Beneficiary Forms for Retirement Plans: The Complete Guide

Beneficiary forms should not be taken lightly. When setting up a cash balance plan or defined benefit plan, one of the initial tasks you will have is completing beneficiary forms for the plan.

Many business owners simply fill out the form and then forget about the form and the election. Some might not even fill it out to begin with. Why is it such a big deal?

At Emparion, we understand the importance of these forms and recommend that our clients review and discuss them with a qualified attorney if they have any questions. This article is meant to give you some basic information and be the starting point for these discussions.

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What is a beneficiary form?

At first glance, the beneficiary form might not seem too challenging. But designating a beneficiary for a retirement plan is one of an employee’s most important financial decisions.

Simply stated, the beneficiary form designates who will receive the retirement funds should the employee/participant pass away. A beneficiary can be essentially any person or entity the owner chooses to receive the benefits of the retirement account or an IRA.

Typically, the forms will request the following:

1) name of the beneficiary(s);
2) amount that each beneficiary would receive; and
3) relationship between the plan participant and the beneficiary.

Beneficiary forms will ask for the beneficiary’s Social Security number or taxpayer-identification number. In some situations, they must be notarized.

Aside from a primary residence, retirement plan accounts are often the largest asset in a person’s estate. So make sure the form is completed.

Why is it so important?

Failure of a retirement plan employee to complete the beneficiary form can potentially raise significant problems for the employee’s family members. You want to ensure that your retirement assets are distributed to the person(s) of your choosing.

If an employee fails to make a beneficiary election, the plan document will specify a default beneficiary. Usually, the surviving spouse is the default beneficiary, making it easy if the participant is married at death.

But when there is no surviving spouse, the plan document lists who is next in line to be the designated beneficiary. It’s not uncommon for plans to have the deceased participant’s estate as the beneficiary of last resort when there is no election on file and no surviving spouse.

Sharpened colored pencils

A clearly established beneficiary designation will also ensure that funds can be paid promptly after death. Each plan document will have specific rules regarding the timing of benefit payments to beneficiaries.

The rules for a qualified retirement plan will usually require the company (or plan sponsor) to offer the beneficiary distribution of a deceased participant no later than the plan year following the plan year in which the employee died.

Wills, pre-nuptial agreements and other estate planning documents are subject to state laws. At the same time, retirement plan documents are subject to federal laws and, often, may not consider any of the estate documents.

Business owners with auto-enrolled employees should request their employees to complete the beneficiary form as part of the auto-enrollment process.

Timely updating

Life events can often cause beneficiary problems upon passing of the employee. Ensuring the beneficiary forms are updated timely is extremely critical upon changes in marital status or upon the birth of additional children.

For example, often, an employee gets a divorce and then re-marries but forgets to update the beneficiary election form. Depending upon the plan document and terms, the funds could go to their ex-spouse if not updated.

What if you want to name someone other than your spouse as the beneficiary? For example, let’s assume you get divorced and then re-marry. If there are kids from the prior marriage, you might want to designate the children as the beneficiaries. As such, the new spouse must consent to that election.

Remember that each retirement plan will have separate beneficiary forms. The beneficiary form for a 401(k) is only for the 401(k) plan, and the beneficiary form for a cash balance plan only applies to that plan. So when one is updated, make sure you update ones for other accounts.

It would be best to consider an annual review of your forms to ensure they are updated and complete. This is often done at the onset of a plan year or at the time participant statements and notices are distributed.

It is quite normal for people to get confused on the principles of solo 401k beneficiary distributions. Here are a few questions and their answers to help you know more:

Solo 401k Beneficiary Question: My wife and kids are the official beneficiaries of my Solo 401k account. In case something happens to me, can they immediately take funds out of the account? Are there any age requirements set regarding my situation?

ANSWER: According to the Federal rulebook, your spouse is automatically the primary recipient of your Solo 401k funds. In your case, your wife can choose to ignore this right, and there are four options that she can further choose from:-

  • She can take a complete distribution.
  • If she is self-employed, she can transfer the funds directly to her Solo 410k account.
  • She can also transfer the assets to her own IRA as well.
  • A transfer is also possible in case of a hereditary or beneficiary IRA.

In case you are unmarried, and your kids are beneficiaries, then each recipient has two options to choose from:-

  • Take complete distributions
  • First transfer the assets to the beneficiary’s IRA. Then start taking distributions on a yearly basis by 31st December following the account owner’s death.

Beneficiary rules:

Here are a few things you should keep in mind concerning beneficiary distributions:

  • In case you are unmarried, you will need to conduct direct rollovers. This means that the funds are required to shift directly into the recipient’s IRA.  You should also avoid touching the assets in the period of transition.
  • Unmarried beneficiaries should also avoid doing rollovers of their Solo 410k funds into their IRAs/qualified plans/Solo 410kplans.
Solo 401k Beneficiary rules

QUESTION: Is there any extendable withdrawal option in case of inheriting an IRA account? I’m currently writing up some directions for my daughter on how to inherit my Solo 401k. For this, I’ve started some estate-planning in case I pass away.

I’m looking forward to telling her to transfer the Solo 401k assets to the inherited IRA account. This will defer any need of the form 5500ez making things easier for her. Is this assumption correct? If not, please tell me what to do.

ANSWER: It is important to know that the withdrawal stretch option is available for IRA accounts but not for Solo 401k accounts. It means the Solo 401k funds will directly transfer to your daughter’s IRA account. This will also include her getting the distributions based on her life expectancy.  Another important thing is that you should not forget listing your daughter as your main beneficiary in the beneficiary form.

QUESTION: Is it possible to make my main beneficiary as my alterable trust to keep the money a part of my whole estate?

ANSWER: It is possible to establish your main recipient as your revocable trust.  After your death, the Solo 410k assets will automatically flow under your named trust’s account.

Final thoughts

As you can see, it is essential to complete a beneficiary form. Not completing beneficiary forms (and not correctly updating them) can cause confusion and hardship for the deceased employee’s family. Keeping beneficiary elections up to date will ensure a smooth process and minimize headaches down the road.

At Emparion, we understand that these forms can have a major significance. That’s why it is so important for you to review and discuss the issue with your family and also an estate attorney.

Paul Sundin

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