Yes, pensions have beneficiaries, and the pension beneficiary rules give you wide latitude to name whomever you want with one large exception: if you’re married and your plan is a private-sector plan, federal law puts your spouse first in line unless your spouse signs a witnessed waiver giving that right up. The person listed on the beneficiary form on file with the plan is who gets paid, and that designation overrides your will, overrides most state laws, and in private-sector plans overrides your divorce decree.
Who You Can Name
Pension plans generally let you name a spouse, children, siblings, parents, friends, a trust, a charity, or your estate. Most forms ask for a primary beneficiary and at least one contingent beneficiary. The contingent is the backup if the primary has already died or can’t be located, and naming one keeps the benefit from defaulting into your estate and landing in probate.
Naming a minor child creates a practical complication many families don’t anticipate. Plan administrators won’t write a check to a seven-year-old. In most cases a court-appointed guardian has to file the claim on the child’s behalf and account to the court for how the money is spent. Setting up a trust and naming the trust as beneficiary avoids this, because the trustee you pick manages the funds without court involvement. If you go this route, the plan will likely ask for a copy of the trust document or a trust certification before accepting the designation.
Percentages have to be exact. Every form requires you to assign a share to each beneficiary, and the shares must add up to 100%. A form that totals 95% or 105% gets kicked back and delays everything.
What Your Spouse Is Entitled to Under Federal Law
For private-sector pensions, the Employee Retirement Income Security Act gives spouses protections that override almost everything else on the beneficiary form. If you’re married and have a defined benefit pension or a money purchase plan, the plan must pay benefits as a qualified joint and survivor annuity unless both you and your spouse elect otherwise in writing.1U.S. Department of Labor. FAQs about Retirement Plans and ERISA The survivor annuity has to be at least 50% of what you received during your lifetime, and plans can offer up to 100%.2Internal Revenue Service. Retirement Topics – Qualified Joint and Survivor Annuity
If you die before you retire, a qualified preretirement survivor annuity kicks in automatically for any vested participant with a surviving spouse. It pays your spouse a lifetime annuity calculated as though you had retired the day before you died.3Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity
To name someone other than your spouse as the primary beneficiary, your spouse must sign a written consent that specifically acknowledges the effect of giving up the survivor annuity. The consent has to be witnessed by a plan representative or a notary public.3Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity A plan representative alone is enough; a notary isn’t strictly required. Without that signed waiver, the plan administrator pays your spouse regardless of what the beneficiary form says.
For 401(k)s and most other defined contribution plans the mechanics differ a little, but the spousal preference holds. If you die before collecting benefits, your surviving spouse automatically receives them, and naming someone else again requires your spouse’s written consent witnessed by a notary or plan representative.1U.S. Department of Labor. FAQs about Retirement Plans and ERISA
Same-Sex Spouses
After United States v. Windsor, the Department of Labor confirmed that “spouse” under ERISA includes same-sex spouses legally married in any state, even if the couple later moves somewhere that previously didn’t recognize the marriage.4U.S. Department of Labor. Technical Release No. 2013-04 – Guidance to Employee Benefit Plans on the Definition of Spouse and Marriage under ERISA Every spousal protection above applies equally. Domestic partnerships and civil unions that aren’t legally denominated as marriages do not qualify.
Divorce Does Not Automatically Remove an Ex-Spouse
This is where people lose the most money through inaction. Many states have laws that automatically revoke an ex-spouse’s beneficiary status after divorce. Those laws work for bank accounts and life insurance, but the Supreme Court held in Egelhoff v. Egelhoff that ERISA preempts state revocation-on-divorce statutes for private-sector retirement plans.5Justia Law. Egelhoff v. Egelhoff, 532 U.S. 141 (2001) If you divorce and forget to update your pension beneficiary, your ex gets the benefit when you die, even if state law says otherwise and even if your divorce decree assigned the pension to someone else.
The one tool that can actually divide a pension in a divorce is a qualified domestic relations order. A QDRO is a court order directing the plan administrator to pay a portion of the participant’s pension to a former spouse, child, or other dependent, and it must name each alternate payee by name and address along with the exact amount or percentage.6Internal Revenue Service. Retirement Topics – QDRO Qualified Domestic Relations Order A QDRO cannot award benefits the plan doesn’t offer, drafting one usually requires an attorney familiar with the plan’s rules, and the plan administrator must approve it before it takes effect.
