Retirement Plan Beneficiary Designations
By Jessica Reynolds, JD, CISP
What does it mean to be a beneficiary of a qualified retirement plan?
A beneficiary is a person (or nonperson) who is designated by a participant, or by the plan, and may become entitled to a benefit under a qualified retirement plan after the death of the participant.
If a participant has a last will and testament, should the plan administrator distribute retirement plan assets to the person designated on a plan beneficiary designation or to the person named in the last will and testament?
When a qualified retirement plan participant dies, the designated beneficiary under the terms of the plan is entitled to the assets regardless of any designation in the participant’s will.
Can a participant name someone other than her spouse as the designated beneficiary for her qualified retirement plan?
If the participant is married, federal law requires that her spouse be named as the designated beneficiary of the qualified retirement plan. The participant’s spouse can irrevocably consent in writing to someone other than herself to be designated as the beneficiary. In general, a prenuptial agreement cannot take the place of the waiver because federal law requires a spouse, not a soon-to-be spouse, to consent to the waiver of beneficiary rights.
If a participant names his spouse as the designated beneficiary of the qualified retirement plan assets and they subsequently divorce, but the participant does not change his beneficiary designation, is the prior spouse entitled to the plan assets?
Qualified retirement plans are governed by federal law, and ERISA requires the plan administrator to pay the proceeds to the beneficiary named by the plan participant and to disregard state law. Therefore, if a participant names his spouse as beneficiary and he later divorces, his ex-spouse will inherit if he does not change the beneficiary designation. However, a plan document can be drafted to disregard any beneficiary designation of a former spouse. A participant should be diligent in updating the beneficiary designation after divorce if he does not want to designate his ex-spouse as beneficiary.
If a participant fails to return a beneficiary designation form or if the beneficiary dies prior to the participant, who is the beneficiary of the qualified retirement plan assets?
If the participant was unmarried at the time of her death, the terms of the plan document will define the default beneficiary. Absent a valid beneficiary designation, the account will be distributed according to the default. The default beneficiary under a plan frequently is the participant’s estate.
If a beneficiary does not want the assets from the qualified retirement plan, is she required to accept them?
If a designated beneficiary does not want to take the plan assets, she can disclaim the assets. The disclaimer must be irrevocable, it must be in writing, and it must be received by the plan administrator no later than the later of (a) nine months after the participant died, or (b) nine months after the beneficiary turns age 21. The beneficiary must not accept any interest in the property and she cannot direct to whom the assets will be distributed after she disclaims. If a participant wants to disclaim assets, she should speak to competent legal counsel or her tax advisor.