401k Plan with no beneficiary form
What happens to a 401k plan with the participant dies without a beneficiary form on file? The participant was not married and has no children. I have been told we need to look at the 401k plan document to determine the default designation. Is this correct? Once the beneficiary is determined can the bene do any sort of stretch?
Permalink Submitted by Denise Appleby on Tue, 2008-04-29 23:53
Yes. That is correct. The terms of the plan document will define ‘who is the beneficiary’ in the event the participant failed to complete a beneficiary designation form. The plan document will also define the distributions options that are available to the beneficiary. It may be easier to review the summary plan description (SPD), as the information is usually more user-friendly. The plan administrator should be able to provide you with a copy of the SPD.
Permalink Submitted by Dennis Isabell II on Tue, 2008-05-06 14:38
I have been told by the atty that the 401ks plan document states that if a beneficiary designation is not found then the estate is the beneficiary and the distributions must be taken over 5 years. The only heir is his sister so does she open a beneficiary IRA for her benefit and then take the dist. out over 5 years? What is the proper way to handle this dist? The 401k account has about $800,000.
Permalink Submitted by Alan Spross on Tue, 2008-05-06 18:32
The 5 year rule should only apply if the 401k owner passed prior to their required beginning date. Distributions would have to be paid to the estate and be reported under the estate’s EIN, and therefore would become subject to probate. The estate would then pass through the distributions to the estate beneficiary stated in the will, and if no will according to the intestate provisions of the state. When the distributions are passed to the estate beneficiary, a K1 is issued and the beneficiary reports the distributions on their own Form 1040.
If the plan will allow a 5 year distribution rather than a lump sum, taking 20% each year will allow the beneficiary to use more of their lower brackets each year. The estate can either remain open or can usually be terminated with the plan benefits assigned directly to the estate beneficiary.
IF the owner died after their required beginning date, distributions should not be subject to the 5 year rule, but should be allowed over the remaining single life expectancy of the decedent, and this provides a much longer distribution period.
A direct transfer to an IRA is NOT permitted for an estate beneficiary, and therefore it is costly to not name a beneficiary for the plan proceeds.
It may still not be a bad idea to get the SPD or other confirmation of the plan’s actual written provisions for default beneficiaries since a large amount is at stake here.
Finally, if the plan holds highly appreciated employer stock shares, the possiblity of a lump sum distribution should be considered in order to take advantage of the lower LT cap gain rates. However, if unless the appreciation is a large part of the total account, taking a LSD would expose the rest to higher brackets. Still, this should be checked out along with checking if there are any after tax contributions in the plan.
Permalink Submitted by Dennis Isabell II on Tue, 2008-05-06 19:42
Thanks, should the plan assets remain in the 401k plan or be moved to an IRA?
Permalink Submitted by Alan Spross on Tue, 2008-05-06 20:12
The assets cannot be moved to an IRA after the participant passes and the estate is the beneficiary. Even if individual beneficiares had been named instead, the transfer to an inherited IRA is optional for the plan at this point. There are some exceptions possible if a surviving spouse is both executor and sole beneficiary of the estate, but none for non spouses.
Even if the participant had rolled over the plan to their own IRA prior to passing, there would still be serious RMD restrictions if the estate were the IRA beneficiary, therefore having an estate beneficiary is a very bad idea regardless of the type of plan holding the assets.
Permalink Submitted by Dennis Isabell II on Tue, 2008-05-13 19:15
I spoke with the atty who said that the 401k is with Fidelity and they are saying the money has to be transferred to the estate since no beneficiary was on file and the deceased was 60 yrs old. I assume it would be all taxable at that point. The atty expressed frustration over the fact that he keeps getting different information about what to do. Should the assets remain in the 401k plan and be paid out to the estate over a 5 year period? Or should the assets be transferred to the estate and then paid to the beneficiary over 5 years?
Permalink Submitted by Alan Spross on Tue, 2008-05-13 23:03
If the plan as administered by Fidelity requires a lump sum distribution rather than allowing the 5 year rule to apply, then the plan distribution will be fully taxable in the year distributed. If the plan permits the 5 year rule, then spreading the distributions out should reduce the tax bill.
Fidelity is a huge administrator of these plans and should know what the plan allows, but the only way to be sure they have it right is to request the plan document or SPD, even if a copying bill will be incurred. The estate will pass the taxable income from the IRA distributions through to the estate beneficiary on a K1 in the year that the plan distributions are paid to the estate.
Permalink Submitted by Dennis Isabell II on Wed, 2008-05-14 12:58
Thanks, the atty said the plan does allow the 5 year rule. If that is the case do the assets remain in the 401k plan while the payments are made over 5 years? Is there anyway for the assets to be moved out of the plan then paid out over the 5 years.
Permalink Submitted by Alan Spross on Wed, 2008-05-14 19:38
No. If the entire amount were paid in a lump sum to the estate, the estate would incur a tax bill at the higher rates of an estate or would have to pass the amount through to the beneficiary who would be taxed on the entire amount in a single year. If the plan is willing to allow 5 distributions (eg 20% first year, 25% second year of balance, 33% third year of balance, 50% fourth year and balance in 5th year, the tax impact would be about equal and some tax deferral benefits will also continue over that period. The estate is the only place the assets can be distributed to as long as it remains open.
There is no way to remove the assets from the plan and not incur taxes on that distribution since an IRA transfer is not available. It is fortunate that the plan does not call for a lump sum distribution.
Permalink Submitted by Dennis Isabell II on Wed, 2008-05-14 21:16
Since the atty is being told conflicting info about the options he would like some sort of documentation from the IRS. Do you have any recommendations on where to get this info?
Permalink Submitted by Denise Appleby on Wed, 2008-05-14 21:25
Going to the IRS is unnecessary and may not provide any solutions or answers. The IRS will likely redirect him to the plan document.
If he is confident that he understands the provisions of the document, then he simply needs to enlighten whoever (at the financial institution) is telling him otherwise. It’s not about what a customer service representative tells him. It’s about what the document says. The document rules!