Quite often, we get asked by clients what they should do with the ESOP account balance of one of their participants that died without completing a beneficiary election form. So, what is one to do to prevent such a situation from happening?
Communication
A good best practice would be to include retirement plan beneficiary elections as a part of your employee on-boarding process.
If for some reason an employee fails to elect a beneficiary in the initial hiring period, it might be wise to consider identifying participants who have not elected. This can be done on an annual basis during participant statement distribution or another regularly scheduled election event.
Plan Document
The provisions of your plan document should be written to account for a hierarchy of who is entitled to a beneficiary payout. There should be contingencies set up to account for all situations including when a participant dies with no surviving spouse or heirs. In this case, frequently the balance would go to the Estate of the deceased participant, but having specific language will take any guesswork out of the decision.
Additionally, the Plan Document language should explicitly reference beneficiary election forms to provide linkage with how the Plan Document directs the disbursement of plan benefits upon death.
Divorce
The distribution of balances of divorced participants that die before they are able to update their beneficiary can be problematic. One solution that can be built into your Plan Document is to have a mechanism where upon divorce, a participant’s beneficiary hierarchy automatically resets to a predetermined order such as 1) spouse, 2) children, 3) other family (parents or siblings), 4) estate. This provision can reduce the risk of having an ex-spouse make a request for a balance and mitigate extra time and energy spent determining the proper division of balances.
Summary
It is preferred for Plan Sponsors to clearly establish who is entitled to a payout from a deceased participant’s account. There are key considerations that need to be addressed as a Plan Sponsor meets their fiduciary duties.
Education is paramount in making sure that the proper recipients are paid the balances to which they are entitled. This takes effort and constant consideration on the part of you as Plan Sponsor. Encouraging participants to comply with requests for election will improve the chances that the payouts are paid properly and that disputes are avoided.
