surviving spouse option

[Guest David5]

I am going to retire soon. I have received an Election Notice: Joint and 50% surviving spouse option. Basicly I have two options. 1. Lose 15% of my pension so my wife will get 50% of my then monthly pension for life when I die. or 2. If I die 60 months after retirement she will get 50% of my pension for the remainder of the 60 months. (If I die after the 60 months she will receive nothing) I have several questions. 1. Do I have to elect an option? My plan says I have 90 days prior to or 90 days after retirement to give written notice, but I does not say what the penalty is If I do not elect one. ( I do not like either option). 2. Is this something my company can do? 3. Is this legal? 4. What can I do to chage the so called "options" for my wife if I die first? I have worked 25 years, I just feel my wife deserves more than what the penion offers her compared to what I have put into my pension. I have read the ERISA and tried other IRS, QSPA research but I am unable to get information on this particular issue. (or I have over looked it) Any help would be greatly appreciated.

[Mike Preston]

Here we go........

The plan will have a default option. If you don't elect, the default option will be deemed elected at some point. You most likely don't want this to happen.

You indicate that you work for a "company", meaning that the plan you are retiring from is an ERISA covered plan (as opposed to a plan provided by a governmental organization, which has rules which are quite different).

Have you read the Summary Plan Description? It sounds like you might have, but I just want to be sure. That is supposed to lay out all of your options in easy to understand English. Easier said than done, though. So, even after reading it you will likely have questions.

I'll assume you have read it and it says exactly (no more, no less) than what you have already posted.

Is this something they can do? Most likely, yes. Federal law (ERISA) requires that the plan offer only a single form of benefit. That benefit is generally known as the "qualified joint and survivor" benefit. The beneift that you described which provides for $X as long as you live and 50% of X to your spouse, if then surviving, satisfies the ERISA definition of "qualified joint and survivor".

To the extent the plan offers other options, though, you should be able to elect them. Your description indicates that they offer only one other option: a 60 month guaranteed payment option, where your spouse gets 50% of what you get, but only until the end of the 60 month period. This is a somewhat unusual benefit, so I can't comment on it. It doesn't sound like it violates any rules, though, as long as your wife has to agree to it before it would actually become your elected benefit.

To answer whether it is legal, you'd need a lawyer to respond. But it sure sounds like everything is on the up and up to me.

You might want to read that Summary Plan description to see if there aren't other benefit options available to you. For example, does the plan offer a lump sum feature? This is unlikely in that you would probably already know about it by now, but it is worth at least one double-check.

If the plan only offers the benefits you have defined, then the only thing you can do to change the options is to self-fund them. For example, if the plan offered a 100% joint and survivor option (rather than the 50% option you defined) your benefit might have been reduced by 22.5%, rather than 15%, but the continuation to your spouse would be 100% of that benefit. I'm not saying that 15% for the 50% joint and survivor or 22.5% fo the 100% joint and survivor are the "correct" numbers. I'm just giving an example. You could take the "exta" amount you are being paid and purchase life insurance with the net (after tax) proceeds of that payment such that the life insurance proceeds would provide additional lifetime income to your spouse upon your death.

There are a number of insurance agents that will quote on this type of policy, as it is a somewhat common planning technique.

Caveat: I'm not saying that this option is neccessarily a sound economic one. It depends on what is available on the insurance market for you. Be sure to analyze the financial impact.

Good luck.

[david rigby]

If it helps to have a second opinion, the comments by Mike are good.