A recent federal court case from West Virginia illustrates that the ERISA spousal protection limits the spouse of a 401(k) participant from preventing the plan from paying the participant a lump sum distribution. In Gifford v. Burton. Mr. Gifford was an optician at Walmart and a participant in the Walmart 401(k) plan. Sara Gifford, his wife, was the sole beneficiary under the 401(k) plan. In February 2021, Mr. Gifford received a distribution of all his 401(k) funds and deposited those funds into an IRA. He then designated his daughter, Emma Gifford, as 90% beneficiary of his IRA and wife Sara as 10% beneficiary.
Mr. Gifford didn’t obtain spousal consent from Sara before receiving the 401(k) distribution. Sara sued, arguing that ERISA required her to consent to the payout. She lost.
ERISA does ban certain retirement plans from paying lump sums to married participants without spousal consent. For those plans, married participants must have their distribution disbursed in the form of a “qualified joint and survivor annuity” (QJSA) unless the spouse consents to another form of payment. A QJSA pays a monthly benefit over the participant’s lifetime and, if the spouse outlives the participant, pays the spouse a monthly benefit over the spouse’s remaining lifetime.
Exceptions
This spousal consent requirement does not apply to most 401(k) plans. It only applies if a 401(k) offers a lifetime annuity as an optional form of payment and a married participant elects for the lifetime annuity. Since the Walmart plan did not propose a lifetime annuity, Mr. Gifford didn’t need Sara’s approval before selecting a lump sum. It is important to note that, unlike most 401(k) plans, the spousal consent rule does apply to all ERISA-covered defined benefit pension plans.
The second type of spousal consent does apply to all 401(k) plans subject to ERISA. (Most 401(k) plans are subject to ERISA. Exceptions include the federal Thrift Savings Plan and solo 401(k) plans.) This rule requires the spouse of a married employee to agree to the employee’s designation of someone other than the spouse as a 401(k) beneficiary. So, if Mr. Gifford had attempted to name his daughter Emma as his 401(k) beneficiary, his wife Sara would have needed to consent to that designation.
This beneficiary rule does not apply to most IRAs since IRAs aren’t subject to ERISA. So, in most states, a married IRA owner can name anyone he wants as a beneficiary without first getting spousal consent. However, in community property states, spousal consent to a non-spouse beneficiary is required for IRAs opened during the marriage.
These rules are helpful to a married person (like Mr. Gifford) who wants to leave his retirement funds to someone besides his spouse. Once eligible, that married person can receive a lump sum 401(k) payment, roll over those funds to an IRA and designate anyone as a beneficiary. In most cases, neither the 401(k) distribution nor the IRA beneficiary designation requires spousal consent.
By Ian Berger, JD
IRA Analyst
