Some 401(k) plans require spousal consent whenever a participant takes a distribution. Others don’t require spousal consent for distributions or loans. Rather, it’s required only if a participant wants to designate a primary beneficiary other than his or her spouse.
Such variations in plan design may leave an employer’s HR staff uncertain about when they should require a participant to obtain spousal consent for a distribution. The answer, of course, lies within the wording of your plan document. Nonetheless, here’s a summary of the basic rules and the way many 401(k) plans avoid spousal consents.
QJSAs and QPSAs
Generally, qualified retirement plans such as 401(k)s are required to provide distributions to participants in the form of a qualified joint and survivor annuity (QJSA), and a minimum pre-retirement death benefit known as a qualified pre-retirement survivor annuity (QPSA).
These assure surviving spouses a minimum benefit that can be waived only with the spouse’s consent. A 401(k) plan, however, can avoid QJSAs and QPSAs so long as:
- The plan requires that vested benefits be paid in full to the participant’s surviving spouse after the participant dies, unless the spouse has consented to a different beneficiary or there is no surviving spouse,
- Participants don’t elect payment in any form of life annuity, and
- Participants’ benefits exclude amounts transferred from a plan that was subject to the survivor annuity requirements.
Thus, if a plan doesn’t offer participants any life annuity distribution option and isn’t the recipient of funds from a plan that was subject to the survivor annuity requirements, it doesn’t have to obtain spousal consent before making distributions to participants.
Transfers and loans
Plans that have received transfers from plans that were subject to the survivor annuity requirements can prevent those requirements from applying to other benefits under the plan by separately accounting for the transferred assets and their income.
For purposes of the survivor annuity rules, plan loans are treated like distributions to the participant. So, if a plan doesn’t need to obtain spousal consent for other distributions to a participant, consent is unnecessary for plan loans.
Deferred annuity contracts
Certain deferred annuity contracts that include lifetime income options can be used as investments in a plan without triggering the spousal consent requirements. However, they must allow participants to move funds freely in and out of the contract until the annuity’s deferred starting date.
If the contract is accounted for separately, the spousal consent rules won’t apply to the contract until the deferred starting date of an annuity distribution. This allows earlier distributions and loans to occur without spousal consent.
Read the fine print
As you can see, many details go into whether a spouse must consent to a distribution or loan from an employer-sponsored 401(k) plan. Read the fine print of your plan document and ensure your staff or third-party administrator is aware of the rules. Our firm can answer any questions you might have about the tax or financial impact of employee benefits.