Navigating Beneficiary Designations: A Guide for Employers

Employers play a pivotal role in guiding employees through their benefits options, including retirement plans and life insurance. However, one crucial aspect often goes overlooked: beneficiary designations. In Wisconsin, these designations carry significant legal weight and can directly shape how an employee’s benefits are distributed after their death.

The Binding Nature of Beneficiary Designations in Wisconsin

For 401(k)s, 403(b)s, profit-sharing plans, and employer-sponsored life insurance (“Benefits Plans”), the beneficiary designation on file at the time of an employee’s death generally controls who receives the benefit. This designation will typically override instructions in a will or trust, even if those estate planning documents are more recent.

If an employee has no beneficiary on file, or if all listed beneficiaries have predeceased the employee, most plan administrators will distribute benefits according to the Benefit Plan’s default provisions. There are no national laws or regulations that govern what the default provisions for a benefits plan must be. Therefore, employers should ensure they understand the default provisions for their specific Benefits Plans. Default rules can vary but often prioritize the estate. Sometimes certain default provisions can prioritize the spouse or children. In summary, a lack of beneficiary designation could cause the proceeds from the benefits plan to not align with the employee’s intentions and can create delay, expense, or conflict.

The Importance of Regularly Updating Beneficiary Information

Life events such as marriage, divorce, birth of children, or the death of a beneficiary necessitate updates to beneficiary designations. Failing to make these updates can lead to unintended consequences. For example, if an employee divorces and does not remove their ex-spouse as a beneficiary, the ex-spouse may still receive the benefits depending on the state law then in effect. Similarly, naming a minor as a beneficiary can complicate the distribution process, as minors cannot directly receive assets, and a Uniform Transfer to Minors Account would need to be established.

Employers should encourage employees to review and update their beneficiary designations regularly, especially after significant life changes. Further, employers should encourage employees to review both the primary and contingent beneficiaries. Providing reminders during open enrollment periods or annual benefits reviews can be effective strategies.

The Role of Wisconsin’s Marital Property Laws

Wisconsin is a marital property state, meaning that most property acquired during marriage is considered jointly owned by both spouses. This includes life insurance policies. Under Wisconsin Statute § 766.61, a spouse may have rights to certain insurance proceeds and retirement benefits even if they are not named as the beneficiary. This could cause confusion as to how the proceeds of a Benefits Plan would need to be paid out. This confusion can lead to a court action to determine the allocation. An employer would be forced to hold benefits proceeds until the issue is decided.

Employers should be aware of these laws and advise employees to consider their spouse’s rights when naming beneficiaries. In some cases, obtaining written consent from a spouse may be necessary to designate someone else as a beneficiary.

The Risks of Not Having a Designated Beneficiary

If an employee has no valid beneficiary designation on file, or if the named beneficiary predeceases the employee, the benefits may be payable to the employee’s estate. When benefits pass to an estate, the family must initiate a probate administration. A probate administration is a court-supervised process that determines how the assets will be distributed. Distribution will follow either the employee’s last will and testament or, if no will exists, the intestacy statutes in effect at the time.

By ensuring that employees have up-to-date beneficiary designations, employers can help mitigate the risks of uncertainty regarding where the benefit proceeds are distributed upon an employee’s death.

Practical Steps for Employers

To assist employees in managing their beneficiary designations:

• Educate Employees: Offer clear, accessible information about how beneficiary designations work and why they matter.
• Integrate Reminders: Include beneficiary updates as part of onboarding, annual enrollment, and life-event notifications.
• Provide Tools and Support: Give employees easy access to forms, online portals, and contact information for plan administrators.
• Clarify Plan Procedures: Ensure employees understand how their specific retirement or insurance plan handles spousal consent, contingent beneficiaries, and default rules.
• Maintain Records Carefully: While custodians/insurers maintain the official records, HR can help ensure employees know where their designations are stored and how to verify them.

Bottom Line

By understanding the legal and practical considerations surrounding beneficiary designations, employers can help employees avoid unintended outcomes and ensure their benefits are distributed according to their wishes. Clear communication, consistent reminders, and accessible resources go a long way in supporting employees as they manage this essential part of their benefits planning.

This article, slightly modified to note recent updates, was featured online in the Great Lakes Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.