Death after signing form, but before processing

[austin3515]

Participant retires Monday. Submits distribution form to roll over to an IRA on that same Monday. The form is faxed over to the provider let's say on Wednesday. He dies on Friday (poor guy...) and the rollover is processed by the recordkeeper on the following Tuesday or Wednesday, after he was already deceased.

The good news is that the beneficiary in the Plan and the IRA beneficiary are one and the same. But has anyone ever had this before? Is the rollover invalid because he was deceased at the time of processing? Thank goodness the beneficiaries are the same, but assume for the sake of discussion that they are not.

[ETA Consulting LLC]

I don't think the rollover would be invalid in this instance because he would've made a bonafide request for an available distribution under the terms of the plan.

Once that is done, then whomever is beneficiary of the IRA would become irrelevant, because the terms of the plan were followed. There are some things that cease with the death of the individual (e.g. Power of Attorney), but I don't think a distribution request is one of those things.

Good Luck!

[jpod]

I disagree. Money not distributed at death belongs to the beneficiary. Processing a request is not the same as a distribution. Yes, likely you can go either way here and nobody would care, but if the plan beneficiary and the IRA beneficiary were different, the plan beneficiary would win in my opinion.

[MoJo]

I disagree with jpod. Distribution is irrelevant, and due to errors, I've seen the "processing" of distributions take upwards of a year and a half to actually get a check cut.. The question is at what point in time did the participant's request become an obligation of the plan to distribute. How long it takes a service provider (or an employer) to actually process the paperwork (delaying the distribution) is arbitrary, and has no effect on the ERISA right to receive the distribution. At the latest, I would suggest that when the appropriate plan fiduciary "approves" the distribution, the right to receive it is fixed.

[jpod]

Of course it depends on what the plan says, and we don't know what it says, but if it says what I suspect it says we'll have to agree to disagree.

[MoJo]

jpod: ...and what is it you suspect it says?

[jpod]

I suspect it says something like "beneficiary is entitled to the vested account balance," and account balance is defined, explicitly or implicitly, to mean money not paid out plus/minus subsequent earnings/losses. In any event, if plan administrator knew the p had died before the distribution and it was possible to stop it, I'd advise that it be stopped. Thereafter, whether to pay it to one or the other or interplead it would depend upon the precision of the plan language and the amount involved.

[Belgarath]

Interesting question. Not directly on point, but I remember talking to a claims examiner at an insurance company, and if a policy owner validly signed a surrender form, but died prior to the request being received by the insurance company, the surrender form took precedence and only the surrender value would be paid, not the death benefit. (of course, the insurance company profits by finding reasons to deny claims, so possibly that might influence the stance...Nah, couldn't be...)

I don't think most plans explicitly address the situation in the IP. In that situation, is it simply a determination by the Plan Administrator, or does State law govern?

[austin3515]

The more I thought about this I came up with this scenario. Let's say the kids were the beneficiaries on the 401k plan. The participant sets up the IRA and affirmatively notes his wife as the beneficiary. Then, he signs the distribution AND submits it for processing. And then he dies before it was processed. To me, it would be a sin to deny him his wishes which he not only expressed but went so far as to EXECUTE those wishes. I just cannot fathom a scenario where those wishes would be denied.

[RatherBeGolfing]

The more I thought about this I came up with this scenario. Let's say the kids were the beneficiaries on the 401k plan. The participant sets up the IRA and affirmatively notes his wife as the beneficiary. Then, he signs the distribution AND submits it for processing. And then he dies before it was processed. To me, it would be a sin to deny him his wishes which he not only expressed but went so far as to EXECUTE those wishes. I just cannot fathom a scenario where those wishes would be denied.

I agree. It is simply unreasonable for the beneficiary to change depending on how long the it takes to process the form. Once the Participant has made his/her wishes clear by submitting the request, that shouldn't change just because the provider took three days to process rather than two.

From the providers side, it would mean possible litigation for every distribution request they process since the party snubbed due to the extra day or two would claim they were injured due to the providers failure to timely process.

[My 2 cents]

The more I thought about this I came up with this scenario. Let's say the kids were the beneficiaries on the 401k plan. The participant sets up the IRA and affirmatively notes his wife as the beneficiary. Then, he signs the distribution AND submits it for processing. And then he dies before it was processed. To me, it would be a sin to deny him his wishes which he not only expressed but went so far as to EXECUTE those wishes. I just cannot fathom a scenario where those wishes would be denied.

I agree. It is simply unreasonable for the beneficiary to change depending on how long the it takes to process the form. Once the Participant has made his/her wishes clear by submitting the request, that shouldn't change just because the provider took three days to process rather than two.

From the providers side, it would mean possible litigation for every distribution request they process since the party snubbed due to the extra day or two would claim they were injured due to the providers failure to timely process.

Possible litigation would not necessarily translate into any liability. Can you imagine someone winning a lawsuit based on failure to process a claim on a timely basis when the claimant died after only three days, rendering the election invalid? Industry standards are surely not so fast as to render a three-day turnaround insufficient.

[RatherBeGolfing]

The more I thought about this I came up with this scenario. Let's say the kids were the beneficiaries on the 401k plan. The participant sets up the IRA and affirmatively notes his wife as the beneficiary. Then, he signs the distribution AND submits it for processing. And then he dies before it was processed. To me, it would be a sin to deny him his wishes which he not only expressed but went so far as to EXECUTE those wishes. I just cannot fathom a scenario where those wishes would be denied.

I agree. It is simply unreasonable for the beneficiary to change depending on how long the it takes to process the form. Once the Participant has made his/her wishes clear by submitting the request, that shouldn't change just because the provider took three days to process rather than two.

