The disposition of an alternate payee’s benefits when he or she dies before receiving or after the onset of benefits may raise questions about contingent alternate payees.
Under most defined contribution (DC) plans, such as a 401(k), the Plan Administrator segregates the alternate payee’s separate interest, and the benefits are normally nonforfeitable. Thus, the plan usually permits an alternate payee to designate a beneficiary, or the plan directs that any unpaid benefits at the time of the alternate payee’s death be paid to the alternate payee’s estate. For a DC plan, therefore, the QDRO should include language that specifies the alternate payee’s right to designate a beneficiary or reference to the plan’s requirements that any residual benefits are paid to the alternate payee’s estate.
In the case of a Defined Benefit Plan, however, both the Internal Revenue Code and ERISA are silent about what happens to an alternate payee’s assigned benefits when he or she dies under a separate interest QDRO before the participant and prior to commencement of benefits to either the participant payee or alternate payee.
When the alternate payee dies after the benefits have begun, the benefit continues based on the option that was chosen because a QDRO cannot change the form of benefit provided in the plan. So, if the form of benefit elected was a single life annuity, the annuity terminates and no additional payments are made. If an optional form of benefit is elected, there may be residual benefits payable to a designated beneficiary or the alternate payee’s estate.
However, neither the IRS or Department of Labor speak to the situation of a separate interest QDRO for a DB plan when the alternate payee dies before the benefit is in “pay” status. If a plan treats the alternate payee’s separate interest as a terminated vested interest, the benefits cease by operation of law or plan procedures. A terminated vested interest means that the benefits are payable only to the designated alternate payee and do not revert to the participant, even if the alternate payee dies before commencement of any benefits to him or her. However, when the plan does not treat the alternate payee’s separate interest as a terminated vested interest, which means that benefits may revert to a participant, it is likely that the benefits can be assigned to another alternate payee, contingent upon the death of the primary alternate payee. This designation is known as a “Contingent Alternate Payee” and it is accepted by some, but not all, Plan Administrators.
