Automatically revoking beneficiary designations on legal separation can lead to plan errors, IRS advises

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, according to the IRS.

Waiver 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.

Automatic revocations

Some plans are written to automatically revoke a participant’s spousal beneficiary designation when the participant divorces or is legally separated. However, the IRS advises that “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:

(1) waived the death benefit; and
(2) specifically designated another beneficiary.

The IRS points out that, 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.

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, the IRS notes.

Plan language

In order to prevent plans from paying death benefits to the wrong parties, the IRS said that it 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%.

Retirement plans may continue to provide that if participants get a divorce, their designation of their former spouse as plan beneficiary is automatically revoked, the IRS said.

Source: IRS Employee Plans News, Issue 2013-3, September 13, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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