The Rules for 401(k)s When You Die

401k piggy bankFederal law is pretty clear cut regarding what happens to company retirement plan assets if a married participant dies on the job. In that scenario, the survivor gets 100% of the account—provided that person hasn’t specifically waived the right.
When a worker takes a retirement plan payout as an annuity, he or she must select a plan that will continue lifetime payments to the surviving spouse equal to at least 50% of the original benefit amount. A spouse can also waive that right, but it must be in writing.
Kiplinger’s August 2016 article, “What Happens to Your 401(k) When You Die–Like It or Not,” reports that when President Reagan signed that rule into law back in 1984, he proudly said, “no longer will one member of a married couple be able to sign away survivor benefits for the other.”
The protection for a surviving spouse is so powerful that it’s superior to properly named beneficiaries. Further, this rule can’t be unset by a pre- or post-nuptial agreement where a spouse waives the death benefit. A pre-nup doesn’t do it since a spouse and not an engaged individual must waive the benefit, and a post-nup has no authority—unless the spouse actually signs a written waiver. Note that singles can designate whomever they choose as beneficiary.
While there are clear rules for the protection for a survivor’s rights, it’s a bit cloudier while the 401(k) owner is alive. There’s actually a loophole to the tune of $1 million in a lump-sum distribution. When a married worker leaves a job, most 401(k) plans permit the employee to roll over the balance to an IRA without notifying the spouse.
Once the money is in the IRA, the death benefit protection is gone.
In most states, the IRA owner can name anyone as beneficiary of the account. However, in community property states, you may need spousal consent to name someone other than your spouse as beneficiary of more than 50% of the account.
There are, however, some plans that require spousal consent for a distribution, such as when the default benefit under the plan is a joint annuity with the participant’s spouse. Otherwise, to claim benefits, such as a lump-sum distribution to be rolled into an IRA, the spouse must agree—it’s pretty rare among 401(k) plans. Plans that require a 100% death benefit for a spouse typically don’t demand spousal consent for a lump-sum payout.
It’s very important to understand the rules—and not just those of your own retirement plan but also of those that govern the plan that covers your spouse.
Reference: Kiplinger’s (August 2016) “What Happens to Your 401(k) When You Die – Like It or Not”

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