Default Beneficiary Designations

Reviewing a plan for takeover. The base document provides for a default beneficiary of:

1. Surviving Spouse;

2. Participant's issue, per stirpes;

3. Participant's surviving parents, in equal shares; or

4. Participant's estate.

Fairly standard stuff. Now, in the Appendix, this default is modified to be:  "the Participant's spouse, children, or parents, then estate."

My question to you legal dudesses and dudes is, other than no per stirpes for the children, what, if any, is the real legal effect of this? How would a Plan Administrator determine, for example, anything other than a 50/50 split for the parents? Etc.? Is there a good reason you can see for this modification of the default? Seems to me it can only cause confusion.

Thanks.

A well-crafted plan would have a single default beneficiary provision that applies across the plan, or at least it would clearly state which provision governs in a given case. If I had to guess, I would say the drafters of the plan you describe were feeling cautious about IRC Section 411(d)(6) at the time of a prior merger, so they copied the full text (or most of it) of the other company's plan wholesale into an appendix, and wrote up something that says "this class of participants is entitled to benefits as provided in the core plan document, except to the extent that the applicable appendix says differently". 

As for the substantive difference between "participant's children" and "participant's children, per stirpes", the potential difference lies in how any grandchildren would be treated if their parent who was the participant's child is dead. Suppose that the participant has three children, one of whom is deceased, and all three of which have 2 children apiece. If a benefit is distributed per stirpes, then the deceased child is allocated 1/3 of the benefit, and then that third is divided in two and distributed to each of the deceased participant's children. Note that the other grandchildren still get nothing. If a benefit is distributed to the participant's "surviving children", then each of the two surviving children gets 50%. If the benefit is simply distributed to the participant's "children", then there is some ambiguity as to which of the above results was intended by the drafters (or perhaps some different result entirely). 

Good comment

i would also add that the Plan should supersede over any supplemental documents under normal circumstances as embodied in a number of court decisions, unless there is more to this than we’re aware of.

Another possible problem: "children or parents" seems to indicate that that is a single class in which survivors would share equally. So, if a participant was survived by 3 children and 1 parent, each would get 1/4.  I suspect they probably meant to say: surviving spouse, surviving children, surviving parents, then estate (so that each of the 3 surviving kids would get 1/3 and the parent would get nothing in that example). 

Belgarath, what was the purpose of the "Appendix?" that could bear somewhat on the issue of which set of provisions would have precedence?

I assume you've quoted the Appendix language verbatim. I have never seen such horrible drafting of a default beneficiary provision. And I mean that literally. It is subject to a variety of interpretations. All the individually designed and preapproved plans I've ever reviewed have always had precision at least on this issue, e.g. "if there are no surviving, then," etc., not commas and an "or," which could even be interpreted as giving the plan administrator discretion to choose. And plans always state per stirpes or, rarely perhaps, "equally." It makes a difference because with per stirpes (aka, "by right or representation"), if there were 3 kids and one had died leaving grandkids, then the deceased child's grand kids would share his or her portion, whereas with equally just the 2 surviving kids would take. If this were a big account and you actually had to apply it, there could well be a fight.

The purpose of the Appendix is to allow a plan sponsor to select overrides of the default document language. Why they chose this particular language I cannot say.

2 hours ago, Belgarath said:

The purpose of the Appendix is to allow a plan sponsor to select overrides of the default document language. Why they chose this particular language I cannot say.

Pardon my jumping in here - are you saying the plan sponsor *wants discretion* in selecting the beneficiaries?  That's what it appear to me that you are saying.

Attorneys would call that "felony stupid" (stupidity of the highest order) and litigators would love that!  The whole point of having specific plan language detailing who gets what is to avoid any possibility of any discretion whatsoever, so the defense is "Your Honor, the Plan language is clear and ambiguous and I am bound by ERISA to follow the terms of the Plan."  Case closed.

We deal with bene disputes all the time, and once you point to the plan language, they go away.  If the benes want something different, then them that gets can give to them that don't (which, actually, never really happens...😗)

Let’s ask a related question:

Assume a nonlawyer TPA.  The IRS-preapproved document is from one of the big document vendors.  With no suggestion from the TPA, its client—the plan’s sponsor—wrote the variation of the default-beneficiary provision.  The TPA considers that provision unwise.  But the TPA believes a prudent plan administrator could interpret the provision as not granting discretion and not tax-disqualifying the plan.

What duty or responsibility (if any) does such a TPA have to tell her client that the provision might be unwise?

Hi MoJo - no, that's not what I'm saying (or if that's what I said, it certainly isn't what I was trying to say). I'm merely saying that the Appendix ALLOWS the plan sponsor to include language to modify/override certain plan default language. It's a normal IRS pre-approved plan.

As to WHY they chose to do this, and whether on the advice of counsel, etc., and whether it as smart, stupid, criminally stupid, or worse, I cannot say. Hence my questions to the legal eagles on this board.

I would not presume to advise  a client on this - that's a matter for counsel, which I ain't. I was just curious about it for my own background information. The discussion has been informative!

Thanks.