Death Benefit Payment Timing

[Dougsbpc]

We administer a small 401(k) plan with about 10 participants.

The 100% owner of the company sponsoring the 401(k) plan died.

In this particular plan, they had self directed accounts for salary deferrals and a pooled account for all employer contribution and rollover sources. The 100% owner never contributed salary deferrals and his account balance 

The 100% owner did roll over a large portion of his overall benefits from a defined benefit plan that terminated about 5 years ago. About 60% of the pooled account is comprised of private investments (trust deeds, partnerships etc.). I am a little worried about the timing requirements of death benefits being paid to his spouse as his primary beneficiary. We think it may take some time to unwind some of these private investments.

The plan document does not seem to address when death benefits need to commence. The 100% owner just turned age 72 this year.

In general, we have always heard of death benefits being paid by the end of the year of the participant's death.

Is there specific timing on when benefits must be paid?

Thanks.

[Peter Gulia]

To get BenefitsLink neighbors’ best help, consider filling-in some missing facts and assumptions.

When did the former owner die? Was it before, on, or after December 29, 2022?

Does the successor owner intend the company continue as an operating business?

Does the successor owner intend to continue the retirement plan? Or end the plan?

For the trustee-managed account with the time-to-redeem investments, how much of that account is allocated to the former owner rather than other participants? What (approximately) are the relative percentages?

Do the plan’s governing documents allow for a distribution delivered in rights or property other than money?

Do the plan’s governing documents allow a distribution paid or delivered over time? Or does the plan provide only a single-sum distribution?

Is the surviving spouse older, the same age as, or younger than the former owner?

If the plan’s governing documents do not expressly provide an involuntary distribution sooner than as needed to meet an Internal Revenue Code § 401(a)(9) tax-qualification condition, might the plan’s administrator interpret the plan’s minimum-distribution and required-beginning-date provisions (including some impliedly adopted during a remedial-amendment period) to align with current Federal tax law (including recent proposed regulations and the SECURE 2.0 Act of 2022)?

[Connor]

Hard to believe the doc purposely wouldn't discuss the timing - you may wish to double check with the vendor on this.  I imagine such a small plan uses a pre-approved doc.  Many (if not all) such docs offer the provision for death benefits to be paid up to five years after the participant's death.  If this option hasn't been selected, and only if the unpaid status of the benefit is not currently running afoul of the document, couldn't the provision be amended to the five-year option?  Some docs allow options to delay the payment even longer for spousal beneficiaries if I remember correctly.  

[Paul I]

As Peter noted, additional details about the plan and the circumstances would be helpful, and as Connor points out, the plan likely is a pre-approved document that certainly would contain language in the basic plan document pointing to the applicable death benefit rules. 

It is highly unlikely that the plan has a provision that requires the payment of a death benefit by the end of the year of the participant's death.  If this actually is the plan provision, the worst case scenario for the plan would be someone who drops dead at a New Year's Eve party just before midnight.

Since the deceased turned 72 this year, there is no RMD in pay status so you have time to sort out the plan accounting related to the investments and strategies on how to have sufficient liquidity for paying benefits when due.  You may find that some of the investments have performed exceptionally well and undoing them could be detrimental to their value.

Start with reading the plan document including the basic plan document, follow any code and regulation references within the documents, gather facts and terms regarding the plan accounting and the investments, identify the beneficiaries and any plan participants with an interest in these investments, layout a plan and move forward. 

This quickly can get complicated and require expertise beyond my and many other TPA's.  If that happens in this case then definitely involve an ERISA attorney and possibly an accountant knowledgeable about the types of investments in the plan.

[Peter Gulia]

And while it’s fine to start preparing for the advice you might render, resist an impulse to do something before you know who acts for your client or other instructing fiduciary.

If the corporation or company is the retirement plan’s administrator or trustee (or both) and the deceased former owner acted for the corporation or company, someone might want advice in sorting out which person now has power to act for the corporation or company.

If the deceased former owner served—personally, rather than as an executive of the corporation or company—as the retirement plan’s trustee, someone might want advice in sorting out who now is the successor trustee.

An instructed service provider should use care not to act or rely on an instruction until the service provider checks that the instruction was made by a person who had power to decide what the instruction tells the service provider to do, or at least that your service agreement provides you a right to rely on that person’s instruction.

[Roycal]

No disagreement with the above, but read the plan document carefully.  It is bound to tell you what to do.  More than likely the spouse-beneficiary will have the right to make an election or elections.  I would also add that unwinding the private investments, as you call them, should be done by the appropriate investment fiduciary.  Regarding time by which they must be paid, law and regs are clear, and they should be reflected in the terms of the plan.  If there's a lot of money involved, bringing in tax issues, timing could be critical, so make sure the widow gets good advice from whoever handles the non-plan part of the decedent's estate, such as the probate attorney and/or the company's and widows tax counsel, who may be different people.  Also, you might want to bring in the person who set the company up with this plan in the first place.  The more I think about it, the messier it seems.  You kind of wonder who put them into the private investments, though it matters little now.