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  • Home>Practice Management>Retiring With Natalie Choate>Same-Sex Marriage and Retirement Plans

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    Same-Sex Marriage and Retirement Plans

    It is very important to complete a beneficiary designation form for ALL plans and accounts that you have.

    Natalie Choate, 07/10/2009

    Natalie Choate will be speaking at a location near you if you live in Seattle (Sept. 16), Lombard, Ill. (Sept. 21), South Bend, Ind. (Oct. 1-2), Atlanta (Oct. 23 and Nov. 3), San Diego (Oct. 24), Baltimore (Oct. 30), or Boston (Nov. 23). See all of Natalie's upcoming speaking events at her Web site.

    Question: "John," age 54, and "Jim," age 58, were married to each other under Massachusetts law. Their marriage is not recognized under federal law. Jim died, leaving a 401(k) plan and a money purchase pension plan, both maintained by his employer, Acme Widget Co. Jim had named John as designated beneficiary of the pension plan, but Jim never filed any beneficiary designation form for the 401(k) plan. The 401(k) plan provides that, if no beneficiary is named, the benefits shall be paid to the employee's "surviving spouse, if any, otherwise to the employee's estate." Elsewhere, the plan provides that the interpretation and administration of the plan shall be governed by Massachusetts law "to the extent not pre-empted by ERISA." I assume this means the 401(k) benefits must be paid to Jim's estate, since under federal laws such as ERISA same-sex marriage is not recognized. John is the sole beneficiary of the estate, under Jim's will, which has been admitted to probate in Massachusetts. What are John's rights with respect to the pension plan? The 401(k) plan?

    The Pension Plan
    John, as the individual named beneficiary of the pension plan, qualifies as Jim's "designated beneficiary" with respect to the pension plan. However, under federal law he is treated as a nonspouse beneficiary. This is because, under the Defense of Marriage Act, "In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word "marriage" means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife."

    Thus, John is not a "surviving spouse" for purposes of Internal Revenue Code ยง 402(c)(9), the provision that allows a surviving spouse to roll over inherited qualified plan benefits to the surviving spouse's own retirement plan. He is simply not entitled to roll over any benefits he inherited from Jim into his own IRA.

    As a nonspouse designated beneficiary, however, he is entitled to request the plan to transfer the pension benefits directly to an "inherited IRA" in the name of "Jim, payable to John as beneficiary." Starting in 2010, plans must honor a designated beneficiary's request for such a "direct rollover" to an inherited IRA. (As of right now, in 2009, it's optional with the plan whether they allow such beneficiary rollovers.)

    If John's income is under $100,000 in 2009, he can even request that the pension benefits be rolled directly into an inherited Roth IRA in Jim's name payable to John as beneficiary. (After 2009, a designated beneficiary can convert an inherited plan to an inherited Roth IRA even if his/her income exceeds $100,000.)

    Whether the benefits wind up in an inherited traditional IRA or an inherited Roth IRA, John, as the designated beneficiary, will be entitled to withdraw these former-pension-plan benefits gradually, in annual installments over John's life expectancy.

    The 401(k) Plan
    The answer is more complicated regarding the 401(k) plan.