Qualified Joint and Survivor Annuity
Federal law requires defined benefit plans (and certain defined contribution plans) to pay retirement benefits to participants who are married in a special form called a Qualified Joint and Survivor Annuity (QJSA), which pays a life annutiy. However, if your spouse agrees in writing to the choice, many defined benefit plans now allow you to choose to receive your retirement benefits in another form such as a qualified optional survivor annuity (QOSA), an annuity equal to either 50 percent or 70 percent of annuity payments. This is often done when a spouse is ill and has a short life expectancy. You make your choice once you meet the plan’s eligibility requirements for retiring (typically reaching a minimum age, such as 62, and ceasing to work for the employer); however, once your choice is made, it usually is irreversible.
Essential Features of a Qualified Joint and Survivor Annuity
The following are the essential features of a QJSA for married participants:
- Your retirement payments are made monthly (or at other regular intervals) to you over your lifetime.
- After you die, the plan will pay your surviving spouse an amount each month (or other regular interval) that is at least one-half of the retirement benefit that was paid to you while you were alive.
- As with any financial planning decision, the decision to take pension benefits in the form of a QJSA involves many considerations. Here are some of the advantages and disadvantages you should consider:
- You are promised a specific benefit at retirement for life. This is particularly advantageous if you are in good health and expect to live well into your 80s or 90s or beyond.
- You know in advance what benefits you will receive, which helps you plan your income and expenses in retirement.
- Your plan must pay you an annuity (typically as a monthly benefit), and this will help you stick with your budget.
- Your plan may pay a benefit for the lifetime of your surviving spouse, assuming you choose the QJSA option.
- Your benefits will not decrease during a declining or bear stock market.
- If your annuity is purchased from an insurance company, then the insurance company is responsible for the investment risk of paying lifetime annuity benefits to you.
- In most cases once your pension annuity benefits start, you cannot change your mind and elect another form of distribution.
- You cannot access additional benefits from your QJSA in the event of an emergency.
- You cannot make decisions about how to invest your QJSA assets.
- Your QJSA may lose its purchasing power over time due to inflation, unless it is adjusted for cost-of-living increases.
- If you are not in good health and have a shorter than average life expectancy, you may not receive a good investment return on a QJSA relative to the amount of pension assets it takes to fund this benefit.
When a Joint Life and Survivor Annuity May Not Be the Best Choice
If you are married and the primary breadwinner, or the only spouse who works outside the home, it usually is a good idea to take a joint life and survivor annuity unless either:
- Your spouse is unlikely to outlive you because of poor health or the age difference between you and your spouse; or
Alternative sources of survivor protection, such as your spouse’s pension, financial assets and/or life insurance are enough to ensure that your spouse would experience only a small decline in income following your death.
What happens if you stop working for an employer with a defined benefit plan before reaching retirement age?
Any retirement plan benefits that you are entitled to (sometimes called vested benefits) legally are yours to keep. In many cases, you can (and should!) roll that money directly into an IRA to preserve it for your retirement if your former employer will allow you to take it when you terminate your employment. Otherwise you need to keep your ex-employer informed of your current address through all the years until you reach the plan’s retirement age, so you can receive your benefits at that future time. Another option may be to roll the account balance over to a new employer's plan if it is allowed.