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It’s Time for the IRS to Eliminate the Retirement Plan Spousal Consent Requirement

The recent COVID-19 pandemic exposed a weakness in the retirement plan infrastructure when thousands of married retirement plan participants attempted to take loans and distributions from their plans and found out that, in order to do so, they had to have the written consent of their spouse and that the written consent had to be personally witnessed by a notary or a plan representative.

Eventually, many states did address this problem by permitting virtual notarization and the IRS provided recent guidance allowing for this, as well as for virtual witnessing by a plan representative. However, that was not before some participants waited weeks or even months to receive their money when it was desperately needed.

There has been some speculation that the IRS will continue to allow the process of “virtual witnessing” of spousal consent for distributions and loans, and perhaps even at enrollment, where a similar consent is required in certain plans. While that is a welcome change, why doesn’t the IRS abolish the spousal consent process entirely?

The consent of a spouse for loans and distributions is due to the waiver of the Qualified Joint and Survivor Annuity (QJSA). The QJSA is a retirement benefit payable in the form of an annuity for the life of the participant, and, if the participant is married, a survivor annuity for the life of the spouse, payable upon the death of the participant. The survivor annuity percentage is specified by the plan, and it must be at least 50% (but no more than 100%) of the annuity benefit that was payable when the participant was alive.

Confused? Many participants are as well, which is why most waive this benefit (with the consent of their spouse), as the QJSA option is rarely selected. Instead, participants elect either a lump-sum payment or another form of distribution, such as periodic payments. Thus, in essence, the IRS forces participants to jump through hoops so that the spouse can waive a benefit that they often don’t understand and are unlikely to elect!

However, not all plans are required to offer the QJSA (non-ERISA plans, such as church and governmental plans, are exempt from the requirement and it is optional for 403(b), 401(k), profit-sharing and stock bonus plans that meet certain requirements). Thus, there are plan sponsors that require this complicated process and plans that do not. Many withdrawals and loans can even be processed electronically, which is an impossibility for plans subject to the QJSA.

And, while the QJSA is bad, the Qualified Preretirement Survivor Annuity (QPSA) is even worse! The QPSA is a pre-retirement death benefit for a married plan participant, payable in the form of an immediate annuity for the life of the surviving spouse, that is purchased at the time of his or her death. As with the QJSA, the precise percentage of the QPSA is stated in the plan document, but it is typically 50% of the account balance (and no more than 100%).

Here’s the kicker: If a retirement plan offers a QPSA, the spouse is again given the right to waive the benefit, typically at the time of initial enrollment in the plan when the participant makes a beneficiary designation for his/her death benefit. However, if that is the case, the plan sponsor must then give a participant a QPSA notice during the period beginning when he or she is age 32 and ending with the close of the plan year before the participant turns age 35, or within one year from when an employee becomes a plan participant if he or she is hired after age 35. In general, a participant cannot waive the QPSA prior to the first day of the plan year in which the participant’s 35th birthday occurs. A plan may allow the participant to waive the QPSA prior to that date, but the waiver would then be revoked on the first day of the plan year in which the participant turns age 35, requiring a brand new waiver to be completed at that time, assuming that the participant still wishes to waive the QPSA (a new waiver is also required if the participant is single at the time of the initial beneficiary designation and later marries, but at least this requirement is a bit more logical).

What do you think the percentage of retirement plans is that correctly administers this? Thankfully, as is the case with the QJSA, not all plans are required to offer this unfortunate provision.

Now, I understand the historic reasoning as to why the QPSA and QJSA were implemented. Decades ago, when typically only one individual in a marriage would accumulate retirement benefits, these provisions prevented the spouse with the retirement benefit from simply naming someone else as a death/retirement beneficiary and leaving the other spouse destitute in retirement.

However, there have been many plans, such as the church and governmental plans described above, that have operated for many years without the QJSA and QPSA benefit, and I have yet to hear any stories of this actually happening. However, I have heard of countless participants having horrendous experiences obtaining loans and distributions where spousal consent was required, even prior to COVID-19. And the QPSA has made many a routine death benefit payout needlessly complicated.

So, in my humble opinion, I think it is well past the time for the IRS to eliminate these archaic and needless provisions. Without the spousal consent requirement, retirement plan withdrawals and loans can be administered in an efficient, paperless environment, and a key burden in the administration of death benefits can be eliminated as well.

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Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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