Do recordkeepers recoup ACH payments made after payee’s death?

[Peter Gulia]

A non-ERISA plan’s sponsor/employer/administrator found that its recordkeeper made a few years’ monthly ACH payments after the participant’s death but before either the administrator or its recordkeeper had notice of the death.

The payments were made under the participant’s instruction to use the recordkeeper’s service for automated payments of the amounts the recordkeeper computed as the participant’s § 401(a)(9) minimums.

The payments were made to a bank account for which the participant and her spouse were joint holders. But the nonparticipant spouse is not, and never was, the participant’s named beneficiary. Also, the plan provides no right to the spouse.

The plan’s trustee is a State-chartered trust company that is a subsidiary or affiliate of the recordkeeper. The payer is that trust company or its paying agent.

Am I right in thinking the payer should demand a return of (at least) the amounts the payee’s bank collected after that bank had notice of the payee’s death?

Is this a task recordkeepers routinely handle?

If not, will a trustee/recordkeeper do it on the plan administrator’s instruction?

[Peter Gulia]

Must the plan’s administrator demand a return of amounts the payee’s bank collected after that bank had notice of the payee’s death?

The sum is not trifling. The administrator worries that the participant/decedent’s surviving spouse will spend the miscollected money, and the plan might be liable to the rightful beneficiary.

Am I right in imaging this situation happens often enough that recordkeepers have routines for what to do, at least when an employer/administrator asks?

[Luke Bailey]

On 12/15/2023 at 8:11 AM, Peter Gulia said:

Must the plan’s administrator demand a return of amounts the payee’s bank collected after that bank had notice of the payee’s death?

Peter, I don't think there's anything in your description of the facts that would indicate that the bank should have known that the incoming amounts should have been stopped. Even if the data accompanying the funds could have led them to conclude the money was coming from a retirement plan, did the bank have a duty to do anything with that information? And if they did, could the bank have not assumed there was a survivor benefit?

The plan administrator (presumably deceased's former employer) should certainly demand a return of funds from surviving spouse, but I'm not sure at all about the bank that has the account the money went into. Maybe I've misunderstood.

[Peter Gulia]

I apologize for my ambiguity in my description of the facts. That the bank had notice of the payee’s death was not separately stated as a fact. Rather, I mentioned it only in my query about whether the payer should demand a return of the amounts the payee’s bank collected after that bank had notice of the payee’s death.

In the real-life situation on which I wrote the description, the bank had actual written notice of the payee’s (the participant’s) death. Soon after the death, the decedent’s child presented to the bank the death certificate and the probate court’s appointment of the decedent’s child as the decedent’s estate’s executor and personal representative.

Thank you for your observation that a bank might not know the duration for the recurring payments.

But the payee was ‘Pamela Smith’, not ‘Pamela Smith or Samuel Smith’.

Does a bank have a duty not to collect a payment made to a payee the bank knows is dead?

When I was inside counsel to a recordkeeper and an affiliated trust company, they demanded returns of payments a bank collected after the payee’s death. In my experience, the banks paid on those demands.

But it’s many years since I was in-house to retirement-services operations. When I posted, I had hoped someone with experience more recent, and more direct, than mine would describe what is done in current operations.

[Luke Bailey]

Very complicated and an area of law (banking) I don't really know much about, Peter.