Death Benefit - Distribution Options to Beneficiaries

[CLE401kGuy]

Participant A passed away leaving a 401(k) account balance. The beneficiary form indicates 3 beneficiaries - Beneficiaries 1, 2 and 3. The balance to each beneficiary is greater than $5000, the involuntary cashout threshold.

Beneficiary 1 works at the company sponsoring the 401k plan while Beneficiaries 2 and 3 do not work at the company sponsoring the 401k.

What options are required to be shown on the form? Would I show Lump Sum and Rollover to IRA or do I need to give the beneficiaries a 3rd option to leave the balance in the 401k plan and take annual RMDs or installment payments?

If I showed only Lump Sum and Rollover to IRA and received no forms back from Beneficiary 2 or 3, would the balance just stay in the plan, moved to a separate account in the beneficiary's name and be subject to RMDs on the beneficiary's life expectancy?

Just want to be sure I show the correct options required on forms. Thanks!

[GMK]

You can leave the distribution form as is. Explain the options for staying in the 401k in the cover letter.

If they leave their benefit in the 401k, they can take distributions based on the applicable life expectancy or in some cases based on the 5-year rule. The 5-year rule is generally available if the participant died before the Required Beginning Date, and some plans allow it in cases where the participant died after the RBD (when applicable, look at what's been checked in the adoption agreement ... and even then the wording may not be crystal clear).

Beneficiaries have to choose life expectancy or 5-year (if available) by September 30 of the year following the year in which the participant died. If they don't make the choice, the Plan Doc says how distributions will be made.

My understanding is that the account for a non-spouse beneficiary remains in the participant's name FBO the beneficiary and basically would work in a way similar to the way an inherited IRA would work.

[Bird]

It really depends on what your document allows. We have choices in ours (Ft William, below) and generally allow extended payouts, but some plans don't want to be bothered with that.

Payment upon Participant's Death

Distributions on account of the death of the Participant shall be made in accordance with the following:

a. [ ] Pay entire Account balance by end of fifth year for all Beneficiaries in accordance with Sections 7.02(b)(1)(A) and 7.02(b)(2)(A) only

b. [ ] Pay entire Account balance no later than the 60th day following the end of Plan Year in which the Participant dies

c. [ ] Allow extended payments for all beneficiaries in accordance with Sections 7.02(b)(1)(A), (B) and © and 7.02(b)(2)(A) and (B)

d. [ ] Pay entire Account balance by end of fifth year for Beneficiaries in accordance with Sections 7.02(b)(1)(A) and 7.02(b)(2)(A) and allow extended payments in accordance with Sections 7.02(b)(1)(B) and © and 7.02(b)(2)(B) only if the Participant's spouse is the Participant's sole primary Beneficiary

e. [ ] Other: