Controlling plan provision: plan at time of death or time of correction?

401k plan making a corrective distribution in 2024 based on error in past plan years.  Default beneficiary provisions are different in current plan document than the plan document in place at the time of the error.  Default beneficiaries (where no beneficiary designation is made) in previous document: spouse, children, parents estate.  Current plan document: spouse, estate.  Which provision controls?  

I believe whatever provisions applied at the time the distribution should have been or had to have been made under the terms of the plan should be applied when corrective distribution is made. 

I tend to agree, but I would defer to ERISA counsel. Depending on the timeframe involved (going back for how many years) there could have been lots of changes in the beneficiary populations - death, divorce, marriage, etc. - and I don't know what effect that might have. Also, the amount of money involved may have an effect - if small, the tendency is to take more "risk" for the sake of administrative sanity, whereas if the amount is large, more caution is usually exercised.

I'm not sure, and this seems to be what we call a "dandelion" - blow on it and the fluffy seeds spread everywhere.  One the one hand, corrections are book "current year" - when contributed, and are otherwise considered "current balances."   On the other hand, there may be protected benefits from the past iterations of the plan document that apply to the individuals for whom a corrective contribution is applicable.  Generally, we take the position that the correction is "current" and all matters relating to it are subject to the current plan provisions - but we haven't analyzed a protected benefit issue, or here, a default beneficiary issue (although, that isn't a protected benefit).

We'd probably use current plan provisions, but if it results in conflict, we might interplead the money and let a court decide....

I think beneficiaries are determined at the time of death, and then obviously (?!) can't be changed. I mean, the decedent obviously couldn't change them after the fact, and I don't see how a plan provision change could change them. I don't have any doubt.

Forget about the corrective distributions that are triggering this. Let's say someone dies Jan 1, 2022, with no spouse, and with kids. In this scenario, the kids are the beneficiaries. Let's say they take RMDs for a year and then ask for the rest of the money, but the plan has been changed so the default is the estate. It makes no sense to me that the bene would actually change. (Or carry out RMDs for 3, 4, 5 or more years...no way would I change anything about those RMDs or other payments mid-stream.)

FTW defines beneficiary as follows (my emphasis):

    "Beneficiary" means the person(s) entitled to receive benefits, under Section 7.04 of the Plan, upon the Participant's death.

(Not "two years after the participant's death" or whatever.)

I think there is something about the way this was phrased that is making you all fuzzy.

57 minutes ago, Bird said:

I think beneficiaries are determined at the time of death, and then obviously (?!) can't be changed. I mean, the decedent obviously couldn't change them after the fact, and I don't see how a plan provision change could change them. I don't have any doubt.

Forget about the corrective distributions that are triggering this. Let's say someone dies Jan 1, 2022, with no spouse, and with kids. In this scenario, the kids are the beneficiaries. Let's say they take RMDs for a year and then ask for the rest of the money, but the plan has been changed so the default is the estate. It makes no sense to me that the bene would actually change. (Or carry out RMDs for 3, 4, 5 or more years...no way would I change anything about those RMDs or other payments mid-stream.)

FTW defines beneficiary as follows (my emphasis):

    "Beneficiary" means the person(s) entitled to receive benefits, under Section 7.04 of the Plan, upon the Participant's death.

(Not "two years after the participant's death" or whatever.)

I think there is something about the way this was phrased that is making you all fuzzy.

And if you are the third service provider since the participant's death and don't have the document in effect nor does the plan sponsor (which may be the third plan sponsor due to M&A activity (real life, here), what do you do?

t.haley, if an imprudent choice might involve meaningful risks, consider suggesting to your client that it engage MoJo to advise the plan’s administrator.

17 hours ago, MoJo said:

And if you are the third service provider since the participant's death and don't have the document in effect nor does the plan sponsor (which may be the third plan sponsor due to M&A activity (real life, here), what do you do?

Cross that bridge when I come to it. 

5 hours ago, Bird said:

Cross that bridge when I come to it. 

Yea, but it's a bridge we cross often....  Working now on a DOL audit, which covers a period that predates our involvement, and moves beyond the date the plan left us.  While we're only responsible for our "era," we have to tie the beginning and end points to what we obtain from/.provided to others....  Bene designations being one of this issues....

