In its latest edition of Employee Plans News, the Internal Revenue Service (IRS) said to prevent confusion, it will no longer permit pre-approved plans to contain provisions that automatically revoke a participant’s spousal beneficiary designation upon legal separation.
The agency explained 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 waived the death benefit, and specifically designated another beneficiary.
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 qualified pre-retirement survivor annuity (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 said 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.
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