Failing To Update A Plan Beneficiary Designation

 

Technically it is not a tax case, but it is so tax-adjacent it might as well be.

Let’s talk about beneficiaries on a retirement account – and, more specifically, an employer-sponsored retirement account.

Carl Kleinfeldt participated in the Packaging Corporation of America (PCA) Thrift Plan for Hourly Employees. In 2006 he designated his (then) wife – Dena Langdon – as his primary beneficiary.

Kleinfeldt and Langdon divorced in 2022. The divorce included a Qualified Domestic Relations Order (QDRO). A QDRO is a court order authorizing distribution to the nonparticipating (ex) spouse. The PCA Benefits Center distributed to Langdon as directed.

However, even after the QDRO there is one more step: has the ex-spouse been formally removed as beneficiary?

Kleinfeldt faxed a request to the Benefits Center to remove Langdon from both his health and life insurance as well as his retirement plan. The Benefits Center updated her status on the retirement account to “ex-spouse.” Mind you, this was not the same as removing her as a beneficiary altogether.

Why not?

There were written plan procedures to follow. Kleinfeldt’s fax was a good start but was not quite enough.

You can guess that Kleinfeldt died.

You know that Langdon wanted that retirement money.

You also know the matter went to court.

And we are in legal weeds immediately.

We are talking here about an employer-sponsored plan, which (almost always) makes the plan subject to ERISA.

ERISA in turn uses a “substantial compliance” doctrine when reviewing actions required under a plan document. It is what it sounds like: if you miss a minor clerical step, the law presumes that responsible parties know what was meant and are expected to act accordingly.

The Kleinfeldt Estate argued the substantial compliance doctrine with a white-knuckle grip.

The Court observed that substantial compliance has two steps:

1.  Was there intent to make the change?
2.  Was the attempt to make the change similar (in all material aspects) to the proper procedures required by the plan?

There was no argument about the first test: the fax was clear evidence that Kleinfeldt intended to remove Langdon as a beneficiary.

On to the second test.

The plan documents wanted Kleinfeldt to either (1) call the Benefits Center or (2) update his beneficiary designation online.

The plan documents nowhere stated that he could update beneficiaries by fax.

The Court did not consider this a minor clerical step.

Kleinfeldt did not follow the rules.

Meaning that Langdon won.

And fair had nothing to do with it.

Our case this time was Packaging Corporation of America Thrift Plan v Langdon, No 25-1859 (7^th Cir. Feb. 2, 2026)

No Tax On Overtime

 

Let’s look at the overtime tax changes.

This is one of the provisions from the One Big Beautiful Bill (OBBB) that the president signed on July 4, 2025. It is retroactive to January 1, 2025, and we will be seeing the overtime deductions on individual tax returns filed in 2026 for tax year 2025.

Note that I said “deduction.” As we have discussed before, tax credits are generally worth more than a deduction. The tax impact of a credit is dollar-for-dollar. The tax impact from a deduction depends on your tax rate (if you are at a 22% rate, then your deduction is worth 22 cents on the dollar).  That said, we will take the break.

The key thing here is that the break applies to overtime, so you must be in a job that pays overtime. Multiple parties might address overtime requirements: the federal government, a state government, a union, a voluntary arrangement by your employer, but only the federal definition will work here.

The Code looks at the Fair Labor Standards Act (FLSA), which introduces us to the terms: “exempt” and “nonexempt” employee. Generally speaking, nonexempt employees are required to be paid overtime, whereas exempt employees are not. The overtime pay is defined as 1.5 times the regular pay rate for all hours over 40 and that itself over a 7-day period.

COMMENT: The definition of exempt looks to a duties test (executive, administrative, or professional). A CPA will be considered a professional and therefore exempt for purposes of the FLSA.

Let’s say you are nonexempt under FLSA. You next question should be: how is your overtime computed? The FLSA requires 1.5 times the regular pay rate. Let’s say that your employer pays double time (I wish). How much is your overtime and how much qualifies for the deduction?

EXAMPLE: You make $35/hour and your employer pays double rate for overtime. You have 150 hours of overtime for the year.

150 hours times $35 times 200% = $10,500

That is what you were paid for those overtime hours, but that is not the deduction.

We have previously discussed how the Code likes to take a common term and restrict it by placing “qualified” in front. Your qualified overtime deduction caps out as follows:

150 hours times $35 times 50% = $2,625

Note that the deduction does not apply to the base pay ($35) for your overtime hours. It applies only to the additional pay, and the additional only up to 50% ($35 times 50%). Chances are good that is not the way you think of overtime, but we are talking tax.

COMMENT: Not quite “No Tax On Overtime.”

The FLSA refers to a 7-day period. There are occupations (firefighters come to mind) that are paid on a different cycle. The Code allows for this variation, and we will not discuss it further.

There is a significant reporting issue for 2025 returns to be filed in 2026: the 2025 Form W-2 does not have a box to report “qualified” overtime. In fact, it does not have a specific box to report overtime at all, although an employer may use an available box (probably box 14) to report. The tax bill (OBBA) was signed by the president on July 4, 2025, a bit late into the year to reasonably demand retroactive changes in W-2 reporting. The new 2026 W-2 forms (for returns to be filed in 2027) will be changed to include the amount of qualified overtime.

But what are we to do for the 2025 returns filed in 2026?

First, it is a concern only if you are paid overtime. That knocks out quite a few of us.

Second, I suspect that tax preparers will routinely request a copy of your last 2025 paystub, if you are paid overtime. The stub should have information showing the calculation. Granted, the numbers may have to be reworked, but it is a logical place to start.

Third, your employer might voluntarily provide this information for 2025, in which case you likely have an attachment to your Form W-2. I suppose an employer could alternatively send you to a website for this information. There is a one-time reporting safe harbor for employers: if they tracked your overtime for the second half of 2025 (remember, OBBA was signed July 4, 2025), they can extrapolate to the full 2025 year. This safe harbor goes away for 2026, as employers will be required to track and report actual detail.

COMMENT: There is a somewhat similar W-2 reporting issue for qualified tips. The difference between the overtime deduction and the tips deduction is there is (some) existing tip reporting on the W-2. The tax preparer has a place to start. The preparer has no similar starting place for overtime.

Like the tips deduction, this is not an itemized deduction. You can get this deduction whether you itemize or not.

There is an overall limit on the deduction. If you are single, the limit is $12,500. If you are married, the limit is $25,000.

And this overall limit is reduced if you have too much income. Too much starts at $150,000 for singles and $300,000 for marrieds. Beyond that point, you will phase-out at a dime on the dollar.

If you are married, you will need to file a joint return.

You will need to provide your social security number to claim the deduction. Leave it out and the IRS will automatically revise your tax return and send you a bill.

A bonus will not qualify for this deduction. It must be overtime, even if the bonus is in lieu of overtime. Stand-by or on-call pay will not qualify either.

Like tips, the overtime deduction is for federal income tax only. It will not reduce your FICA taxes, and your state will decide whether you have a state equivalent to the federal tax deduction. Some states will; other states will not.

In case you were wondering: you cannot claim the overtime deduction and the tips deduction on the same income. One or the other, folks.

The deduction has a shelf life of four years. It will go away (unless a future Congress extends it) after the 2028 returns to be filed in 2029.

BTW, you can now revise your 2026 federal Form W-4 (telling your employer how much to withhold) to allow for your expected qualified overtime deduction. You did not have this option (directly; one could get there indirectly) for 2025. Why the difference between 2025 and 2026? Just look to November.

And there you have the new overtime deduction.