Let's face it—no one wants to think about what happens when an employee dies. It's a deeply human moment, and yet, somewhere between the condolences and the memorial service, someone in Human Resources is quietly asking: "So... what do we do about their final pay?"
It's not cold-hearted—it's compliance. When an employee passes away, employers are suddenly faced with a tangle of legal, tax, and benefits questions that don't come up in your average HR handbook. Who gets the final wages? What about that bonus they were about to earn? Can we offer extra support to the family without triggering a tax nightmare?
This article is here to help you navigate those questions with clarity, compassion, and just enough levity to keep you from crying over these potentially complex issues. We'll walk through the general rules, the risks, and the right way to honor your employee's legacy—and hopefully without running afoul of state laws or those pesky tax entities (think IRS, state income tax and probate laws).1
Let's get into it.
Final Wages: Payroll's Most Morbid Deadline (now with Probate!)
When an employee passes away, employers often want to act quickly and compassionately. But before you cut that final paycheck, take a breath—because generally, final wages are considered the property of the deceased employee's estate, not something you can simply hand over to the nearest grieving relative.
Who Gets Paid? (Hint: It's Not Always the Spouse)
Unless your state has a statute that allows for direct payment to a surviving spouse or beneficiary, final wages are subject to general estate or probate laws and must be paid to the employee's estate. That means:
- You may need to wait for a court-appointed personal representative to step forward.
- You'll likely need a death certificate and legal documentation (e.g., letters testamentary or a small estate affidavit).
- The payee on the check will depend on the legal documents provided and may be the Estate of the Deceased, one or more individuals, or the trustee(s) of a trust.
- Risks? If you pay the wrong person, you could face a claim from the estate, beneficiaries, or even creditors at some point later that the funds were given to the wrong person.
Approximately 35 states have statutes that allow private employers to pay some or all of the final wage payments directly to a surviving spouse or other beneficiary. Some states (like California) allow for simplified procedures—for example, paying wages up to a certain amount directly to a surviving spouse or next of kin outside of full probate.2 But these exceptions are state-specific. Bottom line – it would be wise to know this ahead of time because the process for private employers to pay out final wages is governed by state-specific laws.
Common requirements in these statutes include verifying the claimant's entitlement through an affidavit or declaration, adhering to an order of preference among heirs (e.g., spouse, children, parents), and observing payment limits that vary by state. (For example, Colorado imposes no such limit, but Rhode Island limits the amount the employer can pay to the beneficiary to $150.00!) Many states impose caps on the amount of final wages that can be paid without formal estate administration, and employers are generally protected from liability if payments are made in compliance with these laws. Finally, some states may have a "small estate" exception to probate, thus allowing the payment of the final wages if the total estate value is within the specified amounts.
Timing: It Depends on the State
While many states require prompt payment of final wages after separation, the rules change when the separation is due to death. Some states impose specific deadlines if they allow for payment to the surviving spouse, estate or authorized recipient, while others defer to probate timelines. Specified timeframes range from 30 to 45 days in some states.
Pro tip: Don't assume your usual final paycheck rules apply. Check your state's labor code and/or probate statutes—or better yet, consult counsel.
Avoid These Common Mistakes
- Automated Payment in Accordance with Old Direct Deposit Information: Banks may freeze accounts upon death, or someone may have access to the account who is not entitled to the funds.
- Paying a family member without legal authority: Even if they mean well, they may not be the rightful recipient.
- Skipping tax considerations: Post-death wages are still taxable income, but how you report them (W-2 vs. 1099-MISC) depends on timing. The IRS has very specific rules concerning such payments. (see IRS Publication 15 (Circular E), Employer's Tax Guide.)
Pro Tip:
If you're tempted to just direct deposit the final wages and call it a day, pause. Once an employee dies, their bank account may be frozen. A paper check made payable to the correct legal recipient is often the safer route.
Bonuses and Commissions: The Ghosts of Compensation Past
Ah, bonuses and commissions—the glittering promise of future reward. But what happens when the employee who earned that bonus or commission is no longer around to collect it? Is this part of "final wages"? Can you still pay it? Should you? And who gets it?