18 hours ago, MoJo said:

Yea, but it's a bridge we cross often....  Working now on a DOL audit, which covers a period that predates our involvement, and moves beyond the date the plan left us.  While we're only responsible for our "era," we have to tie the beginning and end points to what we obtain from/.provided to others....  Bene designations being one of this issues....

We work in different worlds. My exposure to larger plans is minimal, but being exposed to the mindset in some transitions, I have been somewhat confused and amazed at how the big recordkeepers will coordinate on "important" stuff like moving money, even including getting investment elections to port over, but other stuff that I would see as just as important (as you note, bene designations) are an afterthought at best. "They are maintained by the employer." Yeah right.

16 minutes ago, Bird said:

"They are maintained by the employer."

We do a lot of work in both worlds and the administration of beneficiary designations is too often an afterthought during a transition in either world.  There are valid reasons why it is very important to include a discussion of beneficiary designations during any transition.

Here are some of the "whys":

Beneficiary designations are primary documents which often require multiple wet signatures including one each for the participant, the spouse and a notary public.  The original document often is the basis for determining death benefits which requires keeping and tracking paper documents or maintaining a document management system that captures sufficient data to document the designations validity.  Larger companies are more likely to have an in-house document management system where they track beneficiary designations along with elections needed across a wide variety of other HR applications.  Smaller companies are more likely to keep paper forms with a physical file folder for each employee.  In these cases, "[beneficiary designations] are maintained by the employer."

Some recordkeepers will collect and retain beneficiary designations and they may charge a separate fee for this service.  Others will collect beneficiary designations but then transmit them to the employer to maintain.  The details of the scope of service most likely are found in the details of the recordkeepers service agreement.

Plan documents and Summary Plan Descriptions include language that specify how a participant must make a beneficiary election to be valid.  If so, and a participant does not follow the specified procedure, then the beneficiary designation can be declared invalid.  It is important that beneficiary designation procedures used within the company or contracted for with recordkeeper are consistent with the plan documentation.

Each plan a recordkeeper services may have its own definition of who is the beneficiary, and each definition can present its own data tracking and administration challenges.  This thread about default beneficiaries is an example.  Other common complexities arise when the plan defines a spouse other than the person who is married to the participant at the time of the participant's death (for example, the plan uses the one-year rule).  Other complexities arise if the beneficiary designation remains in effect after a divorce or a QDRO.  Beneficiary designations that include designating primary and contingent beneficiaries add more complexity, and plan provisions that specify the division of a death benefit per stirpes versus per capita can make it even more complicated. 

(Be honest folks, how many of us can explain the difference between per stirpes and per capita without looking it up.)

Bottom line, managing beneficiary designations is important, can be complicated, should have clearly documented procedures and should have clearly assigned operational responsibilities between the company and its service providers - no matter what the size of the plan. 

We all should not wait until a participant dies to discuss who does what.

“[M]anaging beneficiary designations is important, can be complicated, should have clearly documented procedures[,] and should have clearly assigned operational responsibilities between the [employer that serves as the plan’s administrator] and its service providers[.]”

As Bird alludes to, many employers imagine, often mistakenly, that a service provider will provide every service needed to administer the plan. But wishing won’t make it so. A plan’s administrator must read every service agreement and prudently evaluate whether the administrator can fulfill every needed task using only contracted services and the administrator’s internal capabilities.

Further, a plan’s sponsor might consider an opportunity to narrow what the plan’s administrator needs to do:

Even if a plan’s sponsor is constrained by its use of IRS-preapproved documents, provisions about beneficiary designations, including default beneficiary designations, are—except for required provisions for a surviving spouse—within “administrative” provisions a user may change and add to without defeating reliance on the IRS’s opinion letter.

A plan sponsor that uses that opportunity regularly can avoid situations like a plan having different default-beneficiary provisions for different times (perhaps for no more reason than changing which service provider’s IRS-preapproved documents the plan sponsor uses).

And custom beneficiary-designation provisions (independent of a service provider's IRS-preapproved documents) can get rid of, or make easier, some of the complexities and difficulties Paul I mentions.

5 hours ago, Bird said:

"They are maintained by the employer." Yeah right.

Thanks.  I needed a laugh and glad to know others have the same experience...  It's pretty bad when a client under DOL audit is asked for a copy of their own plan document - as requested by the investigator.....