Be Part of the Ultimate Safety & Compliance Community
Trending news, knowledge-building content, and more – all personalized to you!
You probably offer benefits such as retirement plans or life insurance which require employees to designate a beneficiary. Once completed, these designations may remain in your files for a time that is measured in years or even decades, often without ever being reviewed or updated. Unfortunately, incomplete forms or outdated information can cause problems by drawing your company into legal disputes about who a deceased employee intended to name as a beneficiary.
If a beneficiary designation dispute arises, you may expend time and resources attempting to identify the correct beneficiary under the terms of the plan and defending against lawsuits brought by an incorrectly-designated beneficiary. In some cases, your company might even pay the same benefit twice, once to the mistaken beneficiary and again to the correct beneficiary. In that case, you may have to take legal action to recover the erroneous payment, and such recovery can be difficult or (in some cases) impossible.
Even a seemingly simple error such as an employee's failure to sign or date the document could raise questions about whether the designation is valid or current. Hopefully, you review the completed forms to ensure that the employee actually signed and dated the form before placing them in your files. But even a signed form could have problems.
According to the Employee Benefits Security Administration, the most common error is a failure to update the designation after a marriage or divorce. This can cause legal disputes between the employee's spouse, former spouse, parents, children, siblings and other potential beneficiaries.
Generally, a current spouse will automatically be the beneficiary under a retirement plan. However, a life insurance policy will pay out to the person named, often to the surprise of a current spouse (and also to the surprise of an ex-spouse).
Incorrectly completed forms may cause problems if the distributions don't add up to 100 percent. Even if the total appears to be 100, employees need to understand the difference between primary and secondary beneficiaries. The employee may designate one or more primary beneficiaries (often a spouse) and may also designate one or more secondary beneficiaries in the event of the simultaneous death of the employee and the primary (e.g., the employee and spouse are both killed in a car accident).
Suppose Alissa designates her spouse as the primary beneficiary and lists 50 percent, then designates each of her two children as secondary beneficiaries, each receiving 25 percent. The total may equal 100 percent, but the form was not completed correctly. If Alissa's intent was to divide the benefits among her spouse and children, then all three should be listed as primary. Conversely, if Alissa wanted her spouse as the sole primary beneficiary, she should list her spouse at 100 percent. Then, each child should be listed as secondary beneficiaries, each getting 50 percent. This type of error can cause significant problems within a family, and can even lead to legal action.
Beneficiary designations may also become outdated (or may even be lost) if the company changes service providers, administrators, or otherwise changes the benefit plan. A new provider may request updated designations, but employees who don't have any changes may misunderstand that request and fail to return the form. It may even happen that your new provider offers automatic enrollment and you (or the provider) simply forgot to have the new enrollees complete a designation form.
Consider having all employees review their designations at least once per year to ensure that the information is current and that the forms are complete. At a minimum, remind your employees to review their designations after major life changes such as a marriage, divorce, birth of a child, or death of an immediate family member. If an employee makes changes, keep both the old form and the new form in case questions arise regarding which designation is current or when the changes were made.
The more time that has passed since your employees last reviewed their beneficiary designations, the more likely that the forms contain outdated information.