Beneficiary Designations

Decedent changed substantial IRA beneficiary designation to name his mental health therapist who he was having an illicit relationship with during his treatment. T.Rowe Price IRA beneficiary designation mixes up therapist's first and middle name and does not include date of birth and social security number. The form was submitted online, but seemingly "accepted" by T.Rowe Price. Therapist wants to claim the money. 

TRP did freeze the account pending litigation. Does anyone know if this stays RMD requirements or the 9-month disclaimer? What is your experience with incomplete beneficiary designation forms? 

Only more questions.  Does not the plan document say what happens when there is no valid beneficiary designation?  Surely it must,  What does the plan administrator think?  Has the plan administrator taken a look at the "form" and made a decision as it should as a fiduciary?  What does the employer mean when it says the beneficiary form is incomplete?  The question is, "Is it valid or not?"  Who's in charge here?  That's the big question.  TRP is not, I assume, a responsible fiduciary and I would think had no authority to "freeze" the account.  Is litigation actually pending, a suit filed? Time for the employer to get it's ERISA legal counsel involved.  When all is said and done it may be wise for the employer to reevaluate it's relationship with TRP.  I know they are a mutual fund company, but as to their ability to help run plans I have no idea.  As to my experience, with major players like Vanguard and Fidelity, when they screw up they bit the bullet, fix it, and move on.

Unlike some employment-based retirement plans for which a § 401(a)(9) minimum-distribution provision might apply regarding the particular plan, for Individual Retirement Accounts tax law’s minimum-distribution condition applies to an individual, and applies regarding the aggregate of the IRAs an individual holds.

A typical IRA custodial account agreement does not obligate (and might not permit) a custodian to pay a distribution the holder has not requested.

And an IRA custodial account agreement might provide the custodian a right to delay payment if there are competing claims or other circumstances that raise a reasonable doubt about which person is the proper distributee. A custodian might have a right to wait until the custodian receives a court order or a settlement agreement that protects the custodian.

I recently had a situation like this with a qualified plan. I could not find any guidance that would indicate that in this circumstance the IRS would waive the RMD requirement until the situation was resolved. I would think that the person who ultimately is awarded the amount could get the penalty waived under the circumstances, but that's just speculation on my part.

On whether an employment-based plan’s administrator fails to administer the plan according to its governing documents (including a § 401(a)(9) provision) so that the IRS would tax-disqualify a plan on that ground, a fair reading of relevant tax law ought to allow some tolerance for situations in which the beneficiary is not yet decided.

As Luke Bailey points out, we’ve not found a regulation, or even nonrule published guidance, that describes such a tolerance.

A rulemaking project on § 401(a)(9) remains open. Further, the Treasury might revise its proposed rule to follow and interpret SECURE 2022 changes, and might invite another round of comments.

For situations in which an administrator delays a distribution while deciding (or waiting for a court to decide) which person is the rightful beneficiary, would it be helpful or harmful for Treasury to put something in the regulations to recognize those situations?

For example, a rule might say a plan is not tax-disqualified for failing to pay a beneficiary’s distribution when the plan’s administrator uses a claims procedure—with periods no longer than those permitted under ERISA § 503—to decide who is the beneficiary, or when a court proceeding to decide which person is the beneficiary is pending.

BenefitsLink mavens, do we want an express rule?

Or are we better off leaving this to good judgment?

It depends. If the express rule provides for the necessary flexibility, and the provisions that we want, then I'd vote for an express rule. The problem is, the express rule may not be what we want, or provide sufficient flexibility in all situations, in which case we might be better off leaving it to "good" judgment. The IRS has historically, in my experience, been very reasonable about waiving RMD penalties. Perhaps with the reduced 10% penalty, they may be less inclined to waive penalties - only time will tell. 

Now there's a useless noncommittal response for you...

Those are truly helpful and useful observations.

Other BenefitsLink neighbors' views?

Note that in the case I worked on we interpleaded the benefit into court, and we felt that was as closing as we could come to distributing the benefit for purposes of the plan's obligation to make an RMD. Note that in addition to addressing this in the final regulations, as Peter suggests, the IRS might want to change the 1099-R Form and instructions to include interpleader.