401K did not distribute to correct individuals

The participant died with no named beneficiaries.  The participant has 2 surviving family members, son and granddaughter.  The 401K company said that IRS regulations state that grandchildren are not eligible to receive distributions.  They asked for information about the estate with the expectation that the distribution would go to the estate.  After a 7 or 8 month delay the check was distributed to the son.  The son involved a litigation attorney to send a letter requesting the additional funds from the delay and then they responded with the distribution was done incorrectly and that the granddaughter should have received half.  This notification happened 1 and a half years after the check was distributed. From a beneficiary how does this get corrected?

Just my two cents.  I would first confirm if the distribution actually went to the incorrect beneficiaries; because the suggestion that a portion of the benefit goes to the son and a portion to the granddaughter sounds a little unusual. I would check the terms of the 401k plan document to confirm who the benes are in the absence of a bene designation.  Is it the estate; or are there identified individuals to be treated as benes in the plan document (e.g., children, grandchildren, siblings, etc)?  If the beneficiary truly is the estate (which is typical), you would acquire the estate documents from the estate administrator and, if the estate is still open, the amounts should have gone to the estate (if that was dictated by the terms of the plan document).  It is possible that the estate is closed and the estate docs designated the son to get half and the granddaughter to get half.  Before you go ahead and try to correct the distribution, I would first confirm who the correct beneficiaries are pursuant to the plan document and, if relevant, the estate documents.  

IMO, this is a scenario where the plan needs to hire legal counsel.  It sounds like someone said that the plan terms provided for the default beneficiary to be the participant's issue (children) "per capita", rather than "per stirpes".  (The comment about grandchildren not being ineligible to receive distributions is odd.)  Why was this direction given? 

Assuming the plan did require distribution per stirpes, then the Plan Administrator erred in making the distribution of the entire balance to the son and it will have to make the granddaughter whole.  The plan can likely attempt to collect the excess payment back from the son, but that may not be an easy process (i.e., the son may refuse) so the plan may need to review whether it wants (and the cost/benefit relationship makes sense) to make demands/file suit/etc.

Keep in mind that the Plan Administrator is generally the employer.  The Plan Administrators hires service providers, such as the "401k company," to perform functions, but the service providers generally avoid serving as a fiduciary and just take direction. The questions I'd ask are:  Who is/are the proper beneficiary?  And if it is not the son (only), how was the distribution made incorrectly in the first place?  Most plan documents have clear language regarding default beneficiaries.  Who gave the incorrect advice and who followed it?  The answers to those questions will help to determine who should be responsible for fixing the issue.

1 hour ago, David Schultz said:

Assuming the plan did require distribution per stirpes, then the Plan Administrator erred in making the distribution of the entire balance to the son and it will have to make the granddaughter whole.  The plan can likely attempt to collect the excess payment back from the son, but that may not be an easy process (i.e., the son may refuse) so the plan may need to review whether it wants (and the cost/benefit relationship makes sense) to make demands/file suit/etc.

Can the plan make the granddaughter whole before the recoupment is complete?

Potentially.  Again, I am going to recommend legal counsel.  There are a number of issues here.  But speaking generally, if the PA made an incorrect distribution, giving a beneficiary's money to the wrong party, then there is likely a fiduciary breach.  Assuming there is a realistic belief that the PA could be liable for a breach, the PA can make the plan whole with a restorative contribution which can be used to pay the correct beneficiary. 

Separately, recovering the excess distribution from the other beneficiary can be pursued.

This is not legal advice.  The fact pattern here is interesting, but there is a lot of missing information that could reflect responsibility and/or liability by a number of parties for a number of reasons - or even that no one is due anything.  To steal the line of a frequent poster here:  free advice is worth what you pay for it. Unless this issue is over a trivial amount, I strongly recommend the plan consult with an ERISA attorney.

Has is occured to anyone to ask the person who posted the message what "IRS regulations state that grandchildren are not eligible to receive distributions"?  

I for one would be interested in that.  Most 401(k) Plans that I have seen have an "order of preference" that would apply in the case of a participant who dies without having named a beneficiary. I would look something like this: 

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.

In the absense of an order of preference the account would pass to the estate of the deceased participant and be distributed pursuant to state law that applies when the deceased party dies intestate.  

DSG

I agree with prior posts.

I think it is highly unlikely the granddaughter is entitled to anything. In the absence of a named beneficiary, the plan has a beneficiary under default provisions. It's not like this is a gray area; it is simply a matter of reading the plan provisions to see who the beneficiary is. That is typically going to be spouse, otherwise children, otherwise the estate. (as fmsinc notes, there may be a longer list; it might even be shorter, as in - spouse, otherwise estate). The only way the granddaughter gets anything is if she is the daughter of a deceased child (i.e. not the son's daughter) and the plan says that the benes are "issue per stirpes" (i.e. per branch of the family tree) but I've never ever seen that in a default. (All right, I suppose the plan designation could be "estate" and it is possible the granddaughter is is entitled to something under the will or intestate laws.)

I repeat, this is not mysterious/subject to discretion/gray area.

