Take-Away: A lump sum distribution from a qualified plan, e.g. a 401(k) account, can override ERISA’s spousal consent rules.

Background: One major difference between IRAs and qualified plans is that a qualified plan is governed by the Employee Retirement Income Security Act (ERISA’s) spousal consent rules. In contrast, an IRA owner is free to name whomever the account owner wishes as their IRA’s designated beneficiary. Accordingly, a married IRA owner can name anyone as the designated beneficiary without their spouse’s consent. With regard to a qualified plan account, if the plan participant is married, they must have any distribution from their qualified plan account paid in the form of a qualified joint and survivor annuity (QJSA) unless their spouse provides their consent to another form of payment, such as a lump sum distribution.

401(k) Distribution Exception: A QJSA pays a monthly benefit over the participant’s lifetime and, if the participant’s spouse survives the participant, it pays the surviving spouse a monthly benefit over the survivor’s lifetime. However, this spousal consent requirement does not apply to many 401(k) plans.

Spousal Consent for Non-Spouse Beneficiary: A second type of spousal consent rule applies to all qualified plans, including 401(k) plans. [A principal exception to this rule is for federal Thrift Savings Plans and solo 401(k) plans.] This second rule requires the spouse of a married participant to consent to someone other than the spouse named as the 401(k) account designated beneficiary.

These two rules were the focus of a recent federal court decision from West Virginia.

Gifford v. Burton, (https://www.leagle.com/decision/infdco20220829d35)

Facts: Mr. Burton was an optician employed by Walmart. Mr. Gifford participated in Walmart’s 401(k) plan. Mr. Gifford was married to Sara, who was the sole designated beneficiary of Mr. Gifford’s Walmart 401(k) account. In February, 2021, Mr. Gifford took a lump sum distribution of his entire 401(k) account balance and deposited that distribution in an IRA. Mr. Gifford then named as the beneficiaries of his IRA his daughter, Emma, as the beneficiary of 90% of his IRA balance, with the remaining 10% allocated to Sara. Mr. Gifford did not obtain Sara’s consent before the 401(k) account balance was distributed to him.

Dispute: Sara filed a lawsuit in which she claimed that the lump sum distribution of the 401(k) balance to her husband was invalid because that distribution required her spousal consent.

Court Decision: The District Judge ruled against Sara. The spousal consent rule can apply to 401(k) account, but only if the 401(k) plan offers a lifetime annuity as an optional form of payment and the married participant elects the lifetime annuity payment option. The Walmart plan did not offer a lifetime annuity option. Therefore, Mr. Gifford did not need Sara’s consent before he elected to take the lump sum distribution from the Walmart 401(k) plan.

Conclusion: For a 401(k) plan participant who is married but who does not want to leave his/her entire 401(k) account to his/her spouse, once he/she is eligible to take a distribution, he/she can elect to receive a lump sum distribution from their 401(k) account and roll over those funds to an IRA and then designate anyone they choose as the designated beneficiary of their IRA. In most cases, neither the 401(k) distribution nor the IRA beneficiary designation will require the participant spouse’s written consent.