The
determination of who gets your 401(k) at your death depends on a
combination of factors that include: your current beneficiary
designation and, for married 401(k) owners, certain government rules
favoring spouses. And if either of those do not yield a
beneficiary, then beneficiary default provisions of your particular
401(k) plan, your Will provisions, or the intestacy succession laws of
your State may come into play. This edition of A Legal Moment looks at each of these nuances.
Your Beneficiary Designation
When you enrolled in your 401(k) plan, you may have
named a beneficiary to receive proceeds in case of your death. If
you have had a change in circumstances since that time -- for example, a
divorce -- the originally-named beneficiary may no longer be
appropriate. As long as your currently named beneficiary is an eligible beneficiary,
then that is who will receive your 401(k) proceeds, no matter how
inappropriate or unintended such transfer is under your current
situation—and no matter what your Will provides. Therefore, it is
important to make sure your most recent beneficiary designation is
up-to-date with your plan provider.
Beneficiary Eligibility: Spousal rights to 401(k) under REA
Unlike IRAs and Roth IRAs, there is an important
restriction as to who qualifies as an eligible beneficiary for 401(k)
plans of a married person. Under the “Retirement Equity Act of
1984” (“REA”), if you are married, your surviving spouse is the only
eligible beneficiary of your 401(k) upon your death -- no matter what
the beneficiary designation states --
unless your spouse has signed a proper waiver and consent allowing you to name a different beneficiary.
On the one hand, the spousal rights under REA can happily
“rescue” a beneficiary designation situation where the 401(k) owner
never made a change to an old beneficiary designation and would have
wanted the 401(k) to go to the spouse. On the other hand, those
same rights can upend intent if, for example, spouses in a second
marriage agreed that their respective 401(k)’s should still go to their
respective children as already named, but they neglected to execute the
required waiver and consent forms. Strict requirements must be
followed in order for a spousal waiver to be effective. And note
that the spousal rights under REA can
not be waived by a prenuptial agreement.
There are a few limited exceptions to the applicability of
REA to 401(k) plans, including, for example, if the 401(k) amount is
less than $5,000; but it is also possible the terms of the 401(k) plan
itself give the spouse beneficiary status even where REA does not apply.
401(k) Plan Beneficiary Default Provisions
In the absence of a designated, living beneficiary, a
401(k) plan may provide for a “default” beneficiary or
beneficiaries. This is determined by the terms of the particular
401(k) plan.
Applicability of Will Provisions
The applicability of the provisions of the 401(k) owner’s
Will is zero, unless the owner’s Estate is named as the beneficiary
or
the beneficiary designation defaults to the owner’s Estate because the
owner has no surviving spouse, or other living beneficiary designated,
and there is no default beneficiary provided by the terms of the 401(k)
plan itself.
Applicability of Intestacy Succession Laws
If there is no living beneficiary for a 401(k) plan (and no
default beneficiary is provided by the plan itself) and if the deceased
401(k) owner had no Will, then upon the default to the owner’s Estate
(or if the Estate is the named beneficiary), ultimate distribution would
depend upon the applicable laws of intestate succession.
Recommendations
As the foregoing narrative attests, your beneficiary
designation, or lack thereof, can have unintended consequences.
You may therefore want to confirm -- and update as necessary -- your
401(k) beneficiary designations with your plan provider. If you
are married and wish to name a beneficiary other than your spouse (and
if your spouse agrees!), check with your plan provider to make sure the
necessary spousal waiver and consent forms are in place. Finally,
it is a good idea review your 401(k) beneficiary designations on a
regular basis to make sure they continue to conform to your wishes.
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