When an employee passes away, co-workers are often left grief-stricken and confused. Less obvious, however, is the confusion regarding the administrative matters the employer must take care of to ensure all appropriate taxes and benefits are handled properly. SHRM has developed a detailed checklist of items to consider when dealing with an employee's death.
First, confirm any state law regarding final pay for deceased employees. As a general rule, an uncashed paycheck issued prior to the employee's death should be canceled, and a new check should be issued in the name of the employee's estate or beneficiary. The new check should have the same amount withheld for tax purposes as the old check. Employers will need to contact the family to determine who the estate or beneficiary contact is and open lines of communication with this individual.
In the likely event wages are still owed the employee at the time of death, the employer must issue a check made to the beneficiary or to the estate of the employee. Final wages paid within the same calendar year in which the employee died are not subject to Federal Income Tax Withholdings (FITW), but they are subject to taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). If the wages are paid in the year following the employee's death, they are not subject to FITW, FICA or FUTA taxes. Treat accrued but unused vacation, sick, PTO and other leave in accordance with state law. If no law exists, follow organizational policy. The estate or beneficiary will need to be issued a Form 1099-MISC with "other income" listed in Box 3 for the gross amount paid.
Next, locate beneficiary designations for all benefits as quickly as possible. Schedule a time to meet with the beneficiaries, if possible, to discuss the benefits that the beneficiaries are eligible to receive and the process for administering the claims.
The next step is to terminate health insurance according to the policy as of date of death. If applicable, the employer should determine the balance of the health care flexible spending account for health expenses prior to date of death and notify the family about the process to access these funds. If the employee had a spouse or dependents enrolled into the medical plan, these individuals must be notified of the option to continue their coverage under COBRA.
Finally, the employer should follow the normal termination checklist to ensure the return of all equipment, keys, credit cards and other items and to address security issues.
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