Is it okay to continue periodic payments after the participant’s death?

I am thinking about what procedures (and perhaps plan-document provisions) an individual-account retirement plan might want for situations in which the plan continues periodic payments to a participant for many months (or even a few years) after the participant’s death.

Imagine a situation like this. (This is based on a real situation, but I changed a few facts to protect the employer/administrator’s confidences, and to simplify the legal issues.) In 2017, Jack was 62, eligible to retire, and did retire. Although the plan precludes a life-contingent annuity, the plan allows other periodic payments (subject to minimum-distribution provisions no more restrictive than as needed to meet IRC § 401(a)(9)). Using the recordkeeper/trustee’s form (which the employer/administrator adopted), Jack instructed payment, by direct-deposit electronic funds transfer, of $3,000 every month, to be paid on the first banking day of each month. (Jack never had a spouse.) In 2017-2020, all goes well. On January 9, 2021, Jack dies. Then, no one told the employer/administrator, the recordkeeper/trustee, or Jack’s bank about Jack’s death, and none of them had any knowledge of Jack’s death. On January 4, 2022, Martha (Jack’s friend, but not a relative) informs the recordkeeper/trustee about Jack’s death, and furnishes the death certificate, Jack’s will, and a probate court’s letters testamentary that appoint Martha as Jack’s personal representative. The trustee promptly turns off Jack’s periodic-payment instruction. But before this, the plan made, and Jack’s bank accepted, twelve payments ($36,000) after Jack’s death. The employer/administrator checks Jack’s plan beneficiary designation; it names someone who is not a legatee or beneficiary under Jack’s will, and has no apparent relation to any of them.

Here are my questions for BenefitsLink neighbors, hoping some have experience with this problem:

1)        Must the plan try to get the $36,000 from the bank?

2)        If the plan tries and the bank refuses, how strong or weak would the bank’s defenses be in the plan’s lawsuit to recover the $36,000?

3)        If the plan does not get the money from the bank (and no one otherwise restores Jack’s account), how strong or weak is the designated beneficiary’s claim that the plan fiduciaries’ actions deprived the beneficiary of money the beneficiary otherwise would get?

Because the plan’s participants include a few thousand retirees, the employer/administrator presumes the problem of periodic payments continuing after a participant’s death (until the recordkeeper/trustee is notified) is recurring.

A)      What procedures might help manage this problem?

B)       Could a plan-document provision legitimate after-death payments to a participant (if no surviving spouse has any ERISA § 205 right)? (The employer uses no IRS-preapproved document. Also, the employer’s frequent mergers and acquisitions would set up an opportunity to get an IRS determination on whatever text the employer might add.)

C)       Would a plan-document provision be wise or unwise?

Any further suggestions?

If neither the paying retirement plan nor the receiving bank knows the participant is dead, can it be correct for the previously instructed payments to continue?  For many months?  For years?

Peter, I'm just spitballin' this.

1. Yes. At death, the money belonged to beneficiary, not Jack.

2. If the money is still in the account, very strong. The funds were paid in error. If the bank paid to the executor without notice that were paid by plan in error, then I think weak, because the bank had no notice and the plan should seek to recover the fund from the estate.

3. That's a tough one. I don't even know if the beneficiary's claim is for a benefit or for fiduciary breach. If fiduciary breach, then not clear there was a breach.

A. Have the deceased notify the plan promptly after death. Just kidding. I believe that the governmental plans get computerized death records periodically from SSA, but I don't think that is available for private employers. A Google search indicates that death records are available locally, but I don't know how comprehensive or periodicity. Would be worth researching. I can't think of any other way of avoiding this situation other than periodically running a check of participants in pay status against a database of recent deaths.

B. I don's see how. Typical definition of beneficiary is the person entitled to account after participant dies. I guess you could change that to say the beneficiary in the case of installment payments is the deceased's estate until you have notice of death, and then becomes designated beneficiary or some other default beneficiary. That seems like it will have unintended consequences. Would seem to violate law if the participant leaves a surviving spouse but cut them out of estate.

C. I guess you could have a provision that would state that the plan is not liable for errors of this sort if it had no notice of death. Might work with the right judge.

