Compliance Partner General Employees can’t t...
Employees can’t take it with them: But who’s getting their money?
By Mike Henckel

Reminders often go out to employees about changing health insurance coverage during special enrollment periods for life events such as marriage, divorce, or having or adopting a child. What is often forgotten, however, is that these same events may call for a reminder to employees to verify or change their beneficiary designations.

A case of unclear intentions
In a case decided by the Pennsylvania Superior Court, Jodie, the ex-wife of deceased employee Paul, was awarded the proceeds of Paul’s life insurance policy. They divorced in 2002, but Paul failed to remove Jodie as the primary beneficiary of his life insurance policy.

Although the estate argued that under Pennsylvania law the designation was revoked upon the couple’s divorce, state law was preempted by the Employee Retirement Income Security Act (ERISA), a federal statute. ERISA requires that plans be administered and benefits be paid in accordance with plan documents.

While leaving his life insurance benefits to his ex-wife may not have been Paul’s intention, the court’s hands were tied. Without an updated beneficiary form, the court could not determine Paul’s true intentions.

Update these designations as well
A life insurance policy is only one example where having a current beneficiary designation is important. Other areas that should not be overlooked when naming beneficiaries include an Individual Retirement Account (IRA), employers’ retirement accounts (e.g., 401(k) plan, pension plan, deferred compensation account), as well as any stock or mutual fund accounts. Assets such as these will pass to the designated beneficiary automatically outside of a will. If no beneficiary form is on file, however, the assets will go through probate and will be subject to the terms of the will. If no will exists, then a judge decides who receives the assets — not always according to the wishes of the deceased.

A primary beneficiary(s) should be named as well as a secondary or contingent beneficiary(s). Should the primary beneficiary pass away, the contingent beneficiary will receive the proceeds of the account. In most cases, the participant selects either a fixed dollar amount or a percentage of the balance to leave to the beneficiary.

Some states do require a spouse’s approval in order to name someone other than the spouse as the primary beneficiary.

Sign here, please
Missing signatures can also cause problems with beneficiary designations. In a case decided by a U.S. District Court in Florida, Buddy’s girlfriend, Jerri, unsuccessfully tried to overturn the distribution of his 401(k) assets to Buddy’s son.

At the time of Buddy’s death, two beneficiary designation forms were on file. The original beneficiary form Buddy had completed naming his son as primary beneficiary. This older document overrode the more recent form which named Jerri as 50 percent beneficiary along with Buddy’s daughter. Why? Buddy failed to sign the updated form prior to his death. The court was unwilling to change the original designation noting that without a properly signed form, the identity of the “designator” could not be conclusively determined. A missing signature was not a “minor” technicality and should not be overlooked, according to the judge.

Remind employees
Because beneficiary designations in these cases require the participant to make his or her intentions very clear as to who should receive his or her assets, employees must be reminded to always have a current and properly completed beneficiary form on file for each plan or account.

Any life event changes such as death, divorce, or marriage, should act as reminders for employees to make sure their affairs are in order.

Copyright 2017 J. J. Keller & Associates, Inc. All Rights Reserved.
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