Our company sponsors both a 401(k) plan and a cash balance plan. One of our employees is a strong supporter of a local charity. She does not have a spouse or children, so she would like to name the charity she supports as her beneficiary for both of our retirement plans.
Is it possible for a participant to name a charitable organization as a plan beneficiary?
The answer is yes and no, depending on the reason for the question. In most cases, it is simply because the participant who is asking wants to provide financial support to a charity via the bequest. If that is the objective, then that charity can most definitely be named as beneficiary.
However, only an individual (and sometimes a trust) can be a designated beneficiary. If a “non-person” is designated as a participant’s beneficiary, the participant will be treated as having no designated beneficiary for certain tax purposes.
So what is a designated beneficiary? A designated beneficiary is one whose life expectancy is eligible to be used to calculate required minimum distributions (RMD). As a brief review, plan participants are generally required to begin taking distributions from their plan accounts when they reach age 70 ½. There are certain limited exceptions, but that is the general rule. The amounts that must be distributed each year are determined, in part, by using the participant’s age at the end of each year along with his or her remaining life expectancy based on mortality tables published by the IRS.
A non-person (in this case, a corporation or charitable organization) generally has an indefinite life expectancy, which means there is no life expectancy that can be used to calculate the RMD. If an organization is named as the beneficiary, the participant’s date of death (relative to the date of the first RMD) will determine whether the full benefit must be distributed within five years of the date of death or over the remaining life expectancy of the decedent.
All of this is probably a non-issue for participants with very straight-forward situations; however, there are all sorts of traps for the unwary if a participant attempts to split the death benefit by naming both an individual and a charitable organization as a co-beneficiaries. This is especially true if one is required to take larger distributions over a shorter period of time and the other is able to spread the payments over the remaining life expectancy.
Instead of naming a charity as the plan beneficiary, a participant may consider first rolling the money into an Individual Retirement Account (IRA). IRAs generally offer more flexibility with respect to beneficiary designations and other estate planning objectives. It is even possible to setup separate IRA accounts for different beneficiaries, which is not possible in a company-sponsored plan. Keep in mind that the terms of 401(k) or defined benefit plan will specify when such a rollover is permitted, so be sure to check there before taking action.
Because this involves what happens to benefits after they leave the retirement plans, this is a more complex area than other topics. Our best advice is to work with an experienced tax professional or attorney to review your specific circumstances and advise on the best course of action to meet your objectives.