Invalid Beneficiary Designation?

We administer a small 401(k) plan 

A participant died and the plan sponsor sent us a copy of the participant's most recent Designation of Beneficiary Form. It was signed a few years ago.

The Designation of Beneficiary form provided room to name up to two Primary Beneficiaries and up to two Secondary Beneficiaries. The form also indicates that the participant may attach an additional form should they want to name additional beneficiaries and as long as it the form is signed and dated by the participant it will be valid.

Now the Designation of Beneficiary Form is clear that the total of all primary beneficiaries share of benefits must total 100% and the total of all secondary beneficiaries must total 100%.

This participant was not married and named a friend as primary beneficiary entitled to 50% of the benefits and no other primary beneficiaries entitled to the remaining 50% share (i.e. the total does not equal 100%). Same with the secondary beneficiaries as their share of benefits does not equal 100%.

Question: would this be considered an Invalid Beneficiary Designation?

And if so, I believe we would follow the standard hierarchy allocation of assets as described in the plan document.

Thanks.

The plan’s administrator might read carefully the plan’s governing documents to discern how much discretionary authority the administrator has not only to interpret the plan’s provisions but also to interpret a participant’s beneficiary designation and to make discretionary findings of fact.

I think this would be question for the court to determine. I could see several interpretations and I'm not a lawyer.

Consider also:

The plan’s administrator might not need to decide anything until someone submits a claim, or the plan mandates an involuntary distribution (for example, under a § 401(a)(9) provision).

When someone submits a claim or it otherwise becomes necessary or appropriate to decide who is or is not a rightful beneficiary, the administrator should follow ERISA § 503 and the plan’s claims procedure.

This is not accounting, tax, or legal advice to anyone.

There is no doubt that the Participant is entitled to name a beneficiary or beneficiaries to all of his assets including those within a defined contribution plan (that I assume this is but you didn't say).  The Participant's account does not revert to the Plan so it has to go somewhere. 

This places to name a beneficiary includes the execution of a Last Will and Testament with respect to houses, cars, furniture, investments, boats, yachts and airplanes and most other stuff with respect to which do not pass by operation of law, like life insurance or T/E real property or a beneficiary designation.  

If the deceased dies intestate (without a Will) and fails to name a beneficiary, or if the beneficiary previously designated predeceases the Participant, or if the deceased failed to name a beneficiary with respect to ALL of his 401(k) plan account, there are two places to look.  (i) The Plan document may itself provide that in the absence of a beneficiary designation the asset with pass to specified categories of people.  For example, under Federal TSP the order of preference is: 

1.  To your widow or widower.
2.  If none, to your child or children equally, and descendants of deceased children by representation.
3.  If none, to your parents equally or to the surviving parent.
4.  If none, to the appointed executor or administrator of your estate.
5  If none, to your next of kin who is entitled to your estate under the laws of the state in which you resided at the time of your death.

(ii) If the Plan does not have such a provision the assets wind up in probate court and pass according to the decedent's Will if he dies testate, or, if he died intestate then in the order of preference set forth in state law. 

I don't think you can suggest that the now mortis est Participant really meant to leave 100% to the beneficiary in this case.  It would be more logical to conclude that Participant intended to leave the 2nd 50% to the fist person on this blog to use the Latin phrase mortis est.*      

David

*Dead is. 

23 hours ago, Lou S. said:

I think this would be question for the court to determine. 

IMHO (non-lawyer), this is not the correct course of action.  The Plan must follow its own document and procedures first (in that order).  Eventually, it's possible a court might be involved, but that should not be the default action.  Comments from the two attorneys above are spot on.

Thank you for all of the excellent points.

In reading the plan document, it is clear on the procedures to follow if no Designation of Beneficiary is available. In such a case, the death benefits are paid in the order indicated in 1-5 above.

Nothing in the plan document indicates what an invalid Designation of Beneficiary is and whether or not an invalid Designation of Beneficiary is the same as no Designation of Beneficiary. If it were considered the same as no Designation of Beneficiary, then the order in 1-5 above seems very logical. I guess this really comes down to whether this would be considered an invalid Designation of Beneficiary and if so, would the order in 1-5 above apply.

Yes and the interpretation is first the duty of the plan fiduciary, especially if the plan has a decent description of fiduciary authority and responsibilities. I agree with david rigby that the fiduciary should take it as far as possible. Resorting to the courts is not what ERISA intended. A colleague of mine used to give a speech called “The Fearless Fiduciary” as a way of reassuring that ERISA was not out to get them, and offers plenty of protection for a fiduciary who acts diligently and reasonably. Anyone who is aggrieved to can then go to court.

The Plan Administrator must decide how to interpret the plan and the beneficiary form. 

However, my thinking is that if the form specifically states that the percentages must total 100% (which most forms have this language) and the designations did not total 100%, then the form is invalid and cannot be honored.

Determining that the form is invalid because the instructions on the form were not followed would be consistent with the Honeywell case where the beneficiary form specifically stated that the percentages must be whole numbers and the court found that Honeywell was correct in rejecting a form where the participant had listed the percentages in fractions. 

chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://ecf.ca8.uscourts.gov/opndir/22/08/213453P.pdf

Thinking a little outside the box, if I were the PA I might also consider not rejecting the form but rather paying 50% of the account to the individual who was listed as 50% beneficiary, then taking the position that there is no beneficiary for the remaining 50% so that portion needs to be distributed in accordance with the terms of the plan document.  That might be stretching it a little but personally I would feel better knowing that I was at least honoring the participant's wishes on the portion of the benefit that was clearly intended for the 50% beneficiary..

I think your point is valid, but it depends on an entire reading of the plan document and written procedures, which include the forms. I can imagine that the fiduciary could interpret plan terms and written procedure terms to apply default provisions to “fill up” the difference between the sum of designated percentages in the form and 100%. The scope of imagination must be based on a an intelligent and complete reading of the documents, and a reasonable interpretation. Then, as noted in my prior message, anyone who is aggrieved can appeal, first through the plan’s claims procedures, and then to court if it needs to go that far. If you throw things first into court, you might be losing an easier and cheaper solution that is acceptable and most beneficial to all involved, the errant plan participant be damned. 

As QDROphile observes, even if the plan grants the administrator the widest discretionary authority, that fiduciary must consider (at least) all instruments and documents governing the plan, the plan administrator’s written procedures, including forms, and other relevant documents.

None of us sees the writing the participant signed. But following Dougsbpc’s description, some fiduciaries might find that the participant named two primary beneficiaries, 50% each. Some fiduciaries find reasons to excuse some failures in completing a form; others, not so much.

Fact-finding is sensitive to all the facts and circumstances.

If the plan granted the administrator discretionary authority, an advantage of using it is that a court defers to the fiduciary’s exercise of discretion unless it is so unreasoned that the law treats it as “arbitrary and capricious”.