For married participants in retirement plans, a top concern is making sure that a spouse will receive their retirement benefits if they die. Luckily, most pension plans and many other retirement plans in the United States provide a survivor benefit to widowed spouses of retirement plan participants. In some cases, a survivor benefit can also be left to someone who isn’t a spouse, like a child.
This is especially important for women whose spouses have earned retirement benefits. Women are more likely to depend on a survivor benefit because, on average, women earn less than men, and this means less retirement savings. Women also typically live longer than men, which means they need their retirement savings to last longer. In other words, women earn less and need more.
While Social Security, Individual Retirement Accounts (IRAs), the military retirement system and retirement plans for government employees also provide survivor benefits, this fact sheet discusses what survivor benefits look like in different types of retirement plans that are offered by private employers and/or jointly by employers and unions for their workers. It also provides important tips for protecting your survivor benefits and discusses what happens to survivor benefits at divorce.
Survivor Benefits in 401(k)s, 403(b)s and Similar Plans
One of the best-known employer-sponsored retirement plans is the 401(k). 401(k)s are part of a larger umbrella category of retirement plans called Defined Contribution Plans. This also includes 403(b) plans, profit sharing and money purchase plans, and other plans. These plans are all very similar when it comes to survivor benefits.
In a defined contribution plan, each person participating in the plan has his or her own individual account, and money is contributed to the account while they are working. Depending on the employer and the rules of the plan, the employee and/or the employer may contribute money into the account each pay period. This money is invested so that it can earn additional income. When the participant reaches retirement age, he or she can begin taking money out of the account.
If the participant dies, the survivor benefit is made up of whatever is left in the account when the worker dies. So, if the participant takes all the money out of the account before he or she dies, there is no survivor benefit.
The retirement plan will ask participants to fill out a beneficiary designation form that tells the plan who should receive the survivor benefit if there is money left in the retirement account when the participant dies. Under federal law, if the participant is married, the spouse is automatically the beneficiary who will receive the survivor benefit, unless the spouse consents to letting the participant name a different beneficiary. This consent must be provided in writing, and the spouse must have that document notarized or sign it in front of retirement plan staff. The document must then be submitted to the retirement plan.
If the participant is unmarried, or if the participant’s spouse has consented to give up the right to receive the survivor benefit, the participant can designate anyone he or she wants to receive the survivor benefit. This can include a child, another relative, a romantic partner to whom the participant is not married, a friend, or a charity.
Tips for protecting survivor benefits in defined contribution plans
At age 59.5, plan participants have the ability to take some or all of the money out of the account as a cash distribution. They will simply need to pay income tax on this amount. Alternatively, participants can take money out of the account without paying income tax by transferring the funds or investments to an individual retirement account (IRA). IRAs have fewer spousal protections than employer-sponsored plans. For instance, whether a spouse must consent to allow a different beneficiary designation depends on the state, whereas federal law requires the spouse to agree to a different beneficiary designation in employer-sponsored plans throughout the U.S.
Plan participants can also take money out of the account before age 59.5, but they must pay a 10% penalty in addition to income tax on these amounts. Some plans will allow participants to take money out early without facing a penalty if they are facing a financial hardship. Some plans also allow participants to take loans out of their plans and pay them back, but failure to repay the loan could result in a penalty.
While spouses must consent to allow the plan participant to designate an alternate beneficiary to receive the survivor benefit, their consent is not required to allow participants to take hardship distributions or loans, to cash out their accounts when they leave work covered by the plan, or to roll funds over into an IRA or another retirement plan. This means that spouses should be proactive to ensure that decisions about the retirement benefit are made together as a couple, and make sure the participant understands how the spouse will be affected by choices to take money out of the retirement account.
In some cases, it may not be possible for a spouse to have this kind of conversation with the plan participant. For instance, this may be the case in abusive relationships or if the couple is estranged. A state family law court may be able to help by ordering that a share of the retirement benefit be reserved for the spouse. A family court has this ability in the case of divorce, legal separation, or other situations that may arise under state family law.
Survivor Benefits in Pension Plans
Pensions are another common type of employer-sponsored retirement plan. The formal industry term for a pension plan is a Defined Benefit Plan. Survivor benefits in defined benefit pension plans are very different from survivor benefits in defined contribution plans. Spouses of participants in defined benefit plans are better protected, but defined benefit plans typically only pay survivor benefits to a spouse. If an unmarried plan participant dies but has children, those children will most likely not receive a survivor benefit.
Unlike defined contribution plans, pension plans are not divided into individual accounts, so the size of the benefit and the survivor benefit are not determined by an account balance. Rather, retired participants in defined benefit plans receive a guaranteed amount every month for life. That amount continues to grow the longer the participant works for the employer (or, if the plan is provided jointly by a union and a group of employers, for employers that have signed on to the retirement plan).