5 hours ago, Bird said:

I think it is highly unlikely the granddaughter is entitled to anything. In the absence of a named beneficiary, the plan has a beneficiary under default provisions. It's not like this is a gray area; it is simply a matter of reading the plan provisions to see who the beneficiary is. That is typically going to be spouse, otherwise children, otherwise the estate. (as fmsinc notes, there may be a longer list; it might even be shorter, as in - spouse, otherwise estate). The only way the granddaughter gets anything is if she is the daughter of a deceased child (i.e. not the son's daughter) and the plan says that the benes are "issue per stirpes" (i.e. per branch of the family tree) but I've never ever seen that in a default. (All right, I suppose the plan designation could be "estate" and it is possible the granddaughter is is entitled to something under the will or intestate laws.)

I repeat, this is not mysterious/subject to discretion/gray area.

I left a detail out, the granddaughter is the daughter of a deceased child.  The participant was divorced so no spouse. The plan states that distributions after the spouse go to "your children, including adopted children in equal shares (and if a child is not living, that child's share will be distributed to that child's heirs"  The 3rd party advisor stated that “child’s heirs  (granddaughter, in this case) are only eligible if all children  of the participant are not living”.  The plan administrator followed this and distributed to the son only.  Now the plan administrator has said that the granddaughter should have received half.

17 hours ago, NBS2121 said:

I left a detail out, the granddaughter is the daughter of a deceased child.  The participant was divorced so no spouse. The plan states that distributions after the spouse go to "your children, including adopted children in equal shares (and if a child is not living, that child's share will be distributed to that child's heirs"  The 3rd party advisor stated that “child’s heirs  (granddaughter, in this case) are only eligible if all children  of the participant are not living”.  The plan administrator followed this and distributed to the son only.  Now the plan administrator has said that the granddaughter should have received half.

That's a key detail. I still find that language unusual, but it seems to clearly state that the granddaughter was entitled to half.

I think they have to try to get half back from the son - good luck with that. 

I'm always curious about these types of posts - what is your role here?

I wouldn't touch this with a barge pole. Client needs ERISA counsel.

Another lesson we might take from this:

Different service providers’ documents vary on what a base document provides as the default when there is no participant-named beneficiary. That’s so even for service providers that license documents from the same vendor. Even within one service provider, defaults might vary by documents for different business lines.

Except for providing a death benefit to a surviving spouse, a provision about a default beneficiary might be an “administrative provision” a user may change without defeating reliance on an IRS-preapproved document’s opinion letter.

Before adopting a document (including an amendment or a restatement), a plan sponsor should at least read what default the document would provide.

A plan sponsor should consider whether the proposed default fits the sponsor’s interests. If the plan sponsor serves as the plan’s administrator, one might consider whether the proposed default could lead to difficult or inefficient administration.

Which default provisions produce which kinds of frustrations and inefficiencies can vary with a particular plan’s other provisions, and with the employer’s workforce and the plan’s participants.

While some employers might think a default-beneficiary provision isn’t worthwhile to think about at a plan-documents stage, even one beneficiary situation might cost more time and attention than what the plan sponsor would have used on getting the documents right.

3 hours ago, Peter Gulia said:

While some employers might think a default-beneficiary provision isn’t worthwhile to think about at a plan-documents stage, even one beneficiary situation might cost more time and attention than what the plan sponsor would have used on getting the documents right.

Unfortunately different situations might have different "right" documents. For the vast majority of us (?) using pre-approved documents, "it is what it is."

What prompted someone to say "IRS regulations state that grandchildren are not eligible to receive distributions" is beyond me. And then I guess that "misunderstanding" (being polite; it's just stupid) led them to not pay the granddaughter even though the plan says she is entitled (although I remain skeptical of that detailed language, sorry).

Plus you have the son bringing in an attorney, which is going to cost him half of what he received, if this plays out. It's a cluster f*ck. The lesson here is, IF YOU DON'T KNOW WHAT YOU'RE DOING, DON'T DO IT.

Thanks. My point is that, even for a plan sponsor that uses an IRS-preapproved document, spending a few minutes at the plan-documents stage—to read the default-beneficiary provision, or even without reading to replace that default with the plan sponsor’s preference—can save lots of foolishness later.

On 4/3/2024 at 2:26 PM, NBS2121 said:

I left a detail out, the granddaughter is the daughter of a deceased child.  The participant was divorced so no spouse. The plan states that distributions after the spouse go to "your children, including adopted children in equal shares (and if a child is not living, that child's share will be distributed to that child's heirs"  The 3rd party advisor stated that “child’s heirs  (granddaughter, in this case) are only eligible if all children  of the participant are not living”.  The plan administrator followed this and distributed to the son only.  Now the plan administrator has said that the granddaughter should have received half.

This is indeed important detail.  I triple down on my suggestion that the Plan Administrator hire counsel.  Bad advice was given, bad advice was taken, and bad advice led to unfortunate consequences - for the granddaughter, for the son, for the Plan Administrator, for the plan sponsor, and perhaps for the 3rd party advisor.  We cannot resolve those issues here...