Update your beneficiary designation the week your divorce is final. Don’t assume anything else will do it for you.
Government and Church Plans Follow Their Own Rules
Everything above about spousal consent, survivor annuities, and ERISA preemption applies only to private-sector plans. ERISA explicitly exempts governmental plans and church plans.7Office of the Law Revision Counsel. 29 U.S. Code 1003 – Coverage If you work for a state, county, city, or the federal government, your pension is governed by the statute that created the plan. Many government plans still offer survivor annuities and spousal protections, some are more generous and some less, but the consent rules, QDRO process, and default beneficiary order can all look different. The plan’s summary plan description controls.
How to Designate or Update a Beneficiary
Most employers make the designation form available through HR or a secure online portal run by the plan administrator. The form asks for each beneficiary’s full legal name, Social Security number, date of birth, and current address, along with the percentage share and whether the person is a primary or contingent beneficiary.
If you submit a paper form, send it by certified mail so you have proof of delivery. Electronic systems usually generate a confirmation email or screen that serves the same purpose. Keep the confirmation somewhere safe. If a dispute breaks out among your family after your death, the plan administrator looks at the most recent confirmed designation on file, and the burden of proving a later update was submitted falls on whoever claims it exists.
Review your designation after every major life event: marriage, divorce, the birth of a child, or the death of someone you named. A form you filled out at 28 may not reflect your wishes at 55.
What a Beneficiary Can Actually Do With the Money
How fast a beneficiary has to take the money depends on the plan type and the beneficiary’s relationship to the participant. The rules got much tighter in 2020.
Surviving Spouses
A surviving spouse has the most options. In a defined benefit plan, the spouse typically receives the survivor annuity for life. In a defined contribution plan like a 401(k), the spouse can keep the account as an inherited account, take distributions based on their own life expectancy, roll the money into their own IRA, or use the 10-year rule.8Internal Revenue Service. Retirement Topics – Beneficiary Rolling into the spouse’s own IRA is often the most tax-efficient move because it defers distributions until the spouse’s own required minimum distribution age.
Non-Spouse Beneficiaries
For deaths occurring in 2020 or later, most non-spouse beneficiaries must empty the inherited account by the end of the 10th year after the participant’s death.8Internal Revenue Service. Retirement Topics – Beneficiary The penalty for missing the deadline is 25% of the amount that should have been withdrawn. Non-spouse beneficiaries cannot roll an inherited account into their own IRA.
A narrow group of eligible designated beneficiaries can still stretch distributions over their own life expectancy:
- Minor children of the participant, until they reach the age of majority, at which point the 10-year clock starts
- Disabled or chronically ill individuals
- Anyone not more than 10 years younger than the deceased participant
If the beneficiary isn’t an individual at all, such as an estate or a charity, the account generally has to be emptied within five years.
Taxes on Inherited Pension Benefits
Inherited pension distributions are taxed as ordinary income in the year the beneficiary receives them, reported the same way the participant would have reported them.8Internal Revenue Service. Retirement Topics – Beneficiary A large lump sum can push a beneficiary into a higher bracket for that year. Periodic survivor annuity payments are subject to federal income tax withholding like wages.9Internal Revenue Service. Pensions and Annuity Withholding If the participant made after-tax contributions, part of each payment may be tax-free, but the taxable portion is still ordinary income.
A surviving spouse who rolls the inherited account into their own IRA owes nothing on the rollover and defers tax until their own distributions begin. Non-spouse beneficiaries don’t have that option and should plan withdrawals across the 10-year window rather than concentrating income into one or two years.
If No Beneficiary Is Named
When a participant dies without a valid beneficiary designation on file, the plan’s governing documents decide who gets paid. Most plans use a default hierarchy that runs roughly: surviving spouse, then children in equal shares, then parents, then the estate. The specifics vary; the summary plan description is the controlling document.
The worst landing spot is the estate. Pension funds that go to the estate become part of the probate estate, meaning a court oversees distribution, which adds months of delay and legal costs that come out of the benefit. It also puts the distribution into the public record. Naming a beneficiary and keeping the designation current avoids all of this.