“For a plan that terminates and that requires spouse consent, what are the plan sponsor’s options in the case of a spouse who refuses to sign consent? Is the plan not able to distribute all assets because of this?”
Spousal consent would not keep a terminating plan from distributing all assets. Upon plan termination, all plan assets must be distributed as soon as administratively feasible (generally within one year following the effective date of plan termination).
Federal law provides some measures to protect employees who participated in plans that are terminated, both defined benefit and defined contribution. When a plan is terminated, the current employees must become fully vested in their accrued benefits. This means they have a right to all the benefits earned at the time of the plan termination, even benefits which were not vested and would have been lost if they left the employer.
Only plans subject to the Retirement Equity Act of 1984 (“REA”) must comply with the spousal consent rules when distributing benefits to married participants1. REA amended the portion of ERISA concerning spousal rights, as applied to pension plans, by making Internal Revenue Code (the “Code”) Sections 401(a)(11) and 417 applicable to all defined benefit plans and to defined contribution plans subject to Code Section 412 minimum funding standards.
Following REA’s enactment, ERISA requires that the default benefit payment form for a married participant in a covered plan be a qualified joint and survivor annuity ("QJSA"). A QJSA provides an annuity for the life of the participant and a survivor annuity payable to the participant’s surviving spouse following the death of the participant. Spousal consent is not necessary for distribution made in a form that meets ERISA’s survivor annuity requirements.2 Thus, in a situation where spousal consent is withheld in connection with a termination distribution to a participant, a terminating plan may still distribute the benefit in a form that meets ERISA’s survivor annuity requirements. If the participant has not attained normal retirement age, this will entail distributing a deferred annuity under which benefits will not commence until the participant does in fact attain retirement age.
ERISA allows married participants to waive the QJSA form of benefit and elect an alternative form of benefit payment offered by the plan which may provide no survivor benefit or a survivor benefit payable to someone other than the participant's spouse. However, in order to make such an election, a married participant must provide written consent from his or her spouse. In general, benefits provided under a plan subject to ERISA’s survivor annuity requirements must be provided in accordance with those requirements, even when the plan is terminated. In other words, spousal consent would be required for a married participant to receive a termination distribution in a form other than a QJSA.
1 Treas. Reg. 1.411(a)-11(e) provides that a terminating defined contribution non-pension plan that does not offer an annuity distribution option may distribute a participant’s account balance without regard to the participant’s consent, even if the account balance exceeds the involuntary cash-out limit in the plan.
2 See Treas. Reg. 1.401(a)-20, Q&A 17.