Distributing Retirement Plan Account Balances Following a Participant’s Death
Most plan sponsors are comfortable with approving commonly requested distributions such as cash-outs, rollovers, qualified joint and survivor annuities, and even the more document-intensive hardship withdrawal requests. But even with the highly automated systems that can process the majority of distribution requests without involvement of the plan sponsor, employers are required to collect information and authorize the payment of amounts for distributions of deceased participants.
Processing these unique distribution requests requires supporting documentation and careful attention, both to ensure that the distribution is completed in strict accordance with the decedent’s directive and to avoid liability to your organization.
A participant’s directives must be followed
A participant’s directions must be followed exactly. I once experienced a case where a younger plan participant had named his girlfriend at the time as the beneficiary of his retirement account. He later broke up with her and had a child with his new girlfriend. When he suddenly passed away, he hadn’t updated his original beneficiary designation form. The plan sponsor’s human resources manager was upset that she had to process and approve the distribution to his ex-girlfriend and give nothing to his child.
Encourage participants to update beneficiaries
To help avoid a scenario like the one above, an annual communication campaign will encourage participants to review and update their designations every year. This way, participants are more likely to verify their beneficiaries and make updates to reflect any life changes (marriage, divorce, or additional children). This will also help reduce the opportunity for confusion between paper-based or online-based designations when a distributable event occurs.
With the migration from paper-based forms to online data input, there may be instances where a paper beneficiary designation form is superseded by an online beneficiary designation. When a distribution for a deceased participant is processed, it is recommended that that the plan sponsor check both manual and online beneficiary designations to make sure that the distribution is processed according to the most current designation form.
Assemble pertinent documents before authorizing a distribution
It is vital to have all the pertinent information in order to support a distribution, including a copy of the death certificate, a copy of the beneficiary designation form, and the directive obtained by the named beneficiary as to how they would like to receive the funds (either in cash or as a rollover to an individual retirement account, or a combination thereof). You’ll also want to check the individual’s health insurance enrollment forms to make sure that the participant has not changed their marital status, and that the status listed on the form is accurate.
Once all documents are in complete order, you should perform a last verification before authorizing the distribution and forwarding it on to the custodian for disbursement. It is best practice to have either your plan committee or another person charged with plan governance perform a second review of this documentation prior to it being processed by the custodian.
How we can help
CliftonLarsonAllen (CLA) can help you evaluate your service provider contract to determine whose responsibility (plan sponsor or custodian) it is for gathering the documentation for distributions in the event of a participant’s death, and create a system/checklist for gathering and evaluating the distribution documentation. We can also suggest ways to encourage participants to update their beneficiary documentation on file so that you have updated directives and can process the request in a timely fashion in the case of such an event.