When choosing a beneficiary for a retirement plan, it is important to understand how your spouse will be treated under the plan. Surviving spouses are treated differently under 401(k) plans and IRAs. In general, 401(k) plans provide protections for surviving spouses that IRAs do not – 401(k) plans are governed by a federal law known as ERISA. Under this law, a surviving spouse is the automatic beneficiary of a retirement plan. If an employee wants to name someone other than a spouse as a beneficiary, the spouse must consent to this in writing. (There are some exceptions; for example, the spouse may have to be married to the employee for a certain amount of time).
IRAs are not governed by ERISA, however, so they do not include the same protections for spouses. Importantly, this is true even if a 401(k) is rolled into an IRA. In a recent legal case, a husband rolled his 401(k) into an IRA after he retired. He named his children as the IRA beneficiaries. After he died, his wife claimed that she was entitled to the account funds as his surviving spouse. She argued that because her husband had rolled his 401(k) into the IRA, she should receive the same protections that the 401(k) had given her. A federal appeals court in California disagreed, deciding that IRAs are not governed by the ERISA rules even if the funds originated in a 401(k).
As California is a community property state, disputes have arisen where a spouse designates more than one-half of an IRA to a non-spouse beneficiary when the money used to fund the IRA was acquired during the marriage. If you want someone other than your spouse to be a 401(k)’s beneficiary, you will need your spouse’s consent in writing. In any case, whether you have a 401(k) or an IRA it is important to regularly check your beneficiary designations to make sure they are current.
Ms. MacDonald’s practice is limited to Estate Planning, Probate, Conservatorships, Elder Law & Trust Administration. Ms. MacDonald maintains her practice in the Santa Clarita Valley at 25115 Avenue Stanford, Suite B-124 in Valencia, California. She can be reached at 661-294-6464.