Retirement plan sponsors have a duty to provide complete and accurate information about retirement plan benefits to employees, yet now that the federal government has expanded the definition of spouse to include same-gender spouses, we are finding a general reluctance by plan sponsors to proactively communicate this new rule to all participants.
Because the term “spouse” is not defined in most plan documents, many plan sponsors mistakenly believe this rule change does not need to be proactively communicated to participants. Yet existing participants with same-gender spouses could be dramatically impacted by this rule change in a manner that ends up costing the plan sponsor.
Consider the following hypothetical scenario:
- In 2012, Participant who was recently divorced and legally remarried to a same-gender spouse asks his Employer HR representative for help to change his 401(k) plan beneficiary from his ex-spouse to his children.
- Participant is properly instructed by Employer HR representative to complete and submit a change of beneficiary form. (still 2012)
- Participant informs children of his intention to name them sole beneficiary and provides them a copy of the change of beneficiary form his Employer had him complete.
- In 2014, Participant dies.
- Shortly thereafter, Participant’s children request payment of Plan assets per their father’s expressed and written wishes.
- Despite the existence of a beneficiary form naming his children sole beneficiary, Employer is required to pay Plan assets to same-gender spouse under new federal rule because Participant never acquired a spousal consent form signed by same-gender spouse.
- Children sue for payment claiming the Employer breached its duty to communicate and “but for” this breach, Participant (their father) would have obtained spousal consent.
Sound a little far-fetched? Maybe, but why not foreclose this remote possibility by proactively providing all participants a notice of this important rule change.
Any participant notice should include the explanation that legally married same-gender spouses now have the same spousal rights as opposite-gender spouses under all Employee Retirement Income Security Act (ERISA)-governed retirement plans, regardless of their state of residency. Plan sponsors should remind all participants of the importance of updating beneficiary designations and any other plan election that may now require spousal consent to remain effective.
Michael Francis is president and chief investment officer of Francis Investment Counsel. firstname.lastname@example.org
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.
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