Non-spousal beneficiary

A non-spouse beneficiary has elected to leave her inherited funds in the 401(k) plan. The plan does not allow annuities. She is married but does not wish to name her spouse as sole beneficiary of her assets in the plan. Is spousal consent required?

What does the plan say?

1 hour ago, david rigby said:

What does the plan say?

Plan language addresses participants naming non-spouse beneficiaries (consent required), but it's silent on beneficiaries who leave assets in the plan naming beneficiaries.

I do not think the spousal protections afforded by ERISA that attach to qualified plan participants subsequently apply to the benefits inherited by their beneficiaries. For example, if my married daughter is my beneficiary, upon my death there is no requirement to name her husband as her beneficiary of my inherited account. However, if she fails to designate a beneficiary then the plan's default will apply, which could be her husband.

Also, be mindful of the new RMD requirements.

8 hours ago, CuseFan said:

However, if she fails to designate a beneficiary then the plan's default will apply, which could be her husband.

Totally agree with first part of your answer, CuseFan, but my guess is that most plans don't address at all what happens if beneficiary dies before taking out all funds. Would then go into beneficiary's estate.

Make sure a beneficiary can name a beneficiary.   I just had this come up again recently.  For some reason a client's  plan says a beneficiary can't name a beneficiary. 

I don't know why the plan says it but it clearly says it.   I have seen this more than once in my time doing this stuff.  

43 minutes ago, ESOP Guy said:

Make sure a beneficiary can name a beneficiary.   I just had this come up again recently.  For some reason a client's  plan says a beneficiary can't name a beneficiary. 

I don't know why the plan says it but it clearly says it.   I have seen this more than once in my time doing this stuff.  

If you want. But if you don't have to and want them to take their money to an IRA (where they can of course easily name a beneficiary), maybe better not to allow beneficiary to name a beneficiary. I think most plans don't allow, although the sponsors probably haven't given it much thought.

Some plans specify that only the participant’s beneficiary designation (including a contingent beneficiary designation) governs who gets any benefit any time after the participant’s death.

Under provisions of that kind, a benefit not exhausted by a primary beneficiary’s death might be provided to a contingent beneficiary the participant named.

(If the participant’s beneficiary designation, including the participant’s contingent beneficiary designation, is exhausted, the plan’s default beneficiary might apply.)

If a plan’s sponsor considers providing that a beneficiary may name a further beneficiary, the sponsor might carefully evaluate whether the plan’s administrator can administer that beneficiary regime. Likely, the employer/administrator would administer such a beneficiary-designation regime without the recordkeeper’s help.

3 hours ago, Peter Gulia said:

Some plans specify that only the participant’s beneficiary designation (including a contingent beneficiary designation) governs who gets any benefit any time after the participant’s death.

I have not seen this, Peter, but I guess would work as long as the beneficiary was required to take annuity payments or installments, not a lump sum. Sort of like estate planning in the 401(a) plan, which I guess may be useful in a small plan with a lot of money. I guess you would have to do it that way if you really didn't want the primary beneficiary (e.g., spouse) to have a right to a lump sum, because to get to an IRA you would have to permit a lump sum. I have seen highly customized IRA provisions for this sort of thing where the business owner has already rolled out to an IRA.

Luke Bailey, thank you for your observations.

The provision ESOP Guy described (if it’s the provision I remember some recordkeepers putting in documents furnished to customers) applies also if the employment-based retirement plan permits or requires a single-sum distribution.

Without such a statement in the plan’s text, some might interpret a plan as allowing a person who (by surviving the participant) gained a right to take a payment a right to name a successor beneficiary for whatever remains of the portion the participant-named beneficiary could have taken before her death.

Yet, a change from a primary beneficiary to a contingent beneficiary is likelier with yearly or other periodic payments. (The last time I saw an ERISA-governed § 401(k) plan that provided an annuity was almost 30 years ago.)

The essential import of the provision is that a plan’s administrator (and its service provider) never looks to a beneficiary designation beyond one the participant made before her death.

Among several reasons for such a provision is that many plan-administration regimes have no way to record a beneficiary designation made by a person other than a participant.

And some consider it appropriate for a participant to control, except for the plan’s limited protections for a surviving spouse, the disposition of an accumulation the participant created.

Peter, I am not sure that I agree with your previous statement that the contingent beneficiary would obtain the remaining benefits if the primary beneficiary dies prematurely. Many times, the contingent beneficiary's status is conditioned on whether or not the primary beneficiary survives the participant (which would be determined within a few months of the participant's death). In that scenario, the contingent beneficiary would not be entitled to anything if the primary beneficiary survived the participant. Prior to SECURE, no one ever thought seriously about the possibility that a beneficiary of an RMD would be able to designate a beneficiary. Plans should be amended to allow for this as part of the SECURE remedial amendment period amendments (with one possibility being the revival of the participant's designated contingent beneficiary becoming the default beneficiary). The other concept I saw referenced in the discussion was that the plan's default beneficiary would take. In many plans, the default beneficiary is often the participant's estate.  This latter possibility is also highly undesirable and may prove impractical, particularly if the participant's estate has become closed prior to the primary beneficiary's death. Bottom line, cover this in the SECURE RMD amendment.

rocknrolls2, thank you for your observations.

Sponsors of retirement plans have wide ranges of choices in setting provisions about who gets a benefit after a participant’s death.

My descriptions posted above presume a particular set of (perhaps idiosyncratic) provisions I’m familiar with. Those provisions include:

Only a participant (before her death) can name a beneficiary, or change the participant’s beneficiary designation.

A person is not a beneficiary unless the person is alive when the distribution otherwise would become payable.

A person is not a beneficiary unless the person is alive when the particular payment under a distribution otherwise would become payable.

Any right of a beneficiary is strictly personal to that beneficiary and lapses on her death.

An undistributed benefit that would have been distributable to a person had she lived is not distributable to that person’s legatees or heirs.

On a beneficiary’s death, any undistributed benefit attributable to that beneficiary becomes distributable to the remaining primary beneficiaries or beneficiary if any, or if none, to the remaining contingent beneficiaries or beneficiary, in each case to be distributable in equal shares to all living beneficiaries of the applicable primary or contingent beneficiary class.

The provisions I describe are not my reading of any widely recognized document provider’s IRS-preapproved documents or similar models.

The regime you describe—that a primary beneficiary’s right (including perhaps a right to appoint a further disposition) becomes fixed when that beneficiary survives the participant—could be a correct or sensible reading if the plan’s governing documents so provide, or lack text to provide something else.

I concur that a plan’s sponsor, a sponsor’s lawyer and other advisers, and (in some circumstances) service providers should put more attention on carefully designing and writing a plan’s beneficiary provisions. That includes a plan’s default provision.

A § 3(16) administrator, third-party administrator, recordkeeper, or other service provider might more efficiently handle difficult situations and might save (sometimes unbillable) time and by thinking through which provisions fit one’s clients’ plans and the service provider’s business interests.