Could the plan require retirees in pay status to periodically send back a certification that they are still alive? Maybe once a year? That would not eliminate the problem entirely, but instead of 3 years' worth of payments in question, it would be at most 1 year's worth.

They might consider offering (or requiring) post-retirement installment payments that are paid by the purchase of a life-contingent annuity contract from an insurer. Assuming that the plan administrator acts prudently in the selection of the annuity provider, the problem of determining whether the payee is alive or dead becomes an issue for the insurance company, which is part of their business model. In other words, leave it to the professionals.

Luke Bailey and C.B. Zeller, thank you for contributing your helpful thinking.

About A, the plan yearly runs a cleanup on participant records, using a commercial publisher’s service with databases that include the Social Security death records.

(If the Social Security Administration records a death, this should, at least in theory, result in no more than about 13 monthly payments after the participant’s death.)

About B, if I’d suggest a plan provision (and I’m not there yet), I might consider providing that the plan’s benefit obligation is met to the extent of what the receiving bank properly accepted. (Who’s entitled to take from that bank account is governed by the account’s terms and applicable law.) The provision would apply only to the extent of what the plan does not (and need not) provide to the participant’s surviving spouses (including an alternate payee treated as a surviving spouse).

Asking a payee to confirm her continuing existence might not catch many deaths (beyond those a records cleanup finds) because anyone who has access to the participant’s address, whether postal or email, might return the requested confirmation, and it’s impractical for the recordkeeper to test whether such a response is genuine. A part of the problem is that those who have access to the receiving bank accounts—whether properly, innocently, or (sometimes) fraudulently—see that the periodic payments will continue until the plan gets notice of the death (or the account balance runs out).

The plan’s recordkeeper is a big life insurance company, which is also a big insurer of annuity contracts.

A life-contingent annuity would shift a risk to the insurer. But even if the plan’s sponsor might allow participants a choice of an annuity, the sponsor is unlikely to provide that a life-contingent annuity is the only way a participant may get periodic payments.

Perhaps a sensible approach is to continue the plan’s records cleanups, and monitor whether the breakage remains in reasonable ranges and doesn’t result in more than reasonable plan-administration expenses.

50 minutes ago, Peter Gulia said:

Asking a payee to confirm her continuing existence might not catch many deaths (beyond those a records cleanup finds) because anyone who has access to the participant’s address, whether postal or email, might return the requested confirmation, and it’s impractical for the recordkeeper to test whether such a response is genuine. A part of the problem is that those who have access to the receiving bank accounts—whether properly, innocently, or (sometimes) fraudulently—see that the periodic payments will continue until the plan gets notice of the death (or the account balance runs out).

It might, however, strengthen any later claim for the funds (whether by the plan or by the designated beneficiary) against the person in control of the bank account, as such person would have to actively commit an act of deception in order to keep the payments flowing.

C.B. Zeller, thank you for your further smart reasoning on your good idea.

My two cents:

1)        Must the plan try to get the $36,000 from the bank?

• Assuming that the distributions are an operational failure (which depends on the terms of the plan), the overpayments should be corrected in accordance with EPCRS, which generally requires reasonable efforts at recovery (i.e., a letter or two asking the participant's estate to return the proceeds to the plan and informing the estate that the distributions are not eligible for a rollover). Reasonable efforts may also include attempting to get the bank itself to reverse the transfers. There may also be a fiduciary duty to go further than what is required under EPCRS, but as a practical matter, compliance with EPCRS's overpayment recovery procedures is probably going to forestall a fiduciary challenge (especially from the DOL) and may help with the defense thereof if it does arise. 

2)        If the plan tries and the bank refuses, how strong or weak would the bank’s defenses be in the plan’s lawsuit to recover the $36,000?

• This is outside my area of expertise, but intuitively, Luke's perspective seems correct. If the money is still in the account, then it is a traceable asset that could potentially be recovered as an equitable remedy. On the other hand, the legal obligation to return the asset may fall exclusively on Jack--not on the bank--in which case, the bank may be able to shrug off requests until instructed by either Jack or a court. 

3)        If the plan does not get the money from the bank (and no one otherwise restores Jack’s account), how strong or weak is the designated beneficiary’s claim that the plan fiduciaries’ actions deprived the beneficiary of money the beneficiary otherwise would get?

