The Observer

ARTICLES OF INTEREST

Beneficiary designation: Considerations for Plan Sponsors

by Salina Shariff, Retirement Services Professional, People Corporation

Beneficiary designation: Considerations for Plan Sponsors
Providing a benefits and retirement program is a great start towards attracting and retaining top talent, and it also promotes loyalty. I wish I could tell you “job well done,” but the work doesn’t stop here, because the moment you sponsor a retirement program is the moment you agree to the fiduciary responsibilities that go along with overseeing the plan. Although there are no hard and fast rules on what this entails, there are guidelines to help you navigate through the recommended best practices. The question becomes how involved do you get when it comes to helping your employees and advising them on technical questions as it relates to their retirement plan?

Your role as a fiduciary is to ensure the best possible outcome for your member and their beneficiaries and to ensure the member’s best interests are served upon their passing. You can achieve this by providing members with clear communication regarding the program and explain their roles and responsibilities as a member.

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Ensuring beneficiaries are kept current
When a member passes away, the plan sponsor is almost always brought into the situation. Family members reach out to the employer first when there is a death and rely on them to take action or guide them towards the next steps. The record keeper will also communicate with the plan sponsor for beneficiary contact information and to verify records. It is important to note that litigation around beneficiary designations is a possibility.
 
If family members do not agree with a beneficiary designation they could try and pass blame onto the plan sponsor for not ensuring records were kept up to date. They might also argue they were not properly educated on the ramifications of either not selecting a beneficiary or not updating their beneficiary. Ultimately, if there is a disagreement it may have to be settled in court.

During the 2013 court case of Carrigan vs. Carrigan Estate, at the time of death, the deceased Mr. Carrigan was separated from his legally married spouse and living with his common-law spouse. The court denied benefits of the common-law spouse who lived with the member at the time of death, instead rewarding the legally separated ex- spouse. Both individuals met the definition of “spouse” according to the Pension Benefits Act, Ontario.[1] Since the case of Carrigan vs. Carrigan Estate, the Pension Benefits Act, Ontario was amended to define a spouse who is living separate and apart no longer meets the definition of spouse.[2] Reminding employees to be vigilant in beneficiary designations when life changes occur will ensure their wishes are met upon their passing. 

Situations may arise where a member might want to keep their separated/divorced partner as their beneficiary. In this situation it is recommended they update their relationship with their beneficiary. By signing and dating the change, this action could deter the possibility of beneficiaries challenging a decision following the passing of the member.

Spousal considerations
Spouses may waive their rights to survivor benefits. However, it is important they understand what this entails. In the case of Smith vs. Casco, the employer Casco, provided Mr. Smith with a spousal waiver form which was signed by Mrs. Smith. Upon the passing of her spouse and once monthly annuity payments ceased, Mrs. Smith challenged the spousal waiver stating the form was not explained and she did not understand what she was signing.[3]

In the end, Casco was found to have breached their fiduciary duty to the spouse of the deceased annuitant. In this case, the employer should have clearly communicated the options to the member and the beneficiary, and the explanation should have clearly articulated the outcome of the choice. In addition, the Spousal Waiver form used by Casco was deemed invalid since it was not approved by the superintendent and did not contain proper wording.

