Dear Corporate Pension Actuary: I’m an employer with a pension plan, and I heard about doing a “death audit”—you know, checking if someone who's passed away is still getting payments. I’ve wondered, can doing that regularly actually save our plan money, or is it just extra hassle?
- Debating a Death Audit

Dear Debating,

Great question. In short: Yes—conducting death audits can help your pension plan save money and improve its overall integrity. In addition to identifying deaths among retirees receiving payments, the scope of a death audit can be broader – including deferred participants (such as former employees who have not yet commenced their pensions and the beneficiaries of current retirees who elected a joint life annuity form of payment).

Note that this process has become more challenging as access to public databases like the Social Security Death Master File is now restricted. However, the National Technical Information Service (NTIS) certifies third-party vendors who can provide death audit services. Accurate data records are crucial for any death audit. Necessary data fields include the retiree’s name, social security number, address, and date of birth as well as named beneficiary’s name, social security number, and date of birth.

Audits can be performed on an ad hoc basis from time to time or can be done on a scheduled, “regular” basis (some record locator services offer annual or monthly recurring audits, or in some cases even continuous death monitoring services done on a more frequent basis).

Regular audits are important because traditional methods of learning about deaths—such as relying on family notifications or conducting infrequent checks—are imperfect. Sometimes, the plan doesn’t learn about a participant’s passing right away, and payments continue in error. The longer it takes to discover the death, the more money is paid out incorrectly—and the rules for recovering those funds after the fact are complicated and were recently changed by SECURE 2.0.

Here’s how regular death audits save money:

1. They can help minimize overpayments.

Without regular checks, a plan may unknowingly issue payments for months or even years after a participant's death. These overpayments can add up quickly, especially if there’s no one to report the death or return the money. Death audits help catch these cases early, preventing long-term losses.

2. They reduce recovery costs.

The Internal Revenue Service (IRS) released guidance of SECURE 2.0 provisions that impact the procedures around recovery of overpayments. In certain cases, a plan can decide to forego an attempt to seek repayment of an inadvertent benefit overpayment without risking the plan’s qualification. However, for plans that do seek a recovery - trying to reclaim overpayments after they’ve been made can be costly and difficult to implement. Legal fees, administrative time, and delays can erode any recovery. Proactively verifying deaths through audits helps minimize these issues.

3. They strengthen plan integrity.

Regular audits ensure that your plan’s liability estimates are accurate, which improves funding strategies and actuarial assumptions. Additionally, death audits help identify when beneficiaries of certain payment options (such as joint and survivor benefits) have passed away, allowing the plan to update liabilities accordingly (which could reduce required contributions). For example, if a beneficiary who would have continued to receive payments after the participant’s death predeceases the participant, the plan’s obligations should be adjusted.

4. They save on PBGC premiums.

Plan sponsors are generally required to pay annual premiums to the Pension Benefit Guaranty Corporation (PBGC). These premiums are based on the number of participants (including beneficiaries of deceased participants) in the plan, as well as the funded status of the pension plan. Regular death audits have the potential to lower the headcount as well as improve the funded status, both of which can reduce the premiums due to the PBGC.

5. They support compliance.

Regular death audits demonstrate responsible management and can protect the plan from regulatory scrutiny and potential penalties. In recent years, the Department of Labor (DOL) and IRS have increased scrutiny on plans with missing participants. DOL guidance suggests regular death searches are a necessary component of plan governance.

Plans that have high numbers of terminated vested participants reported on Form 5500 may be at higher odds to be selected for a DOL audit. Plans are required to offer preretirement death benefits to deferred participants in certain circumstances. Timely identification of deaths among this population (and providing the appropriate death benefits to survivors, if any are due) can help control the size of this group and make sure the plan is operating efficiently and according to its terms.

IRS rules require that participants commence benefits at their Required Beginning Date or face penalties (these rules also apply to death benefits and to the participant’s beneficiaries). In addition, when a retiree passes away, their payments should stop or change (for example, by redirecting payments to a joint annuitant beneficiary, which also involves updating tax reporting on the annual Form 1099-R).

In summary

By ensuring that payments stop promptly after a participant’s death, you protect your plan’s assets and uphold its integrity. Regular death audits are more than just a good practice—they’re essential for responsible pension plan management. Schedule actuarial audits consistently and collaborate with a reputable partner. Your actuarial consultant can help you establish effective procedures and ensure your plan operates efficiently and in compliance.

- Your Milliman Actuary

This edition of Dear Actuary was written by Lee Townsend, FSA, EA, MAAA.