• The beneficiary can sue the plan for benefits due to the beneficiary under the terms of the plan. ERISA Section 502(a)(1)(b). The plan may be able to argue that benefits are not owed to the beneficiary to the extent already paid to the participant (for example by citing a non-duplication clause), but that argument may be difficult to make if the plan is poorly drafted. 
• To the extent that the beneficiary is alleging fiduciary breach, the grounds are not clear to me. The plan administrator had no notice of Jack's death, so it didn't breach its duties by failing to cease payments. Perhaps if the plan determines that the beneficiary is not owed a benefit solely because it has already been paid out, the beneficiary could argue that the plan administrator has breached duties by failing to take reasonable actions to recover the amounts due. Or, the beneficiary could allege that the plan administrator breached its duties by failing to conduct reasonable death censuses (but with only a one-year delay in discovery of death, that doesn't seem like a winning argument, even assuming that the plan administrator has a duty to conduct death censuses). 

Because the plan’s participants include a few thousand retirees, the employer/administrator presumes the problem of periodic payments continuing after a participant’s death (until the recordkeeper/trustee is notified) is recurring.

A)      What procedures might help manage this problem?

• The plan or its service providers could routinely (i.e., at least once per year) perform a "death census"--searching obituaries and social security records to see if there is any indication that some participants have been deceased. There are paid services that can help with missing/deceased participant research. 
• Annual searches seem to be standard and generally acceptable to DOL auditors. 

B)       Could a plan-document provision legitimate after-death payments to a participant (if no surviving spouse has any ERISA § 205 right)? (The employer uses no IRS-preapproved document. Also, the employer’s frequent mergers and acquisitions would set up an opportunity to get an IRS determination on whatever text the employer might add.)

• Yes. Plans can and frequently do provide that payments will be made to a participant's estate or some other specific person other than the participant or their designated beneficiary under certain circumstances.
• For example, sometimes a pension plan will provide for an ancillary $10,000 death benefit to the estate or spouse specifically for the purpose of helping to pay for funeral costs. Plans also generally contain provisions determining the circumstances under which a beneficiary designation will be honored, and the ordering of default beneficiaries in the case that no express beneficiary designation is valid. 
• Plan provisions determining beneficiary identity are broadly protected by federal law (ERISA) against interfering state law, and few express restrictions on them exist at the federal level. 
• There might be a cutback issue if the rule is applied to benefits that have already accrued, but there might be an applicable exception in the cutback regulations depending on how the rule is structured. 
• As noted by Luke, unwaived spousal rights are protected by federal law, and could not be circumvented by this sort of provision (note that what is contemplated is generally allocation of a piece of the core benefit--not an ancillary benefit). 

C)       Would a plan-document provision be wise or unwise?

• I might be persuaded otherwise, but my inclination is that it would be wise to draft a plan initially to clearly address what happens in a situation like the above. I am imagining a provision along the following lines: "In the event that a participant dies while periodic payments are ongoing, payments will continue to the participant's estate until the plan administrator is notified of (or otherwise determines) the participant's death. Once the plan administrator has been notified of the participant's death, the plan administrator will begin making payments to the beneficiary as soon as administratively practicable. [Add exception for unwaived spousal benefits.]"
• This needs to be reviewed/drafted by benefits counsel. 

Any further suggestions?

• Depending on plan size and resources, a prudent fiduciary should probably have a program in place whereby they periodically (e.g., annually) and systematically reach out to all retirees (or retirees over a certain age) and terminated vested participants (or at least those who are near or past early or normal retirement age and who have not yet commenced their benefits) to verify that they are still alive, to verify their current address and intended beneficiaries and to ask whether they have any questions or concerns about their pension benefits. 
• All communications should say "formerly [company name when the person was employed]", as applicable, in address blocks to minimize the risk that the mail is dismissed as spam.
• I would NOT recommend adopting a rule whereby participants must verify their addresses and vitality annually in order to avoid having their benefits cut off, at least not unless it is clearly written out in the plan document (i.e., not a matter of fiduciary discretion) and unless the participant or beneficiary remains entitled to backpayments with reasonable interest (and maybe not even then). That sort of rule might not be consistent with fiduciary duties and/or anti-forfeiture rules. 

AKowalski, thank you for your strong thinking (and much appreciated completeness).