When Is Your Beneficiary Not Your Beneficiary? - Rodgers & Associates
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When Is Your Beneficiary Not Your Beneficiary?

A man enrolled in his company’s 401(k) plan and named his wife as the sole benefi­ciary of his account. Years later, his wife died and the worker updated his account to name his three children as the primary benefi­ciaries of the 401(k). The man remarried a few years later, but never changed the benefi­ciaries on his account. Just six weeks after marriage the man died.  Who should receive the proceeds of his 401(k) account?

In most cases, the benefi­ciary desig­nation will determine who is entitled to the assets. However, a 401(k) plan comes under the rules of the Employee Retirement Income Security Act of 1974 (ERISA).  The new spouse argued in court that although she was not named as benefi­ciary she was entitled to the proceeds of the account, because as spouse she had not waived her rights as benefi­ciary. Under ERISA, a plan participant’s spouse must be the primary benefi­ciary unless they waive their rights as benefi­ciary.

The court quickly deter­mined that the new spouse was indeed the benefi­ciary of the 401(k) account. Without obtaining a waiver, the participant’s interest in the account belonged to his new spouse.  The marriage provided an immediate vested interest in the participant’s plan assets.

IRA accounts do not have spousal waiver require­ments. Rolling over plan assets to an IRA can be an effective strategy for someone contem­plating a second marriage. The man in this story could have avoided this situation by rolling over his plan assets to an IRA before he remarried. He would have been able to name his three children as benefi­ciary of his IRA and his second marriage would have had no impact on this desig­nation.

However, rollovers are not always an option for active plan partic­i­pants. In service withdrawals are usually limited to employees that achieve a certain age before they are allowed. If you are an active partic­ipant under the age of 60, you will need to take this into consid­er­ation before entering marriage. A spousal waiver will be required if you still want your children to be the benefi­ciary of your 401(k). Otherwise, you will need to assign other assets to pass onto the children from your first marriage.

We recommend that benefi­ciary forms be reviewed regularly to assure the assets from your accounts are going to the right benefi­ciary. When naming a benefi­ciary on an ERISA account like a 401(k) plan, you cannot name someone other than your spouse without obtaining a spousal waiver. Finally, your will does not overrule your benefi­ciary desig­na­tions. You could leave every­thing in your will to your spouse but name your children as benefi­ciary on your IRA and insurance policies. Your children will receive the assets in the IRA and insurance policies. Your spouse would receive every­thing that does not have a benefi­ciary desig­nation naming someone else.