From the providers side, it would mean possible litigation for every distribution request they process since the party snubbed due to the extra day or two would claim they were injured due to the providers failure to timely process.

Possible litigation would not necessarily translate into any liability. Can you imagine someone winning a lawsuit based on failure to process a claim on a timely basis when the claimant died after only three days, rendering the election invalid? Industry standards are surely not so fast as to render a three-day turnaround insufficient.

No litigation automatically translates to liability, but if processing time is the determining factor between two different beneficiaries, the processing provider would always be open to litigation. Fault or liability is not the only factor in litigation, it is also costly and time consuming.

Provider issues aside, I can't think of a reason why "industry standards" should interfere with the participants executed and submitted request for a distribution.

[Kevin C]

Our VS document has the typical provision that jpod is referring to, that the beneficiary is entitled to the vested account balance upon the death of the participant. I find it really puzzling that any service provider would want to step into a fiduciary role and decide that paperwork signed shortly before the participant's death would overrule the document provision regarding how benefits are distributed after the participant's death. I can see letting the plan sponsor make that decision, but I wouldn't want to be the one to do it.

Let's change the situation a little. Participant retires and signs distribution paperwork on Monday and the form is faxed to the provider on Friday. Also on Friday, the plan is served a QDRO that assigns 100% of participant's benefit to his ex. Would you still process the distribution to the participant the following Wednesday?

[Mike Preston]

The analogy is inapt. DRO's are "special" (death is not).

The question, as has been stated above by at least one participant in this thread, is when did the right to a distribution congeal? I would venture to say it is when all acts of decision by the participant and the plan's representative have been completed.

[TPAJake]

I can't see how you would reasonably justify stopping the distribution once decisions were made & signed paperwork was sent. You can't "un-ring the bell" as they say.

[jpod]

I am no longer convinced that the answer is as clear as I thought it was. A related question: Can the rollover be done if the IRA depositor dies before a check has been cut or a wire transmission sent?

[david rigby]

I have never seen a plan document that did not already address this situation, usually with language something like, "If the Participant dies before the Benefit Commencement Date..."

So....what does the plan say?

[rcline46]

David, in my opinion, that is a 'red herring'. The participant did reach Benefit Commencement Date as evidenced by the signing of the benefit forms. The fundamental question is - does the difference in timing between 'click' and 'bang' change the target? And I think not.

[jpod]

Let's assume the IRA beneficiary is the deceased participant's only child, and the Plan beneficiary is his last girlfriend (or whatever ridiculous scenario you wish to conjure up). Further assume the account balance is quite healthy, let's say $1,000,000. For all of you who are so sure of yourselves on this issue, would you advise the Plan Administrator to pay it to the IRA and sleep soundly (assuming the payment to the IRA could be stopped)?

[rcline46]

Since I am not a lawyer, yes. For those more timid, get an attorney to give a written opinion.

[RatherBeGolfing]

Let's assume the IRA beneficiary is the deceased participant's only child, and the Plan beneficiary is his last girlfriend (or whatever ridiculous scenario you wish to conjure up). Further assume the account balance is quite healthy, let's say $1,000,000. For all of you who are so sure of yourselves on this issue, would you advise the Plan Administrator to pay it to the IRA and sleep soundly (assuming the payment to the IRA could be stopped)?

Processing times differ from company to company, and sometimes processing gets delayed for whatever reason.

Lets look at the literal interpretation of "account balance at death" that ignores the fact that the participant signed and submitted a distribution request. It leaves zero room for interpretation. The argument is that because it wasn't processed, it is included in the account balance and therefore belongs to the QP beneficiary and not the IRA beneficiary.

Lets say that for whatever reason processing was delayed and took longer than normal, and during this time, the participant died. lets go as far as saying it was 3 weeks after the participant submitted the request. I doubt anyone's document says account balance at death unless there is an unreasonable delay. Would you advise the PA to cancel the distribution request (properly executed and submitted by participant) and pay the QP beneficiary and sleep soundly?

[jpod]

No, I would advise to interplead because there is too much risk either way. if it was $1,000 rather than $1,000,000 I would probably err on the side of stopping the distribution (if it could be stopped) and paying it to the QP plan distribution.

[MoJo]

jpod: I agree - if it were $1 million, I'd take extra steps (interpleading being but one of them) - but then again, even without an intervening death, I would take "extra steps" in processing a million dollar distirbution, but you hit the nail on the head when you said "(if it could be stopped)" - implying that the "distribution" had in essence become a "fate acompli" and was an unstoppable train heading towards funding the IRA....

At what point is the distribution LEGALLY stoppable? That is the question (and not when it practically can be stopped) that resolves the issue - and I would take the position that when the final "substantive" act has taken place, it *is* a "distribution" (albeit waiting to be processed). To take it to an extreme, what would be your conclusion if the trustee snail mailed a check to the IRA custodian and it took a week or two to get there? Would you advise that a stop payment be placed on the check?

[GMK]

Are there any court cases on this topic?

From the posts above, I assume there are no IRS pronouncements that apply.

[My 2 cents]

Are there any court cases on this topic?

From the posts above, I assume there are no IRS pronouncements that apply.

I would not consider this kind of issue subject to IRS jurisdiction. If anything, it would be DOL, but if it is a question as to whether the participant survived to the Benefit Commencement Date or something similar to that, wouldn't it have become a matter for state courts to decide?

How would this change if the form was signed 9/22/16 for a Benefit Commencement Date of 10/1/16, with the participant dying during the interim? That is something that the plan document ought to provide for.

[GMK]

^You're right.

Anyway, are there any court decisions one way or another on this?