Automatically Revoking Beneficiary Designations on Legal Separation Can Lead to Plan Errors
Automatically revoking a participant’s designation of his or her spouse as beneficiary when the participant is legally separated may cause a plan to violate the spousal death benefit rules.
A qualified retirement plan must provide that it will pay at least 50% (100% for profit-sharing plans) of a participant’s death benefits to the participant’s current spouse, unless the participant has waived this spousal benefit, with his spouse’s consent. These rules (the qualified pre-retirement survivor annuity (QPSA) rules) apply regardless of whom the participant designates as his beneficiary.
Effect of Legal Separation
Some plans are written to automatically revoke a participant’s spousal beneficiary designation when the participant divorces or is legally separated.
However, legal separation only eliminates the requirement that a participant obtain spousal consent to waive the spousal death benefit and name another beneficiary. The separated spouse must still receive the spousal death benefit unless the participant has:
- waived the death benefit, and
- specifically designated another beneficiary.
Automatically revoking a legally separated participant’s beneficiary designation doesn’t affect the spouse’s right to QPSA benefits
Although a legally separated participant can waive the spousal death benefit without spousal consent, a plan’s automatic revocation language, by itself, doesn’t satisfy the waiver rules. Automatically revoking a beneficiary designation, therefore, has no effect on the legally-separated spouse’s rights to death benefits under the QPSA rules. (Internal Revenue Code Sections 401(a)(11) and 417).
However, a plan’s automatic revocation language is often misunderstood as eliminating a legally-separated spouse’s right to death benefits, and may cause a plan administrator to pay death benefits to the wrong person.
To prevent this confusion, the IRS will no longer permit pre-approved plans to contain provisions that automatically revoke a participant’s spousal beneficiary designation upon legal separation.
Individually designed plans must either eliminate this language or clarify that the revocation does not affect the spouse’s rights to the QPSA death benefits. For example, a pension plan that provides that the spouse is entitled to 50% of a participant’s benefit, but allows the participant to designate a different beneficiary for the rest, must specify that the revocation only affects the beneficiary of the remaining 50%.
Automatic revocation for divorce
Retirement plans may continue to provide that if participants get a divorce, their designation of their former spouse as plan beneficiary is automatically revoked.