The survivor benefit is a portion of this monthly amount, and is paid to the surviving spouse every month for the rest of his or her life. Employers are responsible for ensuring that there is enough money in the retirement plan to pay out the benefits it owes both to retirement participants and to surviving spouses. Just in case, though, these plans are also insured up to certain limits by a federal agency called the Pension Benefit Guaranty Corporation.
Because defined benefit plans provide monthly income for life both to the plan participant and to a surviving spouse, they guarantee that neither the participant nor the spouse will outlive their retirement savings. Federal law also states that the surviving spouse of a deceased plan participant must receive at least half of what the participant was receiving every month. Which means that, unlike in defined contribution plans, there is no risk of a participant spending the entire retirement benefit and failing to leave behind a survivor benefit for the spouse.
The only exception is if a spouse signs a form giving up his or her right to receive lifetime monthly payments. The spouse must either have the form notarized or sign the form in the presence of retirement plan staff.
Why might a spouse give up the right to a monthly survivor benefit payment if nobody else other than the spouse can receive it? First, retirement plans typically reduce the amount that the participant receives in retirement to pay for the monthly survivor benefit. Couples may decide that it makes more financial sense to give up the survivor benefit in order to receive higher payments up front. This makes sense if the spouse is significantly older than the participant, or is seriously ill and unlikely to outlive the participant. It may also make sense if the spouse has another source of significant retirement income.
A spouse must also provide written consent if the participant wishes to take the benefit as a one-time lump sum payment. Not all defined benefit plans will allow a participant to take a lump sum benefit payment, but some plans do. See our fact sheet on taking a lump sum versus monthly payments for life.
Tips for protecting survivor benefits in pension plans
A plan participant in a defined benefit pension plan cannot take any actions that would reduce a spouse’s future survivor benefit without the spouse’s consent. However, it is not uncommon for spouses of participants in these plans to consent to give up the survivor benefit and later regret this decision. There have also been cases in which a spouse has signed a form waiving the survivor benefit by accident or without fully understanding what the form meant. For instance, there have been cases in which a spouse did not speak English but was told to sign a document giving up her survivor benefit that was only written in English.
In some cases, plan participants have engaged in fraud to try to eliminate the survivor benefit without a spouse’s consent. This includes forging signatures or even having someone pose as the spouse at signing time, and it is more likely to happen in relationships where there is abuse or the couple is estranged. However, we are also aware of cases in which a well-intended plan participant forged a spouse’s signature on retirement paperwork, didn’t read the paperwork closely enough, and accidentally gave up the spouse’s survivor benefit. Even though there are notarization requirements to prevent fraud and forgery, mistakes still get made.
We recommend that plan participants and spouses fill out any retirement paperwork together to make sure that accidents don’t happen. Spouses also have the right to request documents and information from the retirement plan. This means that spouses can contact the retirement plan to ask whether the survivor benefit has been waived and can seek copies of any forms relating to the survivor benefit that the plan may have on file (though the plan may require you to make this request in writing). It is best to do this while the participant is alive so you can correct any problems before it is too late. If the survivor benefit has been waived and the plan participant dies, the pension plan is legally considered to have paid out the entire benefit and has no legal requirement to pay anything to the surviving spouse.
Survivor Benefits at Divorce
Dividing retirement benefits at divorce is a complicated process that requires extra steps in addition to simply obtaining a divorce decree. Divorcing couples must also obtain a special court order called a QDRO (Qualified Domestic Relations Order) and submit it to the retirement plan for approval. Without a QDRO, a former spouse’s benefit rights are not protected.
Survivor benefits and divorce in defined contribution plans
A retirement plan participant’s 401(k) or other defined contribution retirement benefit can be divided at divorce (or legal separation or other situations determined under state family law). There are two different ways that a former spouse can receive benefits at or after divorce:
- A family court can decide that the spouse of a retirement plan participant is entitled to a certain share of whatever money is in the participant’s account regardless of when the participant dies.
- A family court can also require that the participant name the former spouse as beneficiary so that she will receive the survivor benefit. Even if the participant remarries, a former spouse who was awarded the survivor benefit at divorce will still receive the survivor benefit.
Survivor benefits and divorce in pension plans
A pension benefit can be divided at divorce (or legal separation or other situations determined under state family law). There are two different ways that a former spouse can receive benefits at or after divorce:
- A family court can decide that the spouse of a retirement plan participant is entitled to receive a share of the pension benefit every month while the participant is alive. Or, if the plan allows lump sum distributions, the spouse can be awarded a share of that lump sum payment at divorce, though this will mean there is no survivor benefit.
- A family court can also require that the monthly survivor benefit be paid to the former spouse. Even if the participant remarries, if there is already a court order granting the survivor benefit to the former spouse that survivor benefit belongs to the former spouse. Even if the court has awarded a share of the participant’s lifetime benefit to the spouse at divorce, the court must also specifically address the survivor benefit. Otherwise, the former spouse’s monthly benefit payments will stop coming when the participant dies.
Read More: PRC Roadmap to retirement: When your family status changes