Law Firm Indianapolis - Ice Miller LLP

The Final Paycheck

"Our company had an employee pass away last month, and now his daughter is calling to request his final paycheck. What should we tell her?"

As attorneys to the company, we field this type of question from time to time. Often the circumstances of the employee's death are unexpected or tragic. The employer is in the awkward position of trying to be sympathetic and helpful to the family while navigating through a murky area of probate laws not often addressed in the employee handbook.

Payment to Estate

In Indiana, the Wage Payment Act provides that wages must be paid to the employee when due. Employers know that failing to pay wages due can result in liability for treble damages and attorneys' fees. However, there is no guidance in the Wage Payment Act as to what an employer must do when an employee passes away. It will often be the case that a deceased employee's spouse or other family member will contact the employer and request payment of wages to them. Although an employer will no doubt be sympathetic to family members, it must take steps so that payment is made to the person who is legally entitled to receive it.

Final wages (including vacation pay if this would have been paid to the employee upon employment termination) are assets of the deceased employee's estate. Often a probate estate is opened with the court and a personal representative (Indiana's term for executor) is appointed to act on behalf of the estate. If this is the case, the final check is payable to the estate so that the personal representative can deposit the funds in an estate account for administration with the other assets.

If a probate estate is opened, the employer should request the following from the personal representative:

The employer should provide the personal representative with the amount of accrued wages and vacation pay as that information is needed to complete the Form IH-14.

Direct Payment to Beneficiaries

Occasionally a probate administration is not necessary, such as when most assets are held jointly with a spouse or the deceased employee has modest assets. If this is the case, Indiana law provides an option for distribution of accrued wages and vacation pay through an informal process after a 45-day waiting period. Sometimes called a "small estate affidavit," a short form signed by a person acting on behalf of the estate can direct the distribution of assets if a formal court administration will not be used.

In general, the affidavit will confirm that a formal administration is not necessary, state that the probate assets do not exceed $50,000 in value, and set forth the name, address, and share of each beneficiary. The employer should take care not to provide the family with legal advice; and should encourage the family point person to work with an attorney to prepare the necessary affidavit and other documentation. Indiana law states that if an employer makes payment in reliance on a small estate affidavit, it is discharged and released to the same extent as if it had dealt with the personal representative of the deceased employee's estate. The employer is not required to inquire as to the truth of any statement in the affidavit.

In addition to the signed and notarized affidavit, the employer should request the following:

Again, the employer should provide the family point person with the amount of accrued wages and vacation pay so that the Form IH-14 can be completed in advance.

Inheritance Tax Consent

The deceased employee's final check should not be distributed to a personal representative or other claimant without first securing a completed Indiana Department of Revenue Form IH-14. Often referred to as a "Consent to Transfer" form, this form must be completed and approved by the county assessor or department of revenue prior to transferring an Indiana resident's personal property. Importantly, significant penalties may be levied against an employer who does not follow the consent requirements. A non-complying company could be held accountable for the inheritance tax liability plus additional fines.

Withholding on Final Wages

After an employer gathers the necessary information, inheritance tax consent and other documents, we are often asked, "What about withholding?" Withholding depends on when the payment is made -- in the year that the employee died or in a year following the date of death. If a deceased employee's wages are paid after the date of death and during the calendar year of the death, then the employer must withhold social security and Medicare taxes (but not income taxes) on the payment and report them as wages on the IRS Form W-2. If the payment is made after the year of the death, no withholding is necessary and no reporting on the W-2 is made.

Regardless of when made, the payment to the employee's estate or directly to a beneficiary pursuant to a small estate affidavit also must be reported on IRS Form 1099-MISC, in box three, and the name and SSN/EIN of the recipient must be included on the form. An excellent reference is the Instructions for Form 1099-MISC, found at http://www.irs.gov/pub/irs-pdf/i1099msc.pdf.

Regardless of the method for distributing the final paycheck, having a basic understanding of the options and clear policies on the required documents can add certainty to the process and allow the employer to provide clear guidance to a mourning family.

If you have any questions about Personal Services, Trusts and Estates, please contact Kristine Bouaichi at (317) 236-5994 or Gina Giacone at (317) 236-5829. If you have questions about Indiana Wage Payment Statute issues or any other labor and employment issues please contact Michael Blickman at (317) 236-2298.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

May 25, 2011