Death of Participant - No benficiary form

[Vlad401k]

Let's say a participant dies and has no beneficiary form. According to our documents, the death benefits should go to the surviving spouse. However, let's say the surviving spouse chooses to distribute the funds into the deceased participant's trust instead of distributing the funds to himself. Is that allowed? Can a beneficiary elect to have the distribution made out to someone else other than himself, including a trust of the deceased participant?

[jpod]

Absolutely not. The surviving spouse may be able to implement an effective disclaimer that can work for purposes of the MRD rules (subject to certain limitations under the regulations), but (a) that doesn't necessarily mean that the Plan must honor the disclaimer, although it can honor it, and (b) if it does honor it that only means that the account would go to the second default beneficiary, which may or may not be the decedent's estate and if it is perhaps that is an indirect way of achieving the surviving spouse's goals. The plan administrator needs to decide (with the advice of its legal counsel) whether the plan would honor any disclaimer, because the point is moot if it won't.

[GMK]

A beneficiary can disclaim interest in the benefit, and then it goes to the next beneficiary on the list. In this case, the benefit then goes to the next beneficiary on the list specified in the plan document, which may or may not be the beneficiary that the spouse would choose.

[jpod]

GMK: Do you think that in all cases the plan must honor a disclaimer? What makes you think that?

[GMK]

jpod: No, I don't think that. It is as you say, the plan administrator makes the call (most preferably with the advice of legal counsel), consistent with the plan document.

My point was merely that the beneficiary doesn't get to choose who is next in line to get the benefit if that beneficiary doesn't want it. Had I seen your post before I posted, I would have sat on my hands ... uncomfortable as that is.

[jpod]

GMK: Thanks. Always good to compare notes and I thought perhaps there was some ERISA case law of which I was not aware that was contrary to my understanding of the way this would play out.

[mbozek]

Need to check reg 1.401(a)-13(e) which allows a participant or beneficiary to direct the plan to pay all or any portion of a plan benefit to a third party which will not constitute an assignment of interest under the ERISA non alienation of benefit rules if arrangement is revocable at any time and the third party files a written acknowledgement with the plan administrator in the format required under the regs. Unlike the disclaimer provision of the gift tax Participant or bene can direct who will receive the benefit.

If this provision is used in lieu of a disclaimer of interest then the plan beneficiary will be taxed on the distribution since it is an assignment of interest subject to the income tax rules for constructive receipt.

[jpod]

Mbozek: Good point, but I kind of assumed that this was not the type of solution the surviving spouse was looking for.

[mbozek]

So what do you think he was looking for? Do you think the spouse wants the funds to be transferred to an IRA trust set up by the decedent?

[jpod]

My guess is that there is either a testamentary or inter vivos trust into which the residuary of the estate is to be poured (and that there may not have been any real thinking about rollover options or other plan-related tax consequences).