401(k) Beneficiary Form is Trumped by Spouse; Disinherting Children
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
In a recent case, the US District Court for the Middle District of Louisiana ruled that despite having previously named his three children as beneficiaries of his 401(k) plan, Leonard Kidder's 401(k) balance would pass to his new wife. The Court determined that under the terms of the participant's plan, a spouse's right to plan assets is immediately vested upon marriage and, since no spousal waiver had been obtained, the default plan beneficiary was the participant's spouse even though she was not the named beneficiary. The spouse got the 401(k) and the children, who were the intended beneficiaries, were disinherited.
The Court's ruling illustrates just how difficult it can be to remove a spouse as the beneficiary of an ERISA governed plan, such as a 401(k). In order to name a non-spouse as the beneficiary of a 401(k) or other ERISA plan, there are two key steps that must be completed. The first step is that your spouse must waive their ERISA granted rights under the plan. This must be done AFTER you are married, as only a spouse can grant consent, and you only have a spouse if you are married. The second step is to update your beneficiary form to list the non-spouse beneficiaries you want to inherit your account.
A spousal waiver just means that your spouse has consented to the naming of a non-spouse beneficiary, it doesn’t mean they can’t be the beneficiary. So if you don’t name someone other than your spouse directly on the beneficiary form, chances are it may end back with them anyway.
All too often advisors focus on only the beneficiary forms for the accounts they have. That could leave your 401(k) even more vulnerable to unfortunate beneficiary mistakes. Make sure that when you review your own plan or meet with your advisor, you include a discussion of any 401(k) and other plan beneficiary designations to make sure you don't inadvertently disinherit your intended beneficiaries.
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