Earned vs. Discretionary: The Great Divide
The key question is whether the bonus or commission was earned before the employee's death, often governed by a written plan or policy. If it was, it generally must be paid along with the final wages (or at the later time specified by the plan or policy)—yes, even if the employee didn't live to see the check hit their account.
Bonuses: It Pays (Pun Intended) to Have a Plan
Commissions: The Plot Thickens
As a first step for bonuses, check the written plan document or policy. It will often specify how the bonus payment should be handled upon an employee's death. For example, is the company still obligated to pay the bonus even if the employee passed before the end of the performance period or the bonus payment date? Who is entitled to the bonus upon the employee's death? Is payment accelerated or made at the same time as all other bonus payments? How is the bonus calculated if the employees passes away in the middle of the performance period? A well-drafted bonus plan or policy will provide answers to all of the questions. And if there is no plan or policy (or the plan or policy is silent on these questions), we generally recommend deferring to applicable state wage and hour laws based on the state where the employee performed the work.
Commissions often fall into a gray area. If the sale closed and the commission was due before death, it's typically owed and would also be part of the final wages. But if the deal was still in the pipeline, or the commission required continued employment, you may have more flexibility.
Tip: Check your commission agreements. If they say, "must be employed at time of payout," courts may still find that language unenforceable if the employee died after earning the commission. (Because, well, they didn't exactly quit.) Better yet, consider addressing this issue in the Plan itself to avoid any ambiguity!
Who Gets the Bonus or Commission?
Just like final wages, these payments don't go to the office snack fund. They're typically treated as part of the final wages and follow the same rules we discussed above.
Avoid the "Surprise Bonus" Trap
If you're feeling generous and want to pay a bonus posthumously that wasn't earned or promised, that's lovely—but it may be treated as a gift or death benefit, with different tax consequences. (Spoiler: the IRS doesn't do sentimentality.)
Benefits and Beyond: What Happens to PTO, Health Insurance, Retirement Plans, and other Benefits?
When an employee passes away, their benefits don't just vanish into the HR ether. There's a surprising amount of paperwork, plan rules, and tax codes that come into play—and yes, you'll probably need to call your benefits administrator (and maybe your benefits lawyer). The general rule applies – if there is a designated beneficiary, then any benefits go directly to that designated beneficiary – end of story. If not, well then, those benefits typically belong to the estate and should not be distributed until you receive direction from the personal representative of the estate. Also, if you have a beneficiary designation for a plan that is NOT subject to the Employee Retirement Income Security Act (ERISA) (e.g., a bonus plan or an equity plan), please understand that there is always a possibility that underlying state law may conflict with the beneficiary designation and state law typically controls. If you have a potentially contentious situation, consider consulting with a benefits attorney before you process payments.
Accrued Vacation/PTO: Pay It Out or Let It Go?
In California and many other states, accrued vacation and PTO are considered wages—which means they must be paid out just like final wages. Sick leave, on the other hand, is usually not payable unless your policy or local laws says otherwise.
Pro tip: If your policy is silent, don't assume silence is golden. Check your handbook before you cut that check, and follow the process required for final wages after death in your state.
Health Insurance: COBRA to the Rescue
When an employee dies, if the employee was carrying their spouse and dependents on their employer-sponsored healthcare policy, their spouse and dependents may be eligible for COBRA continuation coverage for up to 36 months. Employers should:
- Notify the plan and/or COBRA administrators promptly,
- Avoid promising "we'll keep the cost the same"—unless you really mean it (and can actually do it—the administrative processes and IRS rules applicable to subsidized COBRA premiums can be very complex).
Life Insurance: The One Benefit Everyone Remembers
If your company offers group life insurance, now's the time to dust off those beneficiary forms. The insurer will handle the payout, but you'll need to:
- Notify the carrier,
- Provide a death certificate,
- Confirm the beneficiary on file (and hope it's not the ex-spouse from 2009)
- If an ex-spouse from 2009 is, in fact, named as the beneficiary (this happens all the time!), review the plan document to see if it includes any specific provisions regarding the validity of that election. If not, the ex-spouse is likely entitled to the benefit. Time to call your benefits attorney!
Bonus tip: Encourage employees to update their beneficiaries regularly. It's awkward when the payout goes to someone they unfriended years ago.
