Why Your Spouse May Like Your Company Retirement Plan More Than Your IRA

One important difference between IRAs and company retirement plans is spousal protection. Except for community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), spouses of IRA owners do not have any rights to the account. By contrast, many corporate retirement plans must provide spouses at least some protection.

In the world of company plans, spouses have potentially two types of protection, depending on the type of plan.

Spousal Consent to Plan Distributions 

The first type of protection requires certain plans to pay a married participant’s benefit as a specific type of annuity – unless the participant elects another form of payment and the spouse consents. This protection most often comes into play for Defined Benefit Pension Plans. This protection would only apply to 401ks (also known as Defined Contribution plans) if they offer an annuity option. Since most 401k plans offer only a lump sum form of payment, most 401k plans are exempt from this requirement. However, the rules always apply to ERISA-covered defined benefit pension plans. The required annuity type is called a “qualified joint and survivor annuity” or QJSA.

A QJSA pays a monthly benefit over the participant’s lifetime and, if the spouse outlives the participant, pays the spouse a monthly benefit over the spouse’s remaining lifetime.

Example: Lane participates in an ERISA-covered defined benefit plan. Lane is married when he retires, and wants to elect an annuity that pays him a benefit over his lifetime only (with no spousal benefit after he dies). The plan can pay Lane that type of annuity only if his wife consents. If his wife doesn’t consent, the plan must pay him a QJSA.

Spouse as Beneficiary (unless spouse gives consent otherwise)

The second type of protection requires certain company plans to automatically treat a married participant’s spouse as their beneficiary unless the participant designates another beneficiary and the spouse consents. This rule applies to all ERISA plans, 401ks and 403bs included.

As a result of this rule there is a requirement that, without spousal consent, death benefits for beneficiaries of married participants who die before retirement must be paid in the form of a “qualified pre-retirement survivor annuity” or QPSA. A QPSA pays a monthly benefit to a spousal beneficiary over the beneficiary’s lifetime. Here again is the 401k / 403b caveat — the QPSA rule does not apply to 401k or 403b plans that do not offer an annuity as a payment form. The 401k or 403b would just pay out a lump-sum. Regardless of payout option, 401k or 403b plans must require a married participant’s spouse to be the beneficiary unless the spouse consents to another beneficiary.

Example: David participates in a 401k plan that does not offer an annuity as a payment option. David has designated his sister Deana as his 401k plan beneficiary, but his wife Veronica did not consent to that designation. While participating in the plan and still married to Veronica, David dies. The plan must pay the death benefit to Veronica, David’s wife. However, the death benefit does not have to be in the form of a QPSA.

That is a brief overview of each protection afforded to your spouse. This is something that may help you decide whether to roll over a company 401k to an IRA or keep as is. Of course, costs, investment options and overall flexibility will play a large role in determining the best decision for you. As always, we are here to help you address all of these questions.

Happy investing,

Marcos