When and How do Retirement Savings and Spousal Consent Intersect?
By Michael Rahn, CISP
Among the things that marital partners pursue together is saving for a secure retirement. Like home ownership, raising children, and the needs and expenses of day-to-day living, saving for retirement is an issue of mutual concern. This is likely to be true regardless of whether both spouses have employment-based compensation. When it comes to retirement, couples are “in it together.”
A marriage begins with the intention that the relationship will endure—the reality of divorce and separation statistics notwithstanding—and that a couple’s retirement years will be spent together. Consequently, it’s easy to understand why laws give special consideration to spouses when it comes to their entitlement to financial resources intended to provide retirement security.
In addition to general savings accounts and investments, the commonly used mechanisms for retirement saving are IRAs and employer-sponsored retirement plans. Depending on the account type, these provide tax advantages when the saving occurs, at a future time, or both.
Unlike real estate or some general savings vehicles, it is characteristic of both IRAs and employer plans that an account is held in the name of an individual, rather than a couple. Nevertheless, to protect the interests of spouses there are statutory and regulatory requirements that may impact an IRA owner or retirement plan participant’s actions with respect to their own account.
In this regard, there are significant differences between IRAs and many employer-sponsored retirement plans. Some are based on federal law, while others are based on state law.
Who Will Inherit?
Though unpleasant to contemplate, it is almost certain that one partner of a married couple will outlive the other. It is extremely rare for both spouses to die simultaneously, a tragic accident being the most common such scenario (see sidebar on potential consequences of simultaneous death). When death occurs, what happens to the assets in an individually-held retirement plan account or IRA?
As a general rule, most married couples intend that when they die the ownership of their retirement savings—in whole, or in part—will pass to their spouse. But there are exceptions. Perhaps there has been a savings accumulation sufficiently large for some of it to be passed on to offspring, to a charitable organization, or to another individual. Perhaps a couple is in a subsequent marriage, and they wish to provide benefits to family members of a previous marriage. To accomplish this, it is necessary that beneficiaries have been identified before one’s death.
Influence of ERISA
Employer plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) typically have special requirements that dictate whether, and the extent to which, a spouse may be entitled to benefits if the participant to whom they are married should die. ERISA generally preempts state statutes with which they conflict. Not only death benefits, but a spouse’s right to influence whether withdrawals can be made from such plans by their spouse, and—for certain plans—in what form.
ERISA plans include those collectively called “qualified plans”—including defined benefit, profit sharing, 401(k), and similar plans—and ERISA-governed 403(b) plans. They do not include IRA-based employer plans, such as SEP and SIMPLE IRA plans, or non-ERISA 403(b) plans. IRAs are not considered ERISA-governed plans, even though they were created by the same 1974 legislation. Therefore, there is no federal law that requires a spouse to be the IRA’s beneficiary.
Enter REA’s Requirements
Because of certain perceived injustices to the spouses of some retirement plan participants, Congress enacted—and added to the Internal Revenue Code, and to ERISA—the provisions of the Retirement Equity Act of 1984 (REA). To protect the spouses of participants, REA requires that some plans’ benefits be in the form of a qualified joint and survivor annuity (QJSA), with—in the case of defined contribution plans, like profit sharing/401(k) plans—at least a 50 percent benefit to be received by a spouse beneficiary. Within the QJSA rules is the secondary requirement that—if the participant should die before retirement benefits commence—the spouse beneficiary must receive the same level of benefit, as a qualified pre-retirement survivor annuity (QPSA).
Certain plans—including defined benefit and money purchase pension plans, as well as target benefit plans—are always subject to payout in this form unless the participant’s spouse has waived it.
Other plan types can be exempted from this annuity benefit/spousal waiver requirement, by design, or by election. If so, they are said to have a “safe harbor” from this REA requirement. To have this safe harbor, such plans must guarantee that a spouse will have 100 percent entitlement to death benefits, unless this right is affirmatively waived. Profit sharing plans are commonly designed to have this safe harbor exemption from the REA/QJSA/QPSA requirements.
REA Applies to More Than Beneficiary Status
Plans that are always subject to REA, and those not designed to be REA safe harbor plans, must also place restrictions on in-service distributions that are available to participants while they are still employed. This includes cash or any other type of distribution, as well as the taking of a plan loan. Under such plans, the participant’s spouse must consent to such in-service distribution, or to a plan loan that is secured by the participant’s account balance (versus outside collateral), which virtually all are.
REA Requirements Can Be Waived
Comparatively few plan participants actually annuitize their retirement plan benefits at the time of retirement. Most accumulated retirement plan balances continue to be held in account-based investments, and—in most cases—are ultimately rolled over to an IRA. For plans that are subject to REA, spousal consent will almost inevitably be an issue at some time in the life of that participant’s account.
Effects of State Law on Non-ERISA Retirement Assets
There may also be state community property or marital property laws that grant a spouse an interest in their partner’s retirement savings, if that right has not been affirmatively waived, and if that state law is not preempted by ERISA. The details of these laws may differ from state to state. For example, entitlement to some assets may hinge on whether the assets were accumulated before—or during—the marriage.
There are currently nine states that have community property laws. In these states, in order for IRA and non-ERISA retirement savings subject to such laws to pass in their entirety to a nonspouse beneficiary, the spouse must have affirmatively waived his inheritance right. Four states make community property status an option that can be elected by the marrying couple. In these states, in the absence of such a waiver a spouse may be entitled to all, or to a share, of the IRA or retirement account. Generalities are dangerous, however, and for these jurisdictions state law must be consulted for specifics.
Spousal Right, or Administrative Procedure?
An IRA custodial or trust agreement, or the provisions in an employer-sponsored retirement plan, can sometimes be more restrictive than statutory or regulatory requirements. In addition, custodial organizations may establish procedures they deem appropriate to their business, even if they are more restrictive than necessary.
For example, if an IRA owner wishes to name someone other than his spouse as beneficiary, the IRA custodian may prefer that a spouse waive beneficiary rights even if the financial organization is not located in a community or marital property state. This is not uncommon, and is sometimes done to avoid conflict and argument—or even a legal challenge—after an IRA owner’s death.
IRA documents often include a provision under which a spouse may sign to waive beneficiary rights. It may be a provision that must be acknowledged by signature only in community or marital property states. Yet some IRA custodians—as standard procedure—may ask that it be completed whenever an IRA is opened, or when beneficiary elections are made or revised.
Can Plan Document Provisions Shape Beneficiary Rights?
Like IRAs, a non-ERISA 403(b) plan—such as a public school district K-12 plan—would not be subject to the ERISA spousal consent requirements. And, if not a community or marital property state, a 403(b) plan participant would generally not be required to obtain spousal consent to name a nonspouse beneficiary. But a provision within the 403(b) document under which a plan operates could make a spousal waiver necessary in order for the participant to name a nonspouse beneficiary. Such document provisions—a product of plan design decisions, rather than ERISA mandates—may have legal weight even though they exceed statutory or regulatory requirements.
Summary
Given the importance of saving for retirement, coupled with the uncertainties of life’s events, it’s easy to understand why special protections are given to spouses with respect to their entitlement to financial resources that have been accumulated for the purpose of providing retirement security. Regardless of who initially saved them.
