Making Sure Your TSP Beneficiary Form Is Accurate and Complete

Thrift Savings Plan (TSP) participants are advised to make sure that they have completed and submitted a TSP beneficiary form (Form TSP-3). Not only should their TSP beneficiary forms be completed, but TSP participants should make sure that the beneficiary forms are accurate and up to date. This column discusses some of the factors to be considered in order to successfully complete the TSP beneficiary Form TSP-3.

IMPORTANT: Why TSP Beneficiary Form Needs to Be Updated Online

It is important to remind TSP participants that the TSP (a retirement savings plan classified as defined contribution plan) is not a “qualified retirement plan” such as a 401(k) or a 403(b)-retirement plan offered by many private companies. One difference between the TSP and a qualified retirement plan is that any individual can be named as a TSP primary beneficiary.

On the other hand, when it comes to a qualified retirement plan, the spouse of the qualified retirement plan participant is the automatic primary beneficiary unless the spouse formally waives himself or herself as the primary beneficiary.

A TSP participant is allowed to name more than one individual as a primary beneficiary. For example, if a TSP participant has two children, then the TSP participant can elect to name each child as a 50 percent primary beneficiary.

But the question arises: What happens if the primary beneficiary or one of the primary beneficiaries predeceases the TSP participant?

The TSP participant has two options available when naming a primary beneficiary to deal with the issue of what happens when a named primary beneficiary predeceases the TSP participant. One option is to name a contingent beneficiary. The other option is to name a primary beneficiary as either per stirpes or per capita.

Per stirpes is a Latin phrase that means “by roots” or “by branch.” Per capita is a Latin phrase that means “by head.” Before explaining how these two terms apply to estate planning (and in particular to a TSP participant in this case) but also to other financial assets in which beneficiary designation can be made such as IRAs and life insurance), it is important for TSP participants to keep in mind how widely the per stirpes and per capita concept may be used.

A properly filled out TSP beneficiary form is separate from, and takes precedence over, the instructions in a will or trust. This means that a TSP account passes to named beneficiaries after the TSP participant’s death bypassing the time and expense of probate associated with a will.

If a TSP beneficiary form is not filled out and submitted to the TSP, then the TSP will distribute the deceased TSP participant’s account in the following order of precedence:

1. To the TSP participant’s spouse

2. If there is no spouse, then to the TSP participant’s child or children receive equally, with the share due any deceased child divided equally among that child’s descendants.

3. If there is no spouse and no children, then to the deceased TSP participant’s parents equally or to a surviving parent.

4. If there is no spouse, no children, or no surviving parents, then to the appointed executor or administrator of the TSP participant’s estate.

5. If there is no spouse, no children, no surviving parents and no appointed executor or administrator of the TSP participant’s estate, then to the TSP participant’s next of kin who is entitled to the TSP participant’s estate under the laws of the state in which the TSP participant resided at the time of his or her death.

Among married TSP participants, the TSP participant typically names the participant’s spouse as the 100 percent primary beneficiary and children as contingent beneficiaries. A TSP contingent beneficiary moves into the role of the primary beneficiary if the primary beneficiary predeceases the TSP participant.

Also, when a married TSP participant dies, a spousal beneficiary has the option of establishing a TSP “beneficiary” account in the spouse’s name. The surviving spouse can then list his or her children or other relatives as the primary beneficiaries of the TSP spousal beneficiary’s account. Note that only a spousal TSP beneficiary can establish a TSP beneficiary account.

Under what circumstances does the Latin language of per stirpes and per capita come into play? The issue becomes important – in fact, crucial – if one or more of the primary beneficiaries predeceases the TSP participant. A per stirpes designation would distribute the deceased primary beneficiary’s share to his or her children in equal portions. A per capital designation would distribute the amount of the deceased beneficiary equally among the still-living remaining beneficiaries.

The following example illustrates:

Cheryl is the TSP beneficiary participant of her deceased husband Howard’s TSP account. Cheryl named her two children, Carla and Kevin, as 50 percent beneficiaries of her TSP beneficiary account. Both Carla and Kevin are married, and each couple has two children.

Suppose Cheryl and Carla died together in an accident. If the per stirpes designation is in effect, then 50 percent of Cheryl’s TSP beneficiary account will go to Kevin and Carla’s 50 percent TSP share of Cheryl’s TSP beneficiary account would be divided equally between Carla’s two children.

However, if the per capita designation is in effect, only one of Cheryl’s named beneficiaries, Kevin, would be eligible to inherit Cheryl’s TSP beneficiary account since he is the lone survivor. Keving would receive 100 percent of Cheryl’s TSP beneficiary account and Carla’s children (Cheryl’s grandchildren) would not receive any of Carla’s 50 percent TSP beneficiary account share.

Reporting Per Stirpes or Per Capita Designations on TSP Beneficiary Form TSP-3

As illustrated in the example above, the per stirpes and the per capita designations can have serious ramifications. One of the more serious ramifications is unwanted post-death distributions. Some retirement/IRA beneficiary forms have boxes to check for choosing the per stirpes or per capita designations, but many beneficiary forms including the TSP beneficiary Form TSP-3 do not provide this selection opportunity.

How can TSP participants with multiple beneficiaries use the option of per stirpes or per capita beneficiary designations? One suggestion is to “type in” on Form TSP-3 for each primary beneficiary either per stirpes or per capita. Another suggestion if a per stirpes designation is preferred is for the TSP participant to name a contingent beneficiary (more than one can be named) for each primary beneficiary.

TSP participants are advised to review their TSP beneficiary designations and keep them updated especially when there are life changes such as divorce and the passing of named beneficiaries. They should discuss their beneficiary designation choices with their estate attorney to make sure the designations are consistent with their estate plan.