witnessed by a plan representative or a notary public.

(2) Participant consent is deemed obtained at the time the participant agrees to use his accrued benefit as security for a loan for purposes of satisfying the requirements for participant consent under sections 401(a)(11), 411(a)(11) and 417.

(b) Change in status. If spousal consent is obtained or is not required under paragraph (a) of this Q&A 24 at the time the benefits are used as security, spousal consent is not required at the time of any setoff of the loan against the accrued benefit resulting from a default, even if the participant is married to a different spouse at the time of the setoff. Similarly, in the case of a participant who secured a loan while unmarried, no consent is required at the time of a setoff of the loan against the accrued benefit even if the participant is married at the time of the setoff.

© Renegotiation. For purposes of obtaining any required spousal consent, any renegotiation, extension, renewal, or other revision of a loan shall be treated as a new loan made on the date of the renegotiation, extension, renewal, or other revision.

(d) Effect on benefits. For purposes of determining the amount of a QPSA or QJSA, the accrued benefit of a participant shall be reduced by any security interest held by the plan by reason of a loan outstanding to the participant at the time of death or payment, if the security interest is treated as payment in satisfaction of the loan under the plan. A plan may offset any loan outstanding at the participant's death which is secured by the participant's account balance against the spousal benefit required to be paid under section 401(a)(11)(B)(iii).

(e) Effective date. Loans made prior to August 19, 1985, are deemed to satisfy the consent requirements of paragraph (a) of this Q&A 24.

[Kirk Maldonado]

Appleby:

Thanks for posting that material.

However, most of the plans that I work with aren't subject to the J&S rules.

Also, that language only applies if the offset occurs automatically at the date of death. Many plans provide for an offset only if there is a default; meaning a failure to make the payment by the due date (or end of the grace period).

If the plan doesn't treat the death as causing an immediate offset, then the estate of the participant should be able to repay the remainder of the loan, unless payments must be made by payroll withholding.

(I don't think that the estate making the payment should be considered to have been an assignment or alienation of the loan.)