4081 / How is the designated beneficiary under a tax sheltered annuity determined?

Editor’s Note: The SECURE Act significantly changed the rules applicable to designated beneficiaries and eligible designated beneficiaries for tax years beginning in 2020 and thereafter. The SECURE Act generally did not change the rules applicable to surviving spouses. See Q 3902 and Q for details.

A designated beneficiary means any individual designated as a beneficiary by a participant.¹ Under the 2002 regulations, a participant’s designated beneficiary is determined based on the beneficiaries designated as of September 30 of the calendar year following the year of the participant’s death.²

Thus, for example, a beneficiary who disclaims his or her interest after the death of the participant but before the September 30 deadline would not be a considered a beneficiary for this purpose. Under the SECURE Act rules, beneficiary status is determined as of the date of the account owner’s death. Exceptions apply if the account is payable as an annuity or if a surviving spouse beneficiary dies after the participant but before distributions have begun ( Q 3904).

Under the 2002 regulations, a beneficiary designated as such under the plan is an individual, or certain trusts ( Q 3904), who is entitled to a portion of a participant’s benefit, contingent on the participant’s death or another specified event. A designated beneficiary need not be specified by name in the plan or by the participant to the plan to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan as of the date the beneficiary is determined.

The 2002 regulations state that an individual may be designated as a beneficiary under the plan either by the terms of the plan or, if the plan so provides, by an affirmative election by the participant or the participant’s surviving spouse specifying the beneficiary. The fact that a participant’s interest under the plan passes to a certain individual under applicable state law, however, does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan or the plan recognizes succession under applicable state law.³