Must we pay a required-beginning-date distribution to a 8-year-old?

[Peter Gulia]

Here's a puzzler for BenefitsLink mavens:

A participant died about five years ago. A regular report designed to catch accounts that need a minimum distribution flagged this deceased participant's account as one that should be in the upcoming batch of required distributions. The problem? The participant's beneficiary is her daughter, who recently turned eight (if the birthdate in the recordkeeping system is to be believed). Worse, the plan's administrator already has done some fact-digging and has found the following. The apartment that the participant gave as her address now has as its occupant a person who is unrelated to the participant or her daughter. A search has not found any address for the beneficiary. Searches of court dockets on both the participant's name, her daughter's name, and their common surname did not find any proceeding.

Even if a further investigation finds an address for the beneficiary, is it prudent to make the plan's single-sum distribution check payable to a beneficiary that the plan's administrator believes to be an 8-year-old?

If that's not prudent, do you think that the Internal Revenue Service (on examination) would accept your decision to disobey the plan's terms?

[K2retire]

Why would you not pay the legal guardian of the 8 year old instead?

[Peter Gulia]

The plan's administrator would be glad to pay the beneficiary's guardian or conservator. But the plan's administrator has been unable to find any such person. The reason for searching court dockets was a hope of finding a guardianship proceeding or, failing that, an estate proceeding that might mention a name of someone who might be proposed as a guardian. All the searches came up empty.

Again, even if the administrator finds an address for the child, that does not necessarily mean that we'll find a guardian, and the circumstances suggest that it's likely that the beneficiary is in the care of someone who is not her guardian.

[BG5150]

As an aside: the daughter was adopted, right? Otherwise, we are to assume she gave birth at 62!

Has anyone checked with the current occupants of the apartment? Maybe they know where the participant moved to.

[rcline46]

who is the leasing agent for the apartment? Their records should have the forwarding address of previous occupnants/lessees.

[david rigby]

Might this really be a granddaughter?

(Grand)Daughter is in witness protection program?

Another possibility? after diligent search, the PA is unable to locate (or even identify) any such person as the "alleged" beneficiary, so the benefit is forfeited until such time as the person appears?

[masteff]

You all are forgetting the rules... a non-spouse bene must commence payment either 1) based on life expectancy or 2) failing to start life expectancy in a timely manner must take full payout w/in 5 years. This isn't a 70 1/2 distribution but the 5-year rule. Mother could have been 20 at time of death and we would still have this result today.

As to the OP, arguably the lost participant rules supercede (w/out going back to look at the exact text). Follow your standard lost participant protocol.

[Peter Gulia]

Thanks, all, for the help.

The circumstances are those that masteff describes. The participant was a young woman (who had no spouse). Because a distribution didn't begin one year after the death, the computer-system report flags this account as up for a distribution under the 401(a)(9) five-year rule.

Would the can't-find-the-beneficiary idea work if the administrator finds the beneficiary but there is no guardian?

[Bird]

Would the can't-find-the-beneficiary idea work if the administrator finds the beneficiary but there is no guardian?

What is that idea, that it's ok not to pay because you can't find the bene? I don't think so; I mean, of course you can't make a payment if you can't find the person, but that doesn't mean it's ok.

And I'm not sure how you're going to find an 8 year old and presumably communicate without finding a guardian or custodian.

[masteff]

So then what does the plan say about payments to minors? Arguably, you haven't "found" the minor bene until you're able to fully comply w/ the plan's requirements to make a distribution. But as Bird said, if you can contact the child, they should be with an adult... and you just have to hope the adult is helpful in resolving it.

[Peter Gulia]

Bird, you're right that finding the minor also tends to find an adult that the child lives with. But the plan's administrator anticipates a real likelihood that an adult that this minor lives with is someone who has no legal authority to act for the minor (and might prefer not to seek that authority). In some cities, tens of thousands of children live that way - often with a grandparent, other relative, or someone who had some connection to the deceased or otherwise unavailable parent, but frequently without any appointment that grants authority to act for the minor.

If the many smart BenefitsLink mavens haven't figured out another solution, it seems that the risk of a foot-fault on the 401(a)(9) rule might be outweighed by the plan's need not to pay a distribution for which it wouldn't get a satisfactory release. Instead, the plan might simply preserve the account until a proper payee becomes available.

Again, thanks everyone for the good suggestions.

[MoJo]

Bird, you're right that finding the minor also tends to find an adult that the child lives with. But the plan's administrator anticipates a real likelihood that an adult that this minor lives with is someone who has no legal authority to act for the minor (and might prefer not to seek that authority). In some cities, tens of thousands of children live that way - often with a grandparent, other relative, or someone who had some connection to the deceased or otherwise unavailable parent, but frequently without any appointment that grants authority to act for the minor.

First, I believe a distribution has to be made - it is a qualification issue. Second, "fiduciarily prudent" steps need to occur to locate the beneficiary. There are service that quite reasonably will do that for you. Third, if the bene is found but the "custodian" is not the "guardian" the plan can petition the probate court in the jurisdiction to appoint one (and I would think this is a "prudent" step to do, subject only to the amount of money involved). Essentially, once the court is involved, the kid would become a ward of the court and a guardian of both the person (the "kid") and the estate (the "money") would have to be appointed (and it may be the same person for both roles).

What about a rollover to an IRA in the name of the bene? Inspira (located in Pittsburgh) does this all the time, and does the search as well.

[Peter Gulia]

MoJo, thank you for the suggestion about a rollover to an IRA.

But shouldn't the plan's administrator be concerned that the portion of the distribution that is a minimum distribution (in this case, all of it) is not an eligible rollover distribution?

And thank you for the idea of the plan asking a court to appoint a conservator for the beneficiary.

[BG5150]

Are we talking a huge amount of money? Taxes on a few hundred dollars I don't think the IRS is gonna go crazy over. Taxes on a few hundred thousand, that's another matter.

Especially in a case like this.

What about this: open an escrow account, and take the RMD and place it in there while you go about the business of locating the beneficiary. The money is out of the plan and safe for the time being.

[masteff]

I'm thinking you should contact the IRS and the EBSA and get their input. While it's my opinion that it's worse to distribute to a missing participant (causing the money to sit unprotected in limbo) than to miss the MRD, who knows what the govt's opinion is? Another thought is you might research threads on escheat and see if you can glean anything there.

This Benefitslink Q&A predates the current 401(a)(9) regs (and lacks the issue of it being a minor): http://benefitslink.com/modperl/qa.cgi?db=...tions&n=110

I guess I still come back to what does the plan say about missing participants and about distributions to minors.