Blue Ridge ESOP Associates Industry News

The Importance of a Beneficiary Form

Posted by Ray Mazurowski

Dec 12, 2018 2:30:00 PM


When you are hired by a new company, one of your initial tasks may include completing various beneficiary forms for the company’s benefit plans. Most people, including myself, will fill it out and not think about my initial election anymore. Some people may overlook this and not fill one out at all. So, you may be asking yourself, what is the big deal?

First and foremost, when adding new employees, please ensure you are having them fill out a beneficiary form. It is a best practice to ensure that a beneficiary form is filled out for each individual retirement plan, insurance plan, etc. For a beneficiary election to be valid, it has to specifically list the plan for which the beneficiary election was made.  For example, if a participant completes a beneficiary form for his 401(k) account, that beneficiary election generally only applies to that plan and cannot be used for any other company-sponsored benefit plan.

Many companies allow their employees to participate in their 401(k) plan right away, so they can get a beneficiary election from the employee when hired.  In contrast, ESOP’s are usually not designed to allow for immediate entry upon hire so a new employee may not be an ESOP participant right away.  Asking your new employee to fill out a ESOP beneficiary form ahead of time is a proactive option to ensure you have the election once they enter the plan. If you do not do that, a employees should be asked to fill out beneficiary forms when they become participants. Consider a review of your employee population at least once a year to monitor this. This could be a good practice at the beginning of the new plan year or at the time of annual distribution of participant statements.

If a participant does not make a beneficiary election, the Plan Document will specify the default beneficiary.  Commonly the surviving spouse is the default beneficiary, which makes it easy if the participant was married at the time of death.  If there was no surviving spouse, the plan document should list who is next in line to be designated as beneficiary.  It’s not uncommon for plans to designate the estate of the deceased participant as the beneficiary if there is no election on file and there was no surviving spouse.

The clear establishment of the beneficiary direction will ensure that benefits can be paid in a timely manner to the beneficiary. Each plan document is required to have specific rules in place as far as how soon the payment must be made to the beneficiary. The rules for qualified retirement plans generally require a plan sponsor to offer a distribution to the beneficiary of a deceased employee no later than the plan year following the plan year in which the participant passed away.

Keeping your beneficiary form up to date is extremely important. Say you divorced your spouse and then re-married but never updated your beneficiary form.  Depending upon the plan terms, the funds in your account could still end up going to your ex-spouse!

For qualified retirement plans such as an ESOP or 401(k) plan, your spouse is must consent in writing if you name someone else to be the beneficiary. So for example if you re-marry and have children from your prior marriage that you want to designate as the beneficiaries, your new spouse has to consent to that election.

In Summary, it is important to have a beneficiary form on file. Failure to complete a beneficiary election can cause hardship not only on the family of the deceased participant but on the Plan Sponsor as well. Keep your beneficiary form up to date with any significant changes in life events.

Clients of Blue Ridge ESOP Associates who utilize our full service ESOPConnection™ website can direct their employees to make their ESOP beneficiary elections online. This service allows a participant to make beneficiary changes at any time, and allows you as the plan sponsor to run reports to see who has (or has not) made a beneficiary election.

If you have any questions, please contact your Plan Administrator.