Beneficiary designated with a dollar amount?

Is it possible to designate a beneficiary with a specific dollar amount?  For example, the primary beneficiaries are two children who each get $100,000, then the rest goes to the spouse?  Realizing that spousal consent would be required, but I've never seen anything other than percentages used.  In the instance for which this is being asked the account balance is well beyond the dollar amount alloted.  Thanks very much.

Whether a plan’s administrator would follow such a beneficiary designation might turn on the plan’s governing documents and the administrator’s application or interpretation of the plan’s governing documents.

Some plans state that a beneficiary designation must specify shares of beneficiaries only by percentages.

Other plans might let a participant specify her beneficiaries’ shares by a formula, if it can be applied using only simple arithmetic and without using information beyond the plan’s records.

Many plans’ documents are ambiguous about what is allowed or precluded.

Some plans’ document call for the plan’s administrator to set a procedure.

If your client is the plan’s sponsor or administrator, discuss with it what it prefers to allow or preclude.

Further, if the plan’s administration makes and keeps beneficiary-designation records in a service provider’s system, consider that the software might constrain an entry to a percentage.

If your client is the participant who would make the beneficiary designation, consider suggesting that the participant ask the administrator whether it would follow the beneficiary designation.

If an employment-based plan doesn’t support what the individual wants, consider a rollover to an Individual Retirement Account trust (not a custodial account) with a trust company that regularly works with estate-planning and other not-simple beneficiary designations.

This is not advice to anyone.

Thank you Peter.  So it sounds like this is a procedural issue and not a statutory issue?  

Except for provisions like protecting a surviving spouse’s rights or meeting tax-law conditions about a minimum distribution, a plan’s sponsor has a wide range for setting an individual-account retirement plan’s provisions for whether a participant may make a beneficiary designation, which terms a participant may or cannot specify, how a participant may divide beneficiaries’ shares, and in what form a participant must make a beneficiary designation the administrator would follow.

The starting point is RTFD—Read The Fabulous Document.

Many IRS-preapproved documents don’t state the details. Some refer to a “form satisfactory to the Administrator.” Some call the plan’s administrator to set a procedure.

Subject to the terms of the plan document, beneficiary designation and allocation details are usually left to administrative procedures. While on the one hand, that means that amendment is less cumbersome if administration is friendly to participants. On the other, in these days of computer administration, the system might be rather limited and inflexible about what it will accept. Thank the provider for its self-interested off the shelf arrangements. That said, an accommodating human administrator might dread the confusing, inept, and ambiguous designations and allocations that inexperienced drafters come up with. A retirement plan is not meant to be a vehicle for fine-tuned estate planning. Who wants to struggle through difficult interpretation?

2 hours ago, Gilmore said:

Thank you Peter.  So it sounds like this is a procedural issue and not a statutory issue?  

Yes. But administrators and recordkeepers have good reason to insist on percentages. If the designation is "$100K to A, $100K to B, and the rest to C" but there is only, say, $50K in the account, nobody wants to be stuck trying to interpret that.

There is actually a case out there (I can't find it at the moment that held that the plan cannot allocate plan benefits 1/3rd to each beneficiary since, e.g. $100,000/3 = $33,333.333333333333 and that in our monetary system you can only divide money up to 99 pennies past the decimal point. So they reverted to the default order of precedence. The same would true any number that extend beyond 2 spaces past the decimal point. 

On 10/14/2024 at 2:23 PM, Bird said:

Yes. But administrators and recordkeepers have good reason to insist on percentages. If the designation is "$100K to A, $100K to B, and the rest to C" but there is only, say, $50K in the account, nobody wants to be stuck trying to interpret that.

Understood.  In this case the inquiry came from the two owners (spouses), with accounts well beyond the dollar allocations.  Still a good point.  This opens the owners who are also the administrators to having other participants who do not have such large balances making the same type of request.

About the point fmsinc mentions, here’s a Q&A from one of my Wolters Kluwer treatises:

Must a beneficiary designation express beneficiaries’ shares in whole percentages?

Yes, a beneficiary designation must express beneficiaries’ shares in whole percentages if the plan or a plan-administration procedure, which might include a beneficiary-designation form, so provides.

Example. The plan’s beneficiary-designation form’s instructions stated: “The Allocation % must be whole percentages.” After her divorce, the participant, seeking to specify new beneficiaries, submitted a form that named her three siblings and specified “33 1/3%” for each. The plan’s administrator rejected that form and treated it as having no effect. After the participant’s death, the plan paid almost $600,000 to the previously designated beneficiary, the participant’s former spouse. Gelschus v. Hogen, 47 F.4th 679 (8th Cir. 2022).

Even if a plan’s administrator has discretion to accept a not-in-good-order designation, rejecting a participant’s attempted designation might be no breach because a fiduciary administers a plan according to the plan’s documents. Further, that a plan’s whole-percentages provision frustrates a participant’s clear intent does not undo or relax the provision. See Gelschus v. Hogen, 47 F.4th 679 (8th Cir. 2022) (applying the plan-documents rule regarding a plan governed by part 4 of subtitle B of title I of ERISA).

Likewise, some plans treat as having no effect an attempted beneficiary designation with shares that do not sum to 100 percent.

Practice Pointer. Some plans’ documents expressly provide ordering rules, or expressly grant an administrator discretion, to adjust a beneficiary designation not expressed in whole percentages or that does not sum to 100 percent. But nothing requires a plan to provide this, and a court might defer to a plan’s provisions or a plan administrator’s procedure.

(As the publication warns, no one may rely on this.)