We all of course want to plan for a long and happy life, but the fact of the matter is it’s possible to die earlier than expected – even before you receive your retirement benefits. For some, a pre-retirement death would pose problems for a spouse or dependent. One possible solution could be a qualified pre-retirement survivor annuity (QPSA), as these important insurance products provide financial protection for your family after you’re gone. Consider working with a financial advisor as you build out your retirement plan.
What Is a Qualified Pre-Retirement Survivor Annuity (QPSA)?
A qualified pre-retirement survivor annuity, abbreviated as QPSA, is a type of death benefit. It gets paid out as a life annuity or periodic payments that last a lifetime, to a surviving spouse or indirectly to a dependent. The frequency of these payments vary, but they typically occur on a monthly basis.
Payments from a QPSA act as compensation for the living spouse. They take the place of the retirement benefits their spouse would have normally received and used to support their family.
Naturally, employers only offer QPSAs through qualified plans. That includes plans like a defined benefit plan, money purchase plan and target benefit plan. You can skim an example here from the San Francisco Electrical Industry Service Bureau, Inc. (EISB).
Breaking Down the QPSA
A QPSA gives employees a way to continue providing for their spouse (or beneficiary) if they pass before their retirement benefits kick in. Your employer, generally, must offer you QPSA benefits if you are vested in a qualified plan. However, there are some exceptions. The IRS states that some plans may receive an exemption if they:
- Are a defined contribution plan (outside target benefit or money purchase plans)
- Do not offer a life annuity option
- Require a full, one-time death benefit payment to the surviving spouse (unless said spouse signed off on another beneficiary)
- Don’t have a direct transfer from a different plan, which provided a survivor annuity
Both employees participating in the plan and their spouses must sign off for the benefits. In addition, they need to have the signing witnessed. Usually, this requires the presence of a notary, but an authorized plan representative may also work.
Your employer does not decide how much your spouse receives, though. Technically, that decision comes from the government through the Employee Retirement Income Security Act (ERISA). This law instructs how to calculate QPSA payments. But it depends on either: your earliest retirement age if you die before then or at the age of death if you pass after.
You may want these benefits as a safety net for your loved ones. But, you may be in an extenuating circumstance where your beneficiary is not your spouse, or your spouse may not traditionally qualify. In that case, you may need a qualified domestic relations order (QDRO) instead. This allows your retirement plan’s benefit to pay alimony, child support or property rights to another dependent, current spouse, former spouse or child.
In this case, a former or current spouse receiving QDRO benefits must report the payments as if they participate in the plan. They may also be able to roll their plan distribution over. If it distributes to a child or dependent, then the QDRO gets taxed to the plan participant.
QPSA: Key Considerations and Requirements
There are rules regarding QPSA payments. The employee must be fully vested in their retirement plan, first. And second, said employee must pass before their retirement.
Additionally, there are regulations for the recipient of the payout as well. The surviving spouse must be married to the deceased for at least one year. However, some versions of qualified plans may not have to provide a QPSA to a living spouse regardless. You’ll find this with defined-contribution plans, which don’t offer participants a life annuity, and plans that require a different payment schedule. So, if your plan mandates a one-time payment in full, then your spouse can’t receive QPSA benefits.
However, there is one exception. According to the IRS, if your retirement plan’s benefit is worth $5,000 or less, then the plan may pay out as a lump sum, not a QPSA. This can happen without either spouse’s consent.
You’ll know if your retirement plan offers a qualified pre-retirement survivor annuity. Employees receive a QPSA notice, which alerts them to the option. Generally, you receive this notice once you hit the age range of 32 to 35. Or, alternatively, your company may send the information during the first year of your plan participation if you are older than 35. The notification should include:
- An overview of the QPSA’s terms
- You and your spouse’s right to waive the QPSA
- An explanation of the financial impact of waiving
- Alternative death benefit options
You spend most of your life working to earn your retirement. You spend countless hours to ensure you can still support you and your loved ones when you leave the workforce. That’s where the value of a QPSA comes in. While only certain qualified plans offer it, it delivers lifetime payments to your surviving spouse. It’s difficult enough living without a partner. Like this, you can partially take off some of the financial burden that can cause.
Of course, that’s not the only way. If you don’t have access to a qualified plan but want to find other ways to support your spouse if you’re gone, talk to a financial advisor. They can help you form a plan that allows both you and your spouse to live without worry.
Life Insurance Tips
- Planning for your retirement is stressful enough. Creating contingencies plans is even harder. During these times, it might be worthwhile to speak to a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A qualified pre-retirement survivor annuity may help support your spouse or dependent after you die. But it’s not the only way to do that, as life insurance can also fit the bill. Use SmartAsset’s free life insurance calculator to determine how much you should buy. In addition, you’ll want to compare life insurance quotes after you choose what type of life insurance to get.
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