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Best Practices on Handling Beneficiary Designations

Practice Management
Most plans have had to deal with situations in which a participant has died with benefits in a qualified plan. A recent ASPPA webcast discussed those situations, as well as others, and ways to handle them.
 
In “Best Practices on Handling Beneficiary Designations,” Robert M. Richter, J.D., LL.M., the American Retirement Association’s Retirement Education Counsel, offered ideas on how best to address this complicated matter. He focused on the beneficiary designations and how to resolve incomplete designations or designations that conflict with a plan, and also covered best practices for handling and interpreting beneficiary designations.

“In most cases, benefits are paid to beneficiaries without problems,” Richter said. “But in some cases, the improper handling of death distributions can result in additional liability and possible litigation.” For instance, he pointed out, if a plan payment is wrong and the plan does not give a plan administrator the discretion to review claims as under the Firestone ruling, a court will make an independent determination regarding whether the payment was reasonable.
 
Spousal Consent
 
Spousal consent was among the matters that Richter highlights. It must be in writing, he said, although he added that Treasury regulations do permit electronic signatures. And the consent must acknowledge the effect of the election.
 
Furthermore, a spouse’s consent must be witnessed, in physical presence, by a plan representative or notary public, Richter noted. “A notary is safer,” he said, adding that it is “not convenient to have one there, but it helps avoid litigation and disputes.”
 
Richter noted that “in physical presence” is problematic during a pandemic, but that there is a process for online notarization. Many states, he observed, permit remote online notarizations, but it is not clear whether that is acceptable for the consent requirement. And, Richter warned, while it may be easier to enlist the services of a plan representative than those of a notary, that also may increase the potential for claims.

Spousal consent not needed, Richter said, if a plan representative is satisfied that the spouse is:
 
  • lost;
  • legally incompetent (in which case a legal guardian must consent, even if guardian is the participant); or
  • legally separated or abandoned (in which case the participant must have a court order, but also must remember that they are still married under the law).
Designations
 
State laws concerning designations must be followed, Richter noted. State laws that directly impact beneficiary designations are generally preempted by ERISA, he noted; however, he added, ERISA is silent on designations.
 
Despite that silence, Richter told attendees, “Reminding participants to review their designations is a best practice.” And he warned that not doing so leads to a lot of litigation.
 
Redesignations
 
Redesignations of beneficiaries are still important when a divorce takes place, Richter said. Some may argue that a plan can put on blinders and say to itself, “why make the participant’s problem the plan’s problem?” he said, but “you’ve got to be careful.”
 
Richter noted that federal courts have been split on the waiver rule—under which courts looked at divorce decrees to determine whether ex-spouses waived their right to benefits—and the plan document rule, under which plan administrators only need to look at plan documents (i.e., designations and underlying plan document).
 
Some plans include a provision stating that divorce revokes designation of spouse as beneficiary, Richter said. That requires the plan administrator to determine whether a divorce had taken place before making payment, and careful communication if such a provision is added to an existing plan.
 
Slayer Statutes
 
Most states have slayer statutes, which provide that a slayer—someone who is responsible for felonious and intentional killing of another—is not entitled to benefit from the wrong he or she does, noted Richter. “You shouldn’t benefit from killing someone else,” he remarked.
 
Richter added that most courts hold that ERISA preempts state law. ERISA is silent on the matter, he said, but the courts apply (create) a federal common law that is equivalent to a slayer statute.
 
Details and Best Practices
 
Richter outlined some action steps that plans and administrators can take regarding beneficiary designations.
 
  • Spousal Designations. Spousal designations should specify primary and contingent beneficiaries, as well as the contingency (e.g., death of primary). A new designation revokes all prior designations.
  • Designation Forms. Consider including the following on designation forms:
  1. Social Security numbers
  2. Birth dates
  3. Relationships
  4. Addresses
  5. A provision that new designations revoke all prior designations
  • Require Full Completion. Make sure forms are completed. It may be better to require acceptance of a form when it is received. Be consistent on completion of optional information (address, date of birth, etc.)
  • Waivers. Ensure that beneficiary designation forms satisfy the requirements for a waiver:
 
  1. It is written
  2. Beneficiaries are designated
  3. Effect of Election
  4. Notary or plan representative signature
A plan also may want to obtain identifying information on default beneficiaries.
 
  • Spousal Consent. Make spousal consent irrevocable.
  • Terms of the Plan. Follow the terms of the plan, such as:
 
  1. 1-year marriage rule
  2. default beneficiary provisions
  3. time frames for QPSA notices/elections
  4. whether divorce revokes designation in favor of ex-spouse
  • State Laws. Incorporate state laws into plan (e.g., slayer statutes and those concerning simultaneous death).
 
Available on Demand
 
The ASPPA webcast “Best Practices on Handling Beneficiary Designations” is available on demand; click here.