Death Benefit

[coleboy]

A death distribution needs to be done for a young participant. His father, who is handling his son's estate, is also in the the same 401k plan.

When the death benefit was processed, the deceased participant's balance was simply rolled over into his father's 401k account. I believe this is incorrect.

How should the processing of the death benefit be done?

[jpod]

You have an obvious problem here, but before addressing that the first question is who is beneficiary of the son's account balance? 

[coleboy]

There was no beneficiary on file for the 401k plan. His father, I believe, is the beneficiary.

 

[jpod]

"Believing" is nice, but your question is not fully answerable without knowing whether the beneficiary is the father or someone else.  In any event, Step 1 is to undo that intra-plan transfer and put the money (plus earnings, but probably not minus losses) in the son's account.  There should be no tax-reporting associated with that erroneous transfer to the father's account.  Let us know who the beneficiary is and we can help with Step 2.         

[Belgarath]

What is the Plan's default beneficiary heirarchy? Typically it is something like spouse, children, surviving parents in equal shares, estate. But thsi should tell you who the appropriate bene is under theplan.

[coleboy]

As a follow up to my original question. The father is definitely the beneficiary. I have asked that the money from the son's account be taken out of the father's 401k and restored to the son's 401k.

So how should the benefit be processed? Ordinarily a sparate beneficiary account would've been established under the plan in the name of the beneficiary.

 

 

 

[Larry Starr]

2 hours ago, coleboy said:

As a follow up to my original question. The father is definitely the beneficiary. I have asked that the money from the son's account be taken out of the father's 401k and restored to the son's 401k.

So how should the benefit be processed? Ordinarily a sparate beneficiary account would've been established under the plan in the name of the beneficiary.

The fact that the father is a participant in the plan is irrelevant.  Make believe he ISN'T a participant and things will be clearer.

How would it be handled if the son died and the father (non-participant) was the beneficiary?

Initially, the son's account needs to be changed to a beneficiary account.  

Here is a good description of the possibilities available to the beneficiary; you do need to know what the plan says about death benefit payouts, so do RTFP ("fine" , that is!). Written as advice to the father.

If the person you inherited the 401(k) plan from was not yet age 70 ½ (he wasn't), the 401(k) plan will allow one or both of the options below:

1. The 401(k) plan may require you to take all of the money out of the plan no later than December 31 of the fifth year following the year of the person’s death. You could take a little out each year, or wait until the last year to take it all. You will pay regular income taxes on the amount withdrawn, so you may want to take more out in years where you expect to be in a lower tax rate.

2. The plan may allow you to take the money out in annual amounts over your life expectancy according to the required minimum distribution life expectancy tables. You may be able to do this by leaving the money in the plan or by rolling it over to an account titled as an Inherited IRA. This option is often referred to as a "stretch IRA" because if you are much younger than the person you inherited from, you can stretch the distributions out over a long period of time.

So, those are the options that I would expect to be offered.  Of course, it seems unlikely that the stretch IRA is going to be useful to the father.

 

One other possibility that could be available is to have the father disclaim the benefit, in which case it would go to either a listed contingent beneficiary or the next individual on the plan's default schedule.  While that might be legally possible, the normal schedule of payouts might no work so well.  Typically, it goes to spouse, children parents, estate.  If there is no spouse and no children, and the only living parent disclaims, it goes to the estate and then, probably, back to the father.  So in this case, I would doubt that a disclaimer would make any sens

[jpod]

You said that there was no beneficiary designation.  That must mean that the father is the first one in the list of default beneficiaries who actually exists (and there is no mother).  Correct? 

[coleboy]

Sorry, I missed this. There is a mother as well as a father.

 

 

[401_noob]

As Belgarath asked, what is the Plan's default beneficiary hierarchy? You can likely find it in the SPD, at least it is on our SPDs.

The mother may be a default beneficiary too.

[jpod]

If there was no beneficiary designation, I find it hard to believe that the default beneficiary is the father, rather than the mother and father.  For some reason you seem to be making this very difficult for us to understand the facts so we can try to help.