Retirement Accounts and Spousal Consent
Given the prevalence of blended families in today’s society, oftentimes estate planning counsel and financial planners work with married (or soon to be married) clients where one spouse may not wish to name their spouse (or future spouse) the primary beneficiary of their respective individual retirement account and/or company qualified retirement plan account. This situation may arise where a significant portion of such spouse’s net worth resides in such accounts and the spouse wants all or a portion of such account to be passed down to his or her biological children rather than his or her current spouse who is not the biological parent of such children. Such clients may not realize that individual retirement accounts differ from company qualified retirement plan accounts with respect to the potential requirement of “spousal consent.”
Spousal consent in this context consider “means” or “refers to” an agreement by the spouse of a married participant to an action by the participant that affects the participant’s company qualified retirement plan account. Spousal consent is generally given by completing and signing a section of an applicable administrative form and having that consent notarized by a licensed notary, or witnessed by a company qualified retirement plan representative. Note that spousal consent is only required in certain situations.
Married individual retirement account owners generally do not need spousal consent before designating a beneficiary other than their spouse. By contrast, many married company qualified retirement plan participants do need to get their spouse to agree to a non-spouse beneficiary. Further, such married participants in some types of company qualified retirement plans may also need spousal consent before taking distributions, including changes to the form of distribution, in service distributions, or loans from the company qualified retirement plan. The following is a brief overview of when spousal consent may be required.
Distribution, In Service Distributions Or Loans
Company qualified retirement plans which must provide for qualified joint & survivor annuities (QJSAs) and qualified pre-retirement survivor annuities (QPSAs) are subject to the requirement that a married participant’s spouse consent to any change in the optional form of benefit payment offered under the plan, such as a lump sum or installments, rather than the normal form of benefit payment, which is an annuity with survivor benefits. In addition, in such cases, spousal consent is required for any in service distributions or loans from the participant’s account, as these actions could reduce the survivor benefit due to the spouse.
Importantly, many profit sharing and 401(k) plans are exempt from the QJSA and QPSA requirements, as long as they meet certain requirements. [1] While such exempt profit sharing and 401(k) plans usually do not require spousal consent for distributions, including changes to the form of distribution, in service distributions, or loans, it is always important to review the actual plan documents to make sure the plan’s written requirements do not require spousal consent notwithstanding its exempt nature. In addition, be wary of situations where an otherwise exempt profit sharing or 401(k) plan receives assets from a nonexempt plan. In that case, such assets may retain the spousal consent requirement.
Beneficiary Designations
In all types of company qualified retirement plans a spouse must generally give consent if a married participant is changing the designated beneficiary to someone other than the spouse. The spouse is the default beneficiary for married participants. For example, in our example above, if a married participant wants to designate his or her biological children from an earlier marriage as either the sole or co-primary beneficiary, he or she will need to get their current (or future) spouse to consent to this designation.
Prenuptial Agreements
Treatment of company qualified retirement plan accounts can also be the subject of prenuptial agreement negotiation in a situation where one of the parties has been married previously and has children from the previous marriage. In such prenuptial agreements, the parties often agree that the beneficiaries, at least in part, of a company qualified retirement plan account will not be the future spouse. It is important to note that in such a situation, while the prenuptial agreement is signed before the ceremony, the spousal consent cannot be signed before the ceremony, for the reason that neither party is the “spouse” until the ceremony is completed. In these situations, it is imperative to remind the future couple that notwithstanding the unromantic nature of the spousal consent, the best practice is to have the spousal consents prepared well in advance of the ceremony and then have the spousal consent signed immediately after the ceremony.
Obviously, the facts of each situation as well as the actual terms of any qualified retirement plan (as well as any applicable changes in law, regulations and/or approach by regulators) are unique and may involve other factual and technical issues to be addressed in making a spousal consent determination.
If you have any questions regarding the spousal consent requirements with respect to a particular company qualified retirement plan, please do not hesitate to contact one of our tax or employee benefits attorneys for assistance. Our tax and employee benefits attorneys stand ready to assist you in evaluating any spousal consent requirements that might apply in your situation.
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