I am always looking for topics for my column. If you have any ideas for something you would like to read about, please contact me. This week’s topic came from a couple of attendees at our Putting Your House In Order client orientation workshop this past week. They had a friend who had not worked outside the home whose husband had passed away and was shocked to learn that her husband’s monthly pension stopped upon his death. She apparently unknowingly signed off on her spousal rights when he retired.
This used to be a much bigger problem in the 50’s, 60’s and early 70’s. It was quite common for the primary breadwinner husband to pass away leaving no pension for his widow. If a retiree wanted a spousal benefit, the retiree had to specifically request it. The big change came in 1974 with the passage of the Employee Retirement Income Security Act of 1974 (ERISA), which is a federal law that sets minimum standards for retirement plans. According to the US Department of Labor Employee Benefits Security Administration, ERISA protects the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire.
There are many provisions in ERISA as stated by the US Department of Labor Employee Benefits Security Administration, such as when you must be allowed to become a participant, how long you have to work before you have a non-forfeitable interest in your benefit, how long you can be away from your job before it might affect your benefit, and whether your spouse has a right to part of your benefit in the event of your death.
ERISA provides different spousal protections depending whether a retirement plan is a defined benefit plan or a defined contribution plan. A defined benefit plan is generally a retirement plan in which you receive a monthly benefit only and have no right to withdraw any lump sums out of the plan. With a defined contribution plan, on the other hand, there is no monthly benefit promised; there is an account in which contributions are made and upon retirement, you can typically withdraw the entire account balance. With a defined benefit plan, the monthly benefit continues for your lifetime, whereas with a defined contribution plan, once all the funds are withdrawn and gone, they’re gone.
If you are a participant in a defined benefit plan, unless the you and your spouse choose otherwise, upon your death, your surviving spouse is entitled to at least one-half of the monthly benefit you were receiving during your lifetime. This is also called a 50% spousal survivor benefit. Most defined benefit plans that I have reviewed, have four pension options for married retirees, 100% joint and survivor benefit, 75% spousal survivor benefit, 50% spousal survivor benefit, and the retiree single life benefit.
The 100% joint and survivor benefit is generally the smallest monthly benefit, since it continues for the lifetime of the survivor of you, the retiree and your spouse. The 75% survivor benefit is initially larger than the 100% joint and survivor benefit, but if you, the retiree dies first, your surviving spouse only receives 75% of the initial amount. Similarly with the 50% survivor benefit; the initial monthly amount is larger than with the 75% survivor benefit, but after your, the retiree’s death, your surviving spouse only receives 50% of the initial amount. The retiree single life benefit is the largest monthly benefit, but if you the retiree die first, the monthly pension stops; there is no spousal survivor benefit. If you and your spouse choose not to receive a spousal survivor’s benefit, you, the retiree must sign a written waiver and your spouse must sign a consent to a benefit without a spousal survivor benefit.
Some defined benefit plans have what is called a pop-up option with the 100%, 75% and 50% survivor benefit options. With the ones I typically see, the initial amount is less than without the pop-up option, but if your spouse dies before you, you the retiree get a bump or pop-up in your monthly benefit.
If you have a defined contribution plan, your spouse is generally automatically the beneficiary of the plan. If you or your spouse want a different beneficiary, you have to request it and your spouse must sign a written consent to the beneficiary change.
Unfortunately I still see defined benefit plans where there was no surviving spouse benefit option elected. I’ve had this situation come through our office a number of times over the years. For the cases that I’ve seen, it has always been the widow who comes into our office after her deceased husband’s pension stops. He typically has been the primary or sole bread-winner of the family and his pension had been their primary retirement income. When we review the deceased husband’s pension election form, he had elected single life pension which is the largest monthly benefit, and the wife signed off on any spousal pension. She does not specifically remember signing the form, but she ordinarily would sign whatever her husband would ask her to sign, without question. She has another 15 or 20 or more years left to live and no pension, only Social Security. This is not what she understood would happen.
Unfortunately, in the cases I have seen, not only did the spouse sign consent to the waiver of a spousal pension benefit, the retiree had retired 15 or more years before he died and the household had received the benefit of the higher monthly benefit for that whole time. It is going to be highly unlikely that a pension administrator would want to change any benefit at that point.
How do you protect yourself? Make sure at retirement that you understand all pension benefit options and that you know what you are signing, especially if it is your spouse’s pension. These benefit notice documents and benefit election forms can be very confusing. It is easy to choose one benefit option thinking you are electing another benefit option. It may make sense for you to review the elections with an experienced elder law attorney who can explain all your options.
If your marital status changes because of a marriage, divorce or a death of a spouse, notify your plan administrator promptly. If you do not, you or your spouse could be losing some important retirement benefits.
By: Matthew M. Wallace, CPA, JD
Published edited March 13, 2016 in The Times Herald newspaper, Port Huron, Michigan as: Be Aware of Spousal Pension Options