Retirement Plans: Let the Plan Do the Talking
401(k) and pension plans are governed by plan documents and federal law. Your job is to:
- Notify the third-party plan administrator,
- Provide necessary documentation,
- Stay out of the way unless and until you receive a request for further direction from the third-party plan administrator.
The third-party administrator will often engage directly with the family members and handle distributions to the designated beneficiary, and you'll avoid the risk of misdirecting funds. However, in more complex or potentially contentious cases, the third-party administrator may request direction from you before proceeding with a distribution. With these potentially contentious cases, don't rush to authorize the payout. If you rush, you may ultimately find out the plan paid the wrong person with no way to recover the funds, leaving you on the (financial) hook to process the same payment to the correct person. If your third-party administrator is asking you for direction, that's often a sign that it is a potentially contentious situation and a discussion with your benefits attorney might be warranted.
Extra Support: The Generous Employer's Dilemma
Sometimes, doing the right thing feels obvious—like covering funeral costs, offering a death benefit, or continuing health coverage for a grieving family at the active employee rate. But in the world of employment law and tax codes, good intentions can come with unintended consequences (and IRS forms).
"We Want to Help" — That's Great! But...
Employers often want to go above and beyond when an employee passes away. Common gestures include:
- Paying out unused sick leave (even if not required),
- Offering a lump-sum death benefit,
- Continuing salary for a period of time,
- Covering funeral or memorial expenses,
- Subsidizing COBRA coverage.
All of these are generous—and potentially taxable, reportable, or legally complex.
Tax Traps to Avoid
- Posthumous wages are still considered compensation and must be reported on a Form 1099-MISC (not a W-2) if paid after the year of death.
- Death benefits may be treated as taxable income to the recipient unless structured through a qualified plan or insurance.
- Gifts from the company (e.g., funeral contributions) may be taxable unless they meet narrow IRS exceptions.
- Subsidizing COBRA may inadvertently result in taxable income to the covered family members if not structured correctly.
Translation: If you're writing a check out of kindness, make sure it doesn't come with a surprise tax bill for the grieving spouse.
ERISA and Benefit Plan Pitfalls
If you offer a death benefit that looks like a retirement or welfare plan (e.g., continued salary or life insurance), you might accidentally trigger ERISA obligations. That means:
- Plan documents,
- Fiduciary duties,
- Annual filings,
- And possibly a call to your ERISA counsel.
How to Be Generous—Safely
- Be proactive and review your existing death benefit policies for clarity and legal compliance before an employee passes away.
- Coordinate with legal and tax advisors before offering anything outside your standard policies.
- Document the intent and structure of any payments.
- Communicate clearly with the family about what's being offered, advise them to consult with their own tax professionals to determine how it will be taxed, and when to expect it.
Pro Tip:
If you want to offer ongoing support, consider setting up a formal employee assistance fund or life insurance benefit in advance. It's cleaner, clearer, and far less likely to trigger a call from the Department of Labor.
Final Checklist: Don't Let Grief Lead to Legal Trouble
When an employee passes away, emotions run high—and so can legal risk if you miss a step. Best to develop a formal process/checklist based on your employee population to help HR and payroll teams stay compliant, compassionate, and clear-headed.
Conclusion: A Final Act of Respect
Losing an employee is never just a policy issue—it's a human one. But in the midst of grief and logistics, employers have a unique opportunity: to handle the final details with care, clarity, and compassion. Whether it's issuing a final paycheck, navigating benefits, or offering extra support to a grieving family, every step you take sends a message about your values.
Yes, the rules are complex. Yes, the paperwork is real. But getting it right isn't just about compliance—it's about honoring someone's contributions in a way that's both lawful and meaningful.
So, take a breath, follow your processes, and don't be afraid to ask for help. Because when it comes to final pay and benefits, doing the right thing matters—both on paper and in people's hearts.
This blog is part one of a two-part series. Stay tuned for Part 2, coming Thursday, August 21st.
Footnotes
1. This Article summarizes the requirements for private employers. Public employers are often subject to different rules.
2. Check out Seyfarth's March 16, 2026, California Peculiarities Blog that focused on obligations for final wages to the surviving spouse after death for California employees: Till Death Do You Part—Wages Of The Dearly Departed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
