Ruth-Ann E. Toups
What You Need to Know About Beneficiaries and Your Employee Benefits
When you start a job, you sit down on your first day with HR and sign a bunch of paperwork that explains your employee benefits. Often, you don’t have time to fully read and understand all your benefits and your options for designating beneficiaries for these benefits. This article aims to give you a brief overview of your employee benefits and some food for thought about choosing a beneficiary for these benefits. This article is not meant to be construed as legal advice. Before making any decisions about your benefits we suggest you consult a professional.
An Overview of Employee Benefits
There are two types of employee benefits: (1) Mandated Employee Benefits, and (2) Employer-Provided Benefits and Perks.
(1) Mandated Employee Benefits are mandated by federal law, so employers must provide them. Mandated benefits include: COBRA; Disability; Family Medical Leave Act (FMLA); Minimum Wage; Overtime; Unemployment Benefits; and, Workers Compensation.
(2) Employer-Provided Benefits and Perks are provided by companies because they chose to. Employers provide these benefits because they create a more attractive, nurturing work environment. Examples of Employer-Provided benefits include: health insurance; dental insurance; vision care; life insurance; paid vacation; personal leave; sick leave; child care; maternity, paternity, and adoption leave; severance; and, a retirement plan.
How to Choose Your Employee Benefits Beneficiary
Not every benefit you receive from an employer will require that you name a beneficiary. For example, your health insurance does not need a designated beneficiary. Other benefits, such as your employer-provided life insurance policy do require that you choose a beneficiary. For your life insurance policy, you can name anyone, or several people, as beneficiaries. Insurance benefits with a designated beneficiary go directly to your listed beneficiary upon your death. However, you want to be very careful to not name your minor child as a beneficiary. It is also important to understand that by naming someone as a beneficiary if you die that money will be theirs, and they are not obligated to share it or use it for someone else’s benefit. In fact, they could run into tax consequences for doing so. For these reasons, it is important to discuss your beneficiary designations with your estate planning attorney.
Why Designating a Beneficiary for Your Retirement Plan Is Complex
The more complicated employer-provided benefit to designate to a beneficiary is your retirement plan. Retirement plans can offer great tax advantages that many of us take advantage of. With those advantages also comes a strict set of rules. Specifically, when naming your beneficiary it is important to consider the tax consequences of that retirement account passing to that beneficiary. Traditionally, your retirement plan is meant to be left to your surviving spouse. This creates issue for those who pass without a living spouse and leave their IRA to another beneficiary. A beneficiary other than your surviving spouse is taxed very differently. In addition, if you do have a spouse and do not want to name them as beneficiary your company will typically require your spouse to sign the beneficiary designation form as well.
There are many different types of retirement plans, each with their own complex set of advantages and rules. It is important to meet with your tax professional to discuss your specific situation. The key is to meet with your team of advisors regularly and remember to go back and update your beneficiaries as circumstances demand.