Six Payroll and Benefits Steps After an Employee Dies

Six Payroll and Benefits Steps After an Employee Dies

It’s an unsettling and emotional time when an employee unexpectedly passes away. From a personal standpoint, co-workers may be stunned and grief-stricken over the loss of a colleague. On the employer side, the business may have to quickly hire a replacement and train him or her to do the job. Frequently, productivity will suffer.

And that’s hardly the end of the story. A number of payroll and logistical issues also arise, including whether the employee is owed wages, how much tax should be withheld from those wages (if any) and how payments are to be made to the worker’s family. Employers must resolve these matters in a timely fashion.

Some of the critical questions to consider are:


      • Is payment due for services that have been performed but the employee hasn’t yet been compensated for? Are amounts owed for other unpaid accrued wages, vacation pay or sick time, fringe benefits, deferred compensation or other types of compensation?
      • Is payment due in the same year that the employee died or in a subsequent year?
      • Who has been designated as the employee’s executor or personal representative? Generally, this person is designated by the employee’s will or probate. If no executor or personal representative has been designated, state law will control.
      • What is the impact of applicable state laws on the payments the employer must make?

Be mindful that the rules can vary widely from state-to-state. For example, in California, the maximum wage an employer may pay to the survivor of a deceased employee before the estate has been administered is $15,000. In New York, the limit is $30,000 within 30 days of death; $15,000 from 31 days to six months; and $5,000 if more than six months after death.

Keeping that in mind, here are six steps to take in the event of the death of an employee:

1. If the employee has been issued a paycheck but died before cashing it, the check must be canceled and reissued in the same net amount, based on the same withholding. Payment should be made to the employee’s beneficiary, executor or personal representative. In addition, the employer should obtain a statement from the employee’s representative that payment has been made for this purpose.

2. Typically, a deceased employee will be owed wages that haven’t yet been paid. In that case, the employer should issue a check to the beneficiary or estate of the deceased employee. Have the executor or personal representative complete Form W-9. (If no executor or personal representative has been designated, wages can’t be paid until the will is probated and the estate has been issued a tax identification number.) Note that wages paid in the year of death aren’t subject to income tax withholding, but the employer must still withhold employment taxes such as FICA and FUTA.

3. Due to delays caused by probate and other timing issues, payment for wages owed to an employee may not be made until the year following the year of death in some cases. If that occurs, payment isn’t subject to employment taxes that must be withheld for payments made in the year of death. The employer pays the amount due to the employee’s estate.

4. Determine the beneficiaries for all other employer-provided benefits (for example, life insurance coverage) as soon as possible. When appropriate, schedule a meeting with the beneficiaries or personal representative to discuss the benefits that are available and the methodology for administering claims.

5. The employer must pay out other types of compensation due to the employee, including accrued vacation pay, sick time or personal leave time. Again, state law will dictate the treatment. If state law doesn’t apply, refer to the employer manual.

6. Finally, an employer should terminate the employee’s health insurance as of the date of death. In some instances, beneficiaries may have rights to amounts in a health care flexible spending account or some other health reimbursement plan. If a spouse or dependents were covered by the employee’s health insurance plan, they must be notified of their rights to continue coverage under COBRA, when applicable.

There are other potential non-payroll matters to address such as returning the employee’s personal property and collecting keys and other proprietary items. Handle these issues with understanding and sensitivity.

The sudden death of an employee can turn a business upside-down. Rely on your payroll and employee benefits advisers to help right the ship.

Payroll Partners is committed to helping clients stay informed about payroll and human resource news. This article is intended to provide readers with general information on human resources matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular practice. All efforts have been made to assure the accuracy of the information. Payroll Partners does not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular practice. If you are seeking human resources advice, you are encouraged to consult a human resources professional.