When explaining the importance of beneficiary designations to your workforce, you should note:
  • If your retirement program is a registered pension plan and a member has a spouse at the time of death, it is a statutory requirement that the spouse is the primary beneficiary irrespective of who is named as the beneficiary of preference. The definition of spouse varies by province and legislation, so this information should be indicated in plan member booklets and communications.
  • Federally registered saving and retirement programs like Registered Retirement Savings Plans, Registered Retirement Income Funds, Deferred Profit-Sharing Plans and Tax-Free Savings Accounts permit the designation of beneficiaries based on the member’s choice and does not restrict it to a spouse.
  • It’s always a good idea to have a secondary or contingent beneficiary designated in the event the member and primary beneficiary both pass away.
  • If a minor child is designated as a beneficiary, a trustee should be appointed to manage the funds.
  • If a will has been created and addresses the retirement program, ensure the designated beneficiaries on the plan and in the will are the same.
  • Designating a revocable beneficiary permits the member to make changes to their beneficiary, while an irrevocable beneficiary designation requires a signed consent of the beneficiary before any changes or withdrawals are permitted. In the province of Quebec, beneficiaries are defaulted to irrevocable unless advised otherwise. Residents of other provinces should be aware of this distinction to avoid future complications.
  • Naming an individual or organization such as a charity as the beneficiary means the service provider will pay the proceeds of the retirement program directly to the intended without probate fees. By naming Estate as a beneficiary, probate fees may be payable on the execution of the will.
Tax implications
Taxation at death is also an important factor members should take into consideration since Canada Revenue Agency considers the assets in a Registered Retirement Savings Plan (RRSP) to be de-registered just before death and must be redeemed. When money is redeemed the total market/redemption value of the retirement program is considered taxable income on the member’s final Income Tax Return (called the terminal tax return). 

To delay the taxation of RRSP proceeds upon death, and to make sure the net proceeds go to the person (or people) intended, refer to the table below which summarizes how taxes are applied.[4]

 
Named Beneficiary Transfer to their personal registered retirement program Cash
Spouse, Common Law or Pension Partner
  • Allowed
  • No “estate” or probate fees
  • Taxation is deferred until recipient eventually withdraws assets from their own account
  • Estate pays taxes on final tax return-Spouse pays no further tax
  • No probate fees payable; taxation is minimized
Other than Spouse
  • Not allowed unless beneficiary is a minor or a disabled dependent. 
  • Trustee must be appointed or one will be appointed by the courts
  • Estate pays taxes on final tax return-Beneficiary pays no further tax
  • No probate fees payable; taxation is minimized
Estate
  • Not allowed unless spouse is named in the will as beneficiary
  • Estate pays taxes on final tax return
  • Probate fees payable on retirement assets; this is most tax inefficient distribution method

As a plan sponsor, it is important that you communicate to your workforce the importance of designating a beneficiary for their retirement program and the implications of not doing so. Creating a checklist of best practices to ensure your members are well informed is a good way to stay on track.

To ensure you are acting in the best interest of your workforce:
  1. When providing an enrollment package to your employees, explain the importance of naming a beneficiary, the requirements specific to your retirement product (i.e. Registered Pension Plan, RRSP, etc.) and the difference between revocable and irrevocable beneficiaries.
  2. Should an employee enroll by paper, review the form to ensure it is complete and return it to the member as if it is not with a reminder of why naming a beneficiary is so important.
  3. If enrollments are completed on-line, request that the process not allow the member to proceed if the beneficiary is left blank.
  4. Provide annual reminders about the importance of keeping beneficiaries updated as members go through life changes.
Implementing a workplace retirement program is a great first step to ensuring your employees are taken care of during their retirement years. However, don’t forget to ensure your member’s best interests are served upon their passing. Complex situations may arise that require specific areas of knowledge and expertise. If such circumstances arise, it’s always a good idea to seek advice and information from your legal counsel.

SShariff-headshot-3.JPG Salina Shariff, Retirement Services Professional, People Corporation
Salina’s career in the financial service industry spans 30 years, including 15 years in leadership roles. Her experience in the retirement and savings industry is founded in several of Canada’s largest insurance companies. Salina’s background in retirement administration, client relationship management and financial education makes her a subject matter expert for colleagues and clients. The last decade of Salina’s career has focused on various components of Financial Wellness.  Salina now leverages her experience in the field to build and offer Financial Wellness consulting solutions to clients at People Corporation. Salina holds a Bachelor of Commerce degree, Retirement Plan Associate (RPA) designation, is Life Licensed (LLQP) and has passed exams for the Investment Funds Institute of Canada (IFIC) and Canadian Securities Course (CSC).