Administrator’s Notes:

Require and Maintain Participant Beneficiary Designations

By: Lynda Morrison

Plans generally permit participants to designate a beneficiary or beneficiaries who will be entitled to receive the designation, and submit it to the plan sponsor or trustee. When a participant dies, it is up to the plan Sponsor or trustee to distribute the participant’s benefits in accordance with a properly completed designation.

Many employers fail to properly collect and maintain completed beneficiary designation forms. The problems that can occur are many. First, if a participant dies and had not submitted a beneficiary designation, the employer must follow whatever default method of designating a beneficiary is set forth in the Plan. This could be the participant’s spouse or estate, but could include children and siblings. After the participant’s death, identification and location of these persons can be difficult. For example, the employer could have difficulty determining the participant’s marital status at death. Paying the wrong person could prove costly to the sponsor as the proper beneficiary remains entitled to the benefits notwithstanding improper payment to another.

The problem can be compounded if the participant did complete and submit a designation that the employer cannot locate. Imagine the problem if the proper beneficiary is able to produce the designation, but the employer already distributed benefits to another.

Similar problems exist with improperly completed designations. Usually, designating someone other than your spouse will require written consent of your spouse. Many designations I have reviewed designate the participant’s children (possibly from a previous marriage) but the designation is not signed by the participant’s current spouse. This designation is not effective. In the event the participant dies, the participant’s spouse is entitled to benefits in the Plan. The plan sponsor, in this case, must determine the participant’s marital status at death prior to distributing benefits to a designated beneficiary, even if the form is otherwise properly completed and even though the participant may not have been married at the time the designation was completed.

In addition to problems identifying proper beneficiaries, the employer may have difficulty locating them. In a recent situation involving one of our clients, a married participant died without having designated a beneficiary. The plan provided that his spouse was his default beneficiary, and in the absence of a spouse, his children were the beneficiaries. However, the spouse had relocated to Mexico many years before. To this day, the employer is trying to locate such individual and trying to confirm their marital status at death.

The sponsor’s goals should be to effectively gather and maintain beneficiary designations. This should involve (i) requiring participant completion, even if they simply designate their spouse; (ii) requiring mailing addresses for beneficiaries; (iii) reviewing submitted designations for compliance (i.e. being sure any waiver is valid); (iv) reminding participants to complete another designation if they are subsequently married (because prior waiver no longer effective) or divorced; (v) maintain completed designations in a secure location; and (vi) periodically ask employees to review and update designations. This should help to avoid many of the problems.