Spousal Consent Requirements Differ Between Retirement Plans and IRAs
By Lisa Haberman, MBA, MAM
Does a married plan participant need to obtain spousal consent when requesting a distribution from her qualified retirement plan?
If the plan is subject to the Retirement Equity Act (REA), the plan participant is required to obtain spousal consent when requesting a distribution in a form other than a qualified joint and survivor annuity (QJSA). If a plan is designed with an REA safe harbor feature, spousal consent is not required.
REA, enacted in 1984, requires that certain qualified retirement plans provide distributions in the form of a qualified preretirement survivor annuity (QPSA) when a participant dies before distributions commence, or a QJSA, to protect long-term income streams for spouses of participants.
Certain plans, such as defined benefit, money purchase pension, and target benefit, are always subject to the REA annuity requirements, requiring a participant election and spousal consent to forego the annuity form of payout. Other types of plans, including profit sharing and 401(k), may side-step the REA requirement of providing an annuity payout option if the plan is designed to meet specific REA safe harbor criteria, which include the following.
At death, a participant’s vested benefit must be payable to the spouse unless the participant is not married or the spouse consents to another beneficiary designation.
The plan participant cannot elect payments in the form of an annuity.
Transfers from another plan that is subject to the REA requirements (e.g., money purchase pension plan) must be accounted for separately and remain subject to the REA requirements.
If a plan is subject to the REA, spousal consent will be required for in-service cash distributions, hardship withdrawals, and plan loans. Spousal consent will not be required, however, when a participant requests these same types of distributions from a plan designed with the REA safe harbor feature.
For plans that offer in-plan Roth rollovers (IRRs), it’s important to note that a direct IRR generally does not require spousal consent, as an IRR is not considered an actual distribution from the plan. Indirect IRRs are considered actual distributions from the plan; therefore, the REA’s spousal consent rules apply. If a plan requires spousal consent for distributions and loans, spousal consent will also be required for indirect IRRs.
The REA also provides benefit protection for spouses of married participants by deeming the spouse the primary beneficiary of a participant’s retirement plan assets. A married participant is required to obtain written spousal consent if she chooses to name a primary beneficiary other than her spouse. This rule is in effect for all qualified retirement plans, regardless of whether they are subject to the REA or designed as an REA safe harbor plan.
Do IRAs have the same spousal consent requirements as qualified retirement plans?
No. IRAs do not need to abide by the same spousal consent requirements as qualified retirement plans because IRAs are not subject to the Employee Retirement Income Security Act (ERISA) or the subsequently-enacted REA legislation. Spousal consent is not required when taking a distribution from an IRA, but obtaining spousal consent for IRA beneficiary elections becomes an issue when community property rules apply. Community property rules vary somewhat from state to state, but generally apply to married couples who share ownership of income earned or property acquired while they both live in a community property state. For example, a spouse would share ownership of the assets within an IRA that accumulated while married to an IRA owner and living in a community property state. If the IRA owner dies or divorces her spouse, her spouse may be entitled to all or a portion of the IRA assets if the spouse has not properly waived that right. Because of these legal rights, an IRA owner subject to community property rules and wishing to leave assets to another beneficiary is required to obtain spousal consent when first electing or requesting to change the primary beneficiary to someone other than his spouse.
It is the responsibility of the IRA owner, not the financial organization, to determine if assets in the IRA are subject to community property rules. Whereas, plan administrators are responsible for compliance with REA’s spouse beneficiary rights rules and may require spousal consent in every instance of a beneficiary election or change to ensure compliance.
Do spousal consent requirements apply to plan participants joined in civil unions or registered domestic partnerships that are not defined as marriage?
No. Spousal consent requirements for plans subject to the REA will not apply to individuals in a registered domestic partnership, civil union, or other similar relationship that is not identified under state laws as “marriage.” Individuals in these relationships are not considered married for federal tax purposes, including calculating and determining certain benefits and options accorded to spouses in relation to employer-sponsored retirement plans, IRAs, or other tax-favored savings arrangements. IRS Revenue Ruling 2013-17 states that this interpretation applies regardless of whether individuals who are in these types of relationships are of the same or opposite sex. (This IRS guidance does not, however, override state community property laws that may specify entitlement to assets that are subject to community property statues.)
