The rules for naming beneficiaries to a pension fall into three categories. Employer plans covered by the Employee Retirement Income Security Act of 1974, or ERISA, such as 401(k)s and certain 403(b)s, restrict beneficiary naming rights. Pensions based on individual retirement arrangements are less restrictive, except in states that have community property rules. Nonqualified pensions don’t restrict your choice of beneficiary.
ERISA sets the minimum requirements for qualified pensions used in private business. If you belong to an ERISA plan, your spouse is automatically named as your beneficiary. If you want to name someone other than your spouse, you must get written permission from your spouse. You can name a child as the primary beneficiary if your spouse approves or if you aren't married. You can name a child as a contingent beneficiary with or without your spouse’s permission. A contingent beneficiary inherits your pension if your primary beneficiary dies before you do.
IRA pensions qualify for tax benefits, but they fall outside many of the ERISA rules. Examples of IRA-based pensions include a simplified employee pension and a savings incentive match plan for employees. You can name anyone as your IRA-based plan beneficiary. However, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington and Wisconsin have community property laws. In those states, each spouse equally owns any property acquired by either spouse during marriage. You will need your spouse’s permission to name a child or anyone else as beneficiary in a community property state.
Your employer can adopt a nonqualified pension that escapes ERISA and IRA rules. Examples include nonqualified deferred compensation plans, executive bonus plans, group carve-out plans and split-dollar life insurance plans. These plans have no beneficiary restriction unless the employer happens to include one in the plan. However, these plans are still subject to community property laws. If you live in one of the states that have adopted these laws, your spouse must approve other beneficiaries.
Divorce can blur the beneficiary picture. For example, suppose you belong to an ERISA plan. You divorce, remarry and decide to name your three children as your beneficiaries. Your new spouse agrees, but you die before you get around to updating your plan’s beneficiary form. Since your new spouse never gave written permission for the change, the inheritance goes to the new spouse, not the children. Many other wrinkles can arise, and you might need legal advice to sort them out. You might also want to consider naming as beneficiary a custodial trust for the benefit of the named child to ensure responsible distribution of